Not asking enough questions before purchasing a home in a community managed by a homeowner's association can be a costly mistake.

Homeownership comes with a variety of ongoing expenses (beyond mortgage payments) that impact just how affordable your choice of housing will be over the long term. And when you're home shopping, it's critically important to understand these costs carefully to prevent being caught off guard down the road.

One of the most important and often irritating examples of this issue is the cost of homeowner's association dues, otherwise known as HOAs. If you're not careful and don't ask enough questions about a prospective HOA when considering a home purchase, you may be in for a rude awakening when, year after year, the monthly dues continue to creep up and up and up....until one day, your housing costs have inflated well beyond your monthly budget

Suburban homes photo aerial view
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"The most pressing thing someone buying into an HOA community needs to know is whether the price tag going to change," says Kevin Taylor, managing partner with financial advisory services firm InSight. "The rising cost of monthly HOA costs can affect the quality of life for an owner while they live there, and the resale value of a property when they want to leave—both positively and negatively."

Homeowner's associations can certainly add a lot of value to a neighborhood, maintaining the community's appearance and taking care of day-to-day upkeep of public spaces and shared amenities. But they can also cause major financial heartache if you're not clear about what you're signing on for. Before purchasing a home in an HOA-managed community, do yourself a favor and be sure to ask the following questions. (Your bank account will thank you later.)

What is an HOA?

First things, first. For those not entirely familiar, a homeowner's association (HOA) is an organization that makes or enforces rules for properties and residents who live in a subdivision, planned community, or even a condominium building. As Investopedia explains: Those who purchase property within an HOA's jurisdiction automatically become members and are required to pay dues or HOA fees.

Generally, HOAs are run by a board that is made up of members who are residents of the community. These board members are elected by their fellow homeowners. However, in some cases, a community's HOA may be run by a private, third-party organization.

It's not entirely unusual for HOAs to make headlines or wind up in the news because of their overly restrictive rules and regulations.

What are HOA dues?

HOA dues are the fees each homeowner must pay each month to the association. These fees vary widely by community and geographic location in the country and can be hundreds of dollars per month.

The fees are collected to pay for maintenance. Depending on the association in question, the dues may simply pay for community-wide maintenance and landscaping, but in some cases, the money may also be used for maintenance of your home or condominium.

Are HOA fees tax deductible?

As much as you would like them to be, HOA fees are generally not tax deductible. However, there is one notable exception to this rule.

"HOA fees are tax deductible if you use the home in question as a rental property, since they are part of your business expenses, but they are generally not deductible for a primary residence," says  Martin Orefice, CEO of Rent To Own Labs, an online resource guide designed to help consumers find rent to own homes.

When was the last time the HOA raised its dues and by how much?

Before making what for many people is the biggest purchase of their lives, you'll want to ask about the track record of HOA dues increases in a prospective community. This is easily one of the most fundamental and important questions to ask with regard to HOAs. The answer can make a dramatic difference in your monthly expenses.

"It may be a red flag if the HOA has consistently raised its dues over the last few years. That may mean that the same could happen to you as a resident there, and you may face increased dues each year," says Andy Taylor, general manager of Credit Karma Home. "On the other hand, if it's been a while since the HOA raised its dues, that may mean they could increase the dues in the near future."
You should have an understanding of the dues schedule, as well as a clear time frame for when they next expect to increase dues again, so you aren't caught off guard by a much higher monthly rate shortly after moving in.

How much does the HOA have in reserves? And what is the HOA's total funding goal for its reserve account?

This, too, is perhaps one of the most consequential questions you can ask. Here's why: A portion of the monthly HOA dues you will pay are generally channeled into the association's reserve fund to cover future community repair, replacement, or emergency projects.

Without an adequate amount of money in this fund, an HOA may not be able to cover such future needs. And here's the key point, a lack of reserve funds, or a partially or inadequately funded reserve account at the time you purchase a new home, is a sign that HOA dues are likely to increase. And keep increasing until the association reaches its reserve funding goals.

"Ask how much the reserves are currently funded as a percentage of the HOA's overall budget for repairs," explains Roger Cummings, Reali's broker of record. "This question helps to understand the financial solvency of the HOA and how well they maintain and monitor their budget."

If the answer is less than 30 percent, that's not great news, says Cummings. Current reserve funding of somewhere between 30 to 60 percent of the association's target is a slightly better answer. But ideally, you want the answer to be that the association's reserve account is at least 60 percent funded, if not more.

"Anything less than 60 percent could mean a near-term special assessment or dues increases if a large community repair or replacement is imminent," explains Cummings.

Many HOAs will periodically perform reserve studies, and these studies inform the association regarding the appropriate range or level of reserve funds they should have on hand to cover unexpected emergencies, various replacement projects, or HOA improvements, adds attorney Ben Gottlieb, co-founder of Arizona-based MacQueen & Gottlieb.

What is the HOA's philosophy on special assessments versus using a reserve fund?

HOAs approach funding major projects and upgrades differently, based on their size, maturity, and philosophy, says Claire Hunsaker, CEO, of the personal finance website Ask Flossie.

"How much they rely on special assessments can have a big impact on your finances as a member. A newer HOA may rely heavily on special assessments for planned improvements and unplanned repairs because they're still building the reserve fund gradually out of HOA fees," explains Hunsaker. "They might also rely on special assessments if they anticipate a faster average turnover among the units."

Ideally, you'll want an HOA to tell you they're not planning on implementing any special assessments and that they don't rely on this approach to financing needs.

"Special assessments are additional expenses incurred by the homeowner outside of their normal monthly dues. Depending on the repair or replacement item, these can run from several hundred to tens of thousands of dollars," explains Cummings, of Reali. "Sometimes the HOA can offer a loan or payments over time but if not well funded, this will usually come as a one-time payment out of pocket."

What is the average annual increase of HOA dues?

At the risk of exhausting this particular question, you'll also want to ask if the HOA has a track record of increasing HOA dues a specific amount, or if it has a schedule of planned increases you can view. Knowing this will allow you to plan for the increases more accurately in your household budget and perhaps even help you determine if you can afford to live in the community.

"A home is a big investment, regardless of how long you plan to stay there, so it's important to know how much you will owe the HOA each year," says Bailey Carson, home expert at Angi. "Knowing for certain that HOA dues will increase by 3 percent each year is very different than unexpected increases of 10 percent."

If the association has a history of significant, unexpected spikes in monthly dues, it can be a sign of poor management.

"Knowing how often and why dues are increased is critical for you and the affordability of the home today and going forward, but also it is telling of the financial health of the HOA," adds Betsy Ronel, a Compass realtor based in Westchester County, N.Y. "You'll want to know whether the dues are increased at a set rate and what are the increases meant to address? Are the dues raised per project? And do we vote on things? If not, who makes the financial decisions, and are they involved in the HOA? Do they live in the community or are they an outside party?"

What is the HOA fee per square foot of the home in your prospective neighborhood, compared to the HOA fees in surrounding neighborhoods?

Asking this question is just basic benchmarking, says Kevin Taylor of InSight.

"I would just want to know that the monthly cost of my HOA fees, standardized to the square footage of the property was in line with other neighborhoods in my town and other buildings or communities of the same size and similar building types," explains Taylor. "Nobody wants to overpay, and knowing the fees divided by the square footage is the best way to reconcile and begin comparing the cost of HOAs."

What exactly do HOA dues cover?

Once you know the amount of the potential HOA dues, and how often they may increase, you'll want to understand what specifically the money is being used to pay for, so that you can decide if the cost is really worth it to you.

For instance, will the HOA dues cover maintenance of a community pool or tennis courts? If so, are you willing to  shell out what could be several hundred dollars a month on such dues if you have zero interest in using these types of amenities? If the answer is no, your money might be better spent elsewhere, such as in a community that does not have HOA dues, which would allow you to use that extra money each month on other things.

"If there are common areas available to residents, such as pools, gyms, tennis courts or parks, find out what the HOA's responsibility is to maintain them," says Carson, from Angi. "Find out if they are responsible for snow removal, cutting grass, or maintaining sidewalks and roads throughout the community. Once you know what your dues cover and how much they cost, you can make a well-informed decision about whether the property is the right financial decision for you and your family."

How many people does the HOA have on staff full-time?

This is a question that can get overlooked by potential homeowners who fail to realize its significance. But the more operating costs the HOA has, the more you will be paying each month and year.

"Typically, the more people they have on staff, the higher your HOA dues," explains Andy Taylor, of Credit Karma Home. "The number of people on staff typically depends on things like the number of units on the property, or the amenities on the property, especially those that need special attention, like a pool, or landscaping."

Are there any rental restrictions, and if so, what are they? 

By now, if you've asked some or all of the questions already outlined, you should have a good handle on what your future housing costs will likely involve. But there's one more question you may want to ask: whether the HOA limits your ability to rent out your home. This, of course, is important, should you plan to move in the future, but not want to sell the property.

"Some HOAs have a limited percentage of units that can be rented, while others set a mandatory occupancy period such as one year before allowing conversion to a rental," says Cummings, of Reali. "Obviously, the fewer restrictions the better."

Are any HOA rules unenforceable?

HOAs can certainly be maddening and challenging to deal with at times. If you find yourself having a particular issue with your local HOA, it's a good idea to do your research to find out whether or not the regulation in question is actually enforceable.

Some HOA rules, for instance, are unenforceable—not because of the text of the rule, but because they were enacted or enforced incorrectly, says Orefice, of Rent to Own Labs.

"There are also laws in many jurisdictions governing what an HOA can and cannot regulate, especially when it comes to free speech, discrimination, and reasonable (if unsightly to some people) uses of your property, including putting up satellite dishes or clothes lines," says Orefice.

Bottom line? It's a good idea to take the time to understand what you're getting into when considering a property purchase with an HOA-governed community.

"Look at your lifestyle and make sure anything you wish to add or bring to your new home is allowed," says Andy Taylor, general manager of Credit Karma Home. "For example, if you have a green thumb, are you allowed to plant flowers in a planter outside your window? If you're a foodie, can you have a grill with open flames? If you're a smoker, is smoking allowed? Even things like the paint color of your home, or whether or not you can keep that extensive lawn gnome collection could be regulated by the HOA."