How to Form a Homeowners’ Association

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How to Form a Homeowners’ Association

Homeowner’s associations (HOAs) handle problems that impact the whole neighborhood, such safety and security, poor property upkeep, neighborhood annoyances, or the provision of services that the local government does not handle.

When a new neighborhood is built, developers often create a homeowner association. In many neighborhoods, joining the HOA is a requirement for purchasing real estate. As a consequence, a lot of individuals end themselves joining HOAs just because they fell in love with a specific house without really knowing what they are or how they function.

Key Takeaways

  • Homeowner associations (HOAs) are often built into newly developed neighborhoods or gated communities by housing developers.
  • HOA officials must maintain accurate financial records of their business activities.
  • Rules set out by homeowner associations (HOAs) do not supersede laws enacted by the federal, state, or municipal governments.
  • A board of directors governs a HOA and upholds its rules and regulations. They also supervise how the HOA is run.
  • If you are a member of a HOA, you will pay dues in exchange for community benefits.

Growth in HOAs

Homeowner associations (HOAs) are a growing trend. After 1970 (when these three American collective housing ownership types made up just around 1% of U.S. housing), the establishment of condominium projects, homeowners’ organizations, and cooperatives grew rapidly. However, by 2010, there were more than 300,000 community organizations, or 20% of the population, sheltering more than 60 million Americans. Half of the new housing constructed in the United States between 1980 and 2000 was managed privately by community associations.

According to HOA-USA, there were more than 370,000 homeowner organizations in the US as of 2021. This totals more than 40 million homes, or more than 53% of all owner-occupied homes in America.

Learn Local Laws on HOAs

The legal requirements for creating a homeowners’ association are laid forth in state property regulations. For instance, Texas’ property law chapter 204 mandates the creation of a three-person committee to request the establishment of a property owners association (POA).

The committee must formally notify the board in writing of its intention to establish a POA with required membership. A subdivision’s record owners must be informed, and within a year, the owners of at least 60% of the property must sign and endorse the petition. Once the POA is in place, it has the authority to impose limitations by means of a different petition procedure that needs the consent of the owners of at least 75% of the subdivision’s properties.

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Establishing the HOA

The processes for creating a HOA will likely be necessary but will depend on where the HOA is situated.

  1. creating a legal entity, such as an LLC or charitable organization.
  2. establishing covenants, conditions, and restrictions (CC&Rs) that spell out the HOA’s policies and the regulations that property owners must follow.
  3. establishing a process for future CC&R amendments.
  4. Creating guidelines and restrictions that make the CC&Rs clear and understandable for community members.
  5. drafting governing papers, such as articles of incorporation and bylaws, that describe meeting schedules, voting methods, the election of HOA officers, and other operational requirements.
  6. choosing capable leaders and board members. For instance, the treasurer must be knowledgeable with bookkeeping and financial management.

Hiring a lawyer with experience in HOAs might be a wise move at this point if the individuals creating the HOA are not real estate law specialists. If the HOA’s regulations are contested and judged to be illegal, the HOA will not be able to enforce them. A competent attorney may also highlight important points that HOA managers should be aware of, such as fair housing regulations, in order to prevent legal concerns after the organization has been established. Regulations issued by the federal, state, and municipal governments take priority over HOA rules.

Protect the HOA

The HOA is managed and governed by the executives and board of directors. High risk is associated with this degree of responsibility. If a homeowner chooses to file a lawsuit, the HOA needs a mechanism to defend itself.

The HOA or a specific member may be sued by a homeowner for failing to uphold its fiduciary obligations. Why would a homeowner file a lawsuit? The most frequent causes include harassment or discrimination in housing, breach of contract, theft of finances, disagreements about renovation, and failure to perform repairs.

The individuals in charge of the HOA are financially protected by directors’ and officers’ insurance. Both legal defense fees and financial losses are covered. It excludes deliberate misbehavior however. In the event that a director, officer, or property manager embezzles HOA cash, employee theft insurance may be able to shield the organization.

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Keep Sound Financial Records

An HOA needs money to function, and that money comes from the community’s residents. Some of the money funds the HOA’s administration (e.g., legal, accounting, and management services), but most of the money goes toward the upkeep of common areas.

It might cover the cost of rubbish collection, pool upkeep, and even landscaping services. Every month, some of the funds are used, while the remainder is saved up in a reserve fund. There may sometimes be a large expenditure that cannot be covered by the HOA reserve money. In such situation, the HOA will impose a specific assessment as an additional cost on the residents.

A new HOA will need to do a financial analysis and create a budget in order to decide how much to charge the owner(s) of each property in monthly dues. The analysis is based on the costs of the expenditures, the amount that will be contributed to the reserve fund, and the proportion of each resident’s property that is held by the community.

In order to maintain the HOA’s financial stability, the reserve money must also be maintained and invested (for example, the fund’s value must be protected against inflation).

Keep Homeowners Informed

Residents must be kept aware of the HOA’s operations and any concerns impacting the community as members of the community who pay dues and are impacted by its choices.

HOAs are required to have regular meetings and provide residents enough notice so that everyone has the chance to attend. Additionally, they must organize elections for directors and officials and guarantee that everyone has the chance to cast a ballot. Additionally, homeowners may be kept informed with the use of a website, email, or community newsletter.

Officers and directors of HOAs should maintain thorough records of its operations, such as minutes from neighborhood meetings. Associations should regularly update the public on significant financial facts. Members have the right to seek access to HOA documents and should be aware of this right.

Enforcing Rules

Since HOAs are rule-based communities, they sometimes need to police the rules that residents are breaching. Residents may also protest to HOAs about current regulations they don’t like or rules they believe should be implemented to address a persistent issue.

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HOAs must swiftly and consistently enforce the regulations. Those who don’t comply should pay a fee. If a homeowner disobeys, the HOA may need to take legal action against them or send the account to collections. HOAs should refrain from using a selective enforcement policy, which means they shouldn’t favor their friends or other community members who are HOA officials or citizens. Litigation may result from biased conduct.

Hiring a seasoned management firm may ease the strain on a HOA’s directors and officers and remove a possible point of contention between HOA leaders and other residents. Much of the administrative work may be delegated to the management business, which can also handle disagreeable tasks like collecting dues and enforcing regulations. It may also utilize its property management knowledge to guarantee the community runs smoothly and prevent errors that novice officers and directors could make. However, hiring a professional manager would increase the monthly HOA dues for homeowners.

Foreclosing on a homeowner’s house owing to unpaid dues or special assessments is the worst-case scenario for rule enforcement. This drastic action may lead to conflict between the homeowner and the HOA. Additionally, foreclosures lower home prices, which is bad for the neighborhood’s other inhabitants.

Host Community Gatherings

HOAs don’t always have to be all about business, though they often are. It is possible for HOA members to get to know one another outside of the possibly tense atmosphere of a HOA meeting by organizing an occasional enjoyable activity. If neighbors are friendly with one another, the neighborhood may be a better place to live and disputes may be less difficult to settle.

The Bottom Line

The creation and administration of a homeowners association is a labor-intensive process with broad ramifications. Before you purchase a home in a HOA, make sure you know what you’re getting into.

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