Condos are riding a wave of popularity, driven by millennials snatching up their first home and baby boomers looking to downsize. However, before you commit to buying a condo, make sure you factor in hefty condo association fees. Condo association fees account for a noticeable portion of housing expenses. More worrisome, they’ve been rapidly rising year over year for the past decade. This article will cover what condo HOA fees are, what they include, and why they have been on the rise. To pay for the maintenance of common areas, amenities, landscaping, the association asks each unit owner to pay fees. These fees typically cover the maintenance of the external parts of the condo.

What is a Condo HOA Fee?

Condos are run like corporations, with the board of directors that governs the financial and administrative aspects of the building. The association collects a fee from members to cover utilities, maintenance, and insurance. They set the budget for repairs and choose contractors for larger projects. While it may feel like a waste of money to pay HOA fees, in reality, the fees are often necessary. Those who live in single-family homes still have to pay for things like maintenance and landscaping, just not in a tidy monthly sum.

What Do Condo Fees Cover?

Things commonly covered by a condo association fee include:

• Upkeep of the exterior of the building
• Landscaping
• Snow removal
• Trash Removal

Do Condo Fees Cover Utilities?

Utilities like heat, water, sewage, garbage, and electricity are usually, but not always, covered.

Do Condo Fees Cover Property Tax?

No, condo fees do not cover property tax.

Do Condo Fees Cover Insurance?

Most states' condominium acts require the association to carry property insurance on the common elements and the bare walls, floors, and ceilings of the unit. Homeowners are still required to have their own insurance covering the interior of their unit and the property inside. You should check with the association whether they have catastrophe insurance. For example, in the Pacific Northwest, the HOA fees may include earthquake insurance. A building a FEMA-designated flood zone likely carries flood insurance.

Reserve Funds

In addition to your run of the mill, recurring expenses, condo boards also need to fund major repairs. The roof might be leaky, the elevator needs to be rewired, the pool resurfaced. Condo boards typically set one-third of your fees into their reserve fund. In fact, when you try to buy a condo unit, lenders like the FHA and Fannie & Freddie check that the association has set side enough reserves.

Average Condo Association Fees

The cost of an HOA fee will largely depend on what area you live, and what things your association offers. If you’re living in condos in America’s biggest cities, you’ll likely pay hefty fees. You’ll not only be paying for maintenance and amenities, but also for location. Mark Uh, a data scientist at Trulia, used American Community Survey records to determine the average cost for HOA fees in America. According to Mark, HOA fees run anywhere from $200 to $600 a month (for example, $194 in Nashville, $571 in NYC). Other cities cited in the survey include:

• Long Island, New York - $463
• Philadelphia, Pennsylvania - $449
• Miami, Florida - $415
• Charlotte, North Carolina -  $218
• Warren, Michigan - $218
• Indianapolis, Indiana - $213
• Las Vegas, Nevada - $198

Special Assessment

In an ideal world, your association can dip into the reserves to cover unexpected expenses. Unfortunately, underfunding is very common. Association Reserves found that 70% of HOAs are underfunded. If they can't cover it from their budget, the association will impose a special assessment on members. For example, one San Mateo, CA resident had to cough up over $50,000 for major repairs the association had deferred for years. For large expenses, most states require approval of a majority of a quorum of association members.

Are HOA Fees Capped?

Sure you pay $400 a month now, but this can jump to $600 in a few years. Unfortunately, there’s usually no cap to how much an association can increase fees. An HOA needs to make sure that their annual budget is being met, and this could mean increases every year (or more). While this is generally true, there are a few exceptions that do affect the amount that fees can be raised.

HOAs That Limit Increases in the Declaration of Covenants, Conditions, Restrictions, and Easements (CC&Rs)

Occasionally a planned development will have a restriction on HOA fee increases, or a limited dollar amount for assessments, built right into their CC&R. These developments are usually older, and they may limit the increases to no more than 2% each year. While this does sound budget-friendly, it may end up being unfavorable to the community and individual condo owners. If the HOA is not raising enough funds to pay for maintenance and repairs, the development might soon fall into disrepair. This reflects poorly on the community and will also affect the value of the properties.

State Laws Sometimes Limit Increases

In some instances, there are also individual state laws that limit how much HOAs can raise their fees in a given year. For example, in Arizona, an HOA can’t increase their fees by more than 20% per year without a majority vote of HOA members. Unlike the CC&R limitations, state laws are usually much more generous, making it less likely for development to become underfunded.

Lower Fees Aren’t Necessarily Better

One thing residents need to watch out for is the special assessments fees. This happens when the HOA collects money from residents to pay for expenses that the HOA is responsible for but aren’t included in the monthly HOA dues. This could be for routine things or emergency situations like flooding. This can also happen if the HOA isn’t managing their funds properly. A well-managed HOA will make sure there’s sufficient funding in both the reserve account and operating account. But if they don’t, residents are legally required to foot the bill if there’s an emergency expense. For instance, a condo association in Bellingham, Washington attempted to raise dues by 48% because their old board of directors neglected to maintain the pool and tennis court, rendering both unusable.

Conclusion

If you’re thinking of purchasing a condo, you need to check the association's financials. Ask if they have a reserve fund, and when they last depleted it. It’s also very helpful to review the CC&R or to hire a lawyer to review it for you.