The ABCs of HOAs

Love ‘em or hate ‘em, homeowners associations are part of daily life for many in greater Cincinnati and around the nation. While the earliest examples were often private agreements in wealthy areas to maintain property values and neighborhood aesthetics, beginning in the 1950s they also served to take over some responsibilities traditionally filled by local governments such as road maintenance, security, and parks or other communal areas. They have remained popular especially in areas with rapid suburban growth, and today over 73 million Americans live in communities governed by HOAs. Some municipalities even require HOAs for new construction neighborhoods.

HOA advocates usually prefer the consistent landscaping and housing style, which can keep property values consistent because there are many comparable homes nearby held to a similar standard and offering the same amenities, like pools, tennis courts, walking trails, or exercise facilities. But if you’re not a fan of paying dues, adhering to rules about the appearance and use of your property, or trusting a group of strangers to manage funds or apply rules consistently, an HOA is probably not for you.

HOAs can have different rules and powers, so it’s important to review the Covenants, Conditions & Restrictions (or CC&Rs) to understand, for example, whether there are rules about paint colors or fence types, screening in the deck of a condo, or the quantity and types of animals are allowed. Some smaller HOAs that include only single family homes might only charge a small annual fee to cover the maintenance of a sign at the entrance or street lighting, while a condominium HOA might charge higher monthly fees and regulate noise volumes, package delivery locations, and the number of guests that may park in the lot.

On the plus side, if you live in an HOA with a shared pool, playground, or park, you don’t have to worry about maintaining any of that yourself. Don’t want to garden or shovel your driveway? Find a neighborhood that includes landscaping and snow removal in the fees. HOAs with property types that share roofs (condominiums, townhomes, landominiums, some patio homes) often cover roof maintenance and replacement. You might also save on utility bills if you live in an HOA that includes water, sewer, trash, or even natural gas and electric.

Your quality of life in an HOA community may also be affected by the professional management company they use to handle payments, repairs, maintenance, landscaping, etc. It’s important to note that these companies vary in quality and services, and that HOAs can elect to switch companies by member vote.

In addition to the CC&Rs, you should review any recent financial statements, meeting minutes, special assessments, and insurance policies — mortgage lenders will require these as well. Here’s why:

• During the subprime mortgage crisis, many HOAs suffered severe financial losses when foreclosed homeowners (and the banks who retained the properties) were no longer paying their dues. This brought about new standards for the amount HOAs hold in reserves, the amount of insurance coverage they have, etc.

• HOA meeting minutes can be dry reading, but it’s often the only way to know whether there are any potential special assessments for large expenditures, or ongoing disputes between your potential neighbors and the HOA or its management company.

• All HOAs should carry insurance coverage sufficient to cover any shared facilities, and in condominiums it needs to cover the replacement cost of the entire building. If these coverage amounts are not sufficient, homeowners can face serious financial burdens as seen in one local community this year.

Do you have more questions about HOAs? Let me know!

What to Consider When Buying Your First Home

Are you ready to buy your first home? First off — in case no one has told you already — I’m so proud of you! Purchasing a home is a sign that you’ve reached a level of financial stability that some people never do, so give yourself a quick pat on the back. Then sit down and get ready to take some notes, because this is serious business and the more you know…well, you get the idea.

Buyers today have their fair share of struggles — rents are high, but so are home prices. Salaries aren’t growing at the same rate as inflation, interest rates have risen a lot over the past few years, and many are having to wait longer to purchase their first home than their parents did. But if you’re confident that you’ll be living in the same area for the next 2-5 years, owning a home is the most common and effective way to build wealth. I’m not just saying that because it’s my business: the gap in wealth between homeowners and renters has always been significant, but has been growing steadily over the past 30 years.

Step one should always be evaluating your financial position: How is your credit? How much of a mortgage can you qualify for? What kind of monthly payment are you comfortable with? How much money do you have saved for a down payment? What types of loan options are available to you? Do you qualify for any down payment assistance or grants to help with closing costs? A good real estate agent can put you in touch with local lenders who will be happy to discuss all of the options available to you, so you can determine your desired budget and get a better idea of how much money you’ll need to have on hand. They can even help you if you’re not ready: many lenders offer advice on debt reduction and improving your credit score to make sure you’re as qualified as possible when the time comes.

Next up, interview some buyer agents if you don’t already know one that you trust. Have an honest conversation about what to expect in the current market in terms of competition, pricing, and seller concessions. Find out if they only work in specific areas or price ranges, if they have scheduling conflicts that will make it difficult to meet up for showings, and if they understand your needs and wants. How much do they expect you to pay in commission, and will they negotiate to have that and/or other costs paid by the seller? Are they knowledgable enough to help identify red flags during showings, and make sure you don’t overpay?

Finally, decide whether you’re going to have anyone else help you in this process, such as an attorney, an aunt who’s a broker in another state, your bestie who bought a home last year, or your parents who have offered to gift you money to move out of their basement (or just because they love you). Whose advice do you value? Let your agent know that they’ll be helping you make smart decisions and they should be welcomed with open arms; after all, we like meeting new people! Getting opinions from someone who’s not making money from your purchase isn’t a bad idea, and it should give your agent more peace of mind that you’re going to be happy about your decision for years to come.

Everything You Need to Know About Appraisals

Despite real estate appraisal being part of nearly every real estate transaction, I’ve noticed that many clients (and even some agents) have a lot of questions about the process and purpose of property valuation. Below, you’ll find some of the most common questions with answers that will hopefully clear up any misunderstandings!

• Is the appraisal the same as a home inspection? No. The buyer hires their own inspector(s) to do a thorough investigation of the property’s condition and ensure that it meets their expectations. An appraiser is usually hired by the mortgage lender, paid for by the buyer, to ensure that the property value is worth at least what the buyer has agreed to pay. If a lender has agreed to provide a mortgage equal to 90% of the property value, they have to verify that the value is actually there in case someone defaults on the mortgage and they have to sell the property.

  • Some types of loans (e.g. FHA, VA, USDA) require appraisers to visually inspect the attic and verify that the utilities are functioning. Assume that you should have all utilities active unless your purchase contract specifies otherwise.

• My lender told me I don’t need an appraisal. Why not, and should I get one anyway? Many lenders have automated valuation software that can provide a general idea of a property’s value; if you are making a substantial down payment or purchasing a property below market value, your lender may decide to waive the appraisal. It saves the buyer money and saves the lender time. If you’re worried about the value, don’t be — there’s hardly any chance that a traditional lender today would assume a property’s value without plenty of evidence. If they’re agreeing to lend you the money you need to buy it, just roll with it.

• I just had my home appraised a few months ago for a refinance. Can’t we just use that report instead? Nope. Because property values can change over time, each appraisal is technically only valid for the date the property was evaluated. Also, appraisers must take the purpose of the appraisal into account when preparing the report, so it is not uncommon to see different values for refinances, purchases, divorces, etc. That might seem strange, but if you consider the lower risk of refinancing an existing mortgage for a homeowner who has already been making regular payments, it does actually make sense.

• I want to make sure the appraiser gets the “right” value — what information can I give them? This depends on who you are, but first, please remember: it takes a shocking amount of time and work to become an appraiser, so they might not look kindly upon someone else telling them how to do their job. Also, there are very strict appraisal guidelines that detail exactly what information can and can’t be considered.

  • The lender is not allowed to instruct the appraiser and will usually avoid personal contact with them; this is to avoid the appearance of undue influence (which was definitely something that used to happen a lot before the mortgage crisis and subsequent new laws).

  • I encourage sellers to provide a list of any substantial improvements made during their ownership, especially during the previous 5 years. Knowing the age of the roof, doors, windows, siding, etc. is always helpful. Any additions or major remodeling would also affect value. If you want to share the cost of those improvements, feel free…but it doesn’t matter. What you paid doesn’t impact the value from an appraisal perspective.

  • Agents, please know that the appraiser has access to the same data you do in the MLS and public records! So while it may be tempting to leave comparable sale information for every appraiser, please don’t waste your time or theirs unless the property is especially unique or you’re aware of a reasonably similar home that might be missed during a standard comp search. One exception that might be made during very competitive markets is providing information on the number of offers that were received and the relevant details of those offers (all over list price, etc.). This might help justify, for example, a picture-perfect mid-century modern home selling for $100k over list price and at least $125k more than any other nearby home with the same number bedrooms and bathrooms.

• Who can be present during the appraisal? The seller is always allowed to be present at their property, and the seller may require their agent (or the buyer’s agent) to be on the premises when any 3rd party is at the home. However, if you are present during the appraisal, let the appraiser do their thing — be available to answer any questions, but don’t follow them around. Pretend it’s a buyer tour and turn on all the lights, make sure doors are unlocked, and make it easy to access the major mechanics and the attic if necessary.

• Can I get a copy of the appraisal? If you’re the buyer who paid for the report, absolutely. If you’re the seller, no. When the lender has approved the appraisal report, you’ll be notified whether it is “good” or not (in other words, did it meet the value in the purchase contract?) and whether there are any conditions — these are repairs that could be required by an appraiser to ensure the property meets the minimum standard for that type of loan.

• The appraisal says the value is good, but subject to some repairs. Does the seller have to make the repairs or can they refuse? If they want to sell the property to this buyer, they need to make the repairs — and if they are unclear about any part of the conditions, definitely get clarification from the appraiser as soon as possible. However, a seller might decide that it’s too much work or expense. The buyer is usually prohibited from making any repairs to a property they are purchasing (unless they are already a tenant of the property, which is a fair exclusion in my opinion), but there’s technically nothing to prevent an agent helping out.

• Can I appeal the appraisal if I don’t like the value? While there is a process to appeal an appraisal, there are many factors involved and the success rate varies greatly (based on a quick Facebook survey of Cincinnati-area agents I did last night). Some agents recommend changing lenders instead, which would usually prompt a new appraisal. Others have had luck by using the right language: “please help me understand” rather than “what on earth are you looking at”. From my experience, it’s always worth a try, but don’t get your hopes up — discuss backup plans to be sure you know what your best options are.

Home Equity Saves the Day

NAR recently reported that the Baby Boomer generation has overtaken Millenials as the largest homebuyer segment in the USA, despite being a smaller percentage of the overall population and having lower income on average than Gen Xers. How are they doing it? By leveraging their home equity. As it happens, almost half of the over-60 crowd have been in their homes for 20 years or more, so not only have they been paying down their mortgages but their home values have increased dramatically. In the past 5 years, in fact, home prices have increased over 40% (on average) nationwide!

Homeowners have been using their home equity in a variety of ways, especially since interest rates started to rise to more stable levels after the pandemic. The most common use has been to roll the proceeds from the sale of one home into the purchase of their next home: in most cases, homeowners have enough equity to end up with a similar or lower monthly payment even if they are purchasing a more expensive property. More equity = larger down payment, or money to pay down other debts in order to increase your credit score and qualify for better loan terms. Another smart use for extra funds during this process is to buy down your interest rate — also known as paying points. This upfront fee buys you a lower interest rate for the length of your mortgage, enabling you to pay down the principal and gain equity more quickly.

Paying down debt or consolidating it is another popular use for home equity, especially with interest rates rising, high inflation, and relatively stagnant wages. Let’s say you have $20,000 in credit card debt spread over three credit cards, and your average interest rate on those is now 20%. If you took out a home equity loan or line of credit (HELOC) instead, your interest rate would be closer to 8%! If you were struggling to make those payments before and making little to no progress on paying down your debt, this lower interest rate should make a huge difference in your ability to pay the balance more quickly while also decreasing the amount of interest you are charged over time. The amount of equity you can use depends on the value of your home and your current mortgage balance, but if you’ve owned your home for 5 years or more, chances are very good that you’ll have enough equity to substantially improve mounting credit card debt.

But what if you love your home and don’t need to move? You can still use that home equity to make improvements to your home: think kitchen or bathroom renovations, new flooring, finishing a basement, adding an in-law suite, replacing your windows, or exterior hardscapes like a paver patio! If you’re not sure which improvements to make first, ask your favorite real estate agent — they’ll have the most up to date information on what buyers are willing to pay a premium for in your neighborhood. But in general, I’d recommend you prioritize like this:

1. If it’s broken or at the end of its life, fix it! Roofing older than 20 years, furnaces older than 15 years, windows and doors that don’t operate quite right, broken garage door springs, faulty electrical wiring…it could be anything, but waiting too long to do maintenance on some of these things can cause major problems.

2. Keep the water & critters outside, and the heating/cooling inside. This would include sealing any small holes or gaps in siding and soffits, adding weather stripping or insulation, regrading your yard to direct water away from the foundation, adding a french drain or basement waterproofing system (don’t forget a battery backup for that sump pump…you can thank me later), recaulking around plumbing fixtures, replacing hose bibs with anti-frost spigots, and more. Replacing single paned windows with insulated double-paned windows, or replacing a basic wood door with an insulated fiberglass door, can make a big impact on your home’s comfort and appearance, as well as on your utility bills.

3. Cosmetic updates, specifically those that positively impact your home value: over time there remain some upgrades that buyers are always looking for, some that are taste- or lifestyle-specific, and others that are appealing to only a small segment of buyers (or only to you!) or only certain areas/climates. Freshly remodeled kitchens, upgraded bathrooms, and finished basements have always been popular selling points; having suffered through some of these remodels myself, I can understand the appeal of finding a home that won’t need that kind of work anytime soon! Keep in mind that the finishes you’re choosing for these remodels need to appeal to a wide segment of people (your agent will be a great resource for this) or your improvements might not result in enthusiastic buyers when it’s time to sell. And if you’re thinking about adding a big ticket item like a swimming pool, pickleball court, pole barn, or elevator, make sure that buyers in your area share your desire for these amenities! Minnesota is not Tennessee, and California is not New York: real estate is local, so it’s important to understand what your local market wants.

Anyhow, that’s an overview of how your home equity can work for you — hope you found it helpful! Remember, even if you’re not ready to move, your favorite real estate agent will be happy to talk to you about your current home value, estimate your equity position, and advise you on the best bang for your buck when improving your home. They can also connect you with a skilled finance professional so you can determine whether using your equity to pay down debt is the best option right now.