What Is an HOA Special Assessment? What California Condo Buyers Should Know Before Buying

A beautiful condo can have new flooring, an updated kitchen, a great location and a monthly payment that fits perfectly into your budget.

Then you discover something that wasn't obvious during the showing.

The homeowners association needs millions of dollars for major repairs, doesn't have enough money saved in reserves, and owners may be facing a substantial special assessment.

That can change the economics of the purchase very quickly.

This is why buying a condominium requires a different kind of due diligence than buying a traditional detached single-family home. You aren't only evaluating the condition and value of the unit you're purchasing. You're also buying into an association responsible for maintaining and financing portions of the larger property.

Understanding that association can be incredibly important.

What Is an HOA Special Assessment?

A special assessment is generally an additional amount an HOA charges owners when regular assessments and available association funds aren't sufficient for a particular expense.

Imagine a condominium building needs a major common-area project. The total cost is significant, but the association hasn't accumulated enough money in its reserves to cover it.

The association may need another source of funds.

Depending on the governing documents, applicable law and circumstances, that can potentially mean a special assessment charged to the individual owners.

For someone considering purchasing a condo, an existing or anticipated assessment can therefore be extremely important.

Why HOA Reserves Matter

Think of HOA reserves somewhat like a homeowner's emergency and long-term maintenance savings.

Buildings don't last forever without maintenance.

Roofs wear out. Elevators require work. Exterior components deteriorate. Plumbing systems age. Parking structures need maintenance.

A well-run association plans for future expenses and accumulates reserves over time.

Problems can arise when an association repeatedly keeps dues artificially low while delaying adequate funding for future projects.

The monthly HOA bill may look fantastic.

Until the bill for deferred maintenance arrives.

That's why I wouldn't automatically assume that the condo with the lowest monthly HOA dues is the better financial deal.

Insurance Has Become Another Major Issue

Insurance deserves particular attention in California.

Associations can face rising insurance premiums, changing coverage options and higher deductibles. California HOA industry sources continue to identify insurance costs as a significant financial pressure for community associations.

And insurance isn't merely an HOA budgeting issue.

From the mortgage side, the association's insurance coverage can also matter when determining whether a condominium project meets the requirements of a particular loan program.

This is one reason I want condo buyers, agents, insurance professionals and the mortgage team communicating early.

Discovering an insurance problem three days before closing isn't anybody's idea of fun.

Why This Can Become a Mortgage Problem

Here's where my side of the transaction enters the picture.

With a condominium, lenders may need to evaluate more than the individual borrower.

Depending on the loan and project, factors involving the condominium project itself can matter.

That can include issues such as insurance, litigation, ownership characteristics and other project eligibility requirements.

A borrower can have excellent income, substantial assets and outstanding credit and still encounter a financing issue related to the condo project.

That doesn't automatically mean the property cannot be financed.

It may mean we need to understand the issue and determine which financing options, if any, are appropriate.

This is also where non-warrantable condominium financing can become relevant for certain properties that don't satisfy standard agency requirements.

What Should Buyers Review?

Your real estate agent and other appropriate professionals should help you understand the documents available for the specific property and association.

Among the items worth investigating are the association's financial statements, budget, reserve information or reserve study, insurance, pending or existing special assessments, significant upcoming projects and litigation.

Recent reporting on HOA due diligence has similarly emphasized reserves, upcoming improvements, insurance claims and the association's overall condition as important areas for prospective buyers to investigate.

The goal isn't to become an HOA accountant overnight.

It's to identify potential problems before you own a percentage of them.

Is a Special Assessment Automatically a Reason Not to Buy?

No.

Context matters.

Suppose an HOA approved a substantial assessment to complete an important project that will improve the building and resolve years of deferred maintenance.

That isn't necessarily the same situation as an association facing recurring financial emergencies without a credible plan.

The amount matters.

The reason matters.

How it's being paid matters.

The condition of the association afterward matters.

And from the financing perspective, the nature of the project and assessment may also require additional evaluation.

Don't automatically panic.

Investigate.

Low HOA Dues Aren't Always Better

Buyers understandably dislike HOA dues.

If two similar condos are available and one charges $450 per month while another charges $700, the $450 association initially looks much better.

But what are you getting for those numbers?

If the $700 association has adequately funded reserves and has consistently maintained the property, while the $450 association has delayed major work and accumulated little savings, comparing dues alone tells you almost nothing.

You need context.

Can You Finance a Non-Warrantable Condo?

Potentially.

Certain condominium projects that don't meet conventional agency requirements may still have financing options through lenders offering non-warrantable condo programs.

Eligibility depends on the borrower, project, property and specific loan program.

This is why identifying potential project issues early matters.

If the standard financing route won't work, I'd rather know before you've spent weeks in escrow.

Frequently Asked Questions

What is an HOA special assessment?

It's generally an additional charge to owners used to fund expenses beyond what regular assessments and available association funds can cover, subject to the association's governing documents and applicable requirements.

Should I avoid condos with special assessments?

Not automatically. Understand the amount, purpose, payment structure, underlying project and overall financial condition of the HOA before making that decision.

Can an HOA affect my mortgage approval?

Yes. Depending on the mortgage program, characteristics of the condominium project may affect project eligibility even when the individual borrower qualifies.

What is a non-warrantable condo?

The term generally refers to a condominium project that doesn't satisfy certain conventional agency project requirements. Alternative financing may be available depending on the circumstances.

Are lower HOA dues always better?

No. Monthly dues should be considered alongside reserves, maintenance needs, insurance, amenities and the overall financial health of the association.

The Bottom Line

When you're buying a condo, don't stop your due diligence at the front door.

You're buying the kitchen.

You're buying the bedrooms.

You're buying the location.

But you're also becoming part of an organization responsible for maintaining and funding the larger property.

That organization's financial health can affect your expenses, your ownership experience and potentially your financing.

So before you fall in love with the countertops, spend some time understanding what's happening behind the HOA statement.

You're not just buying the condo.

You're buying the HOA too.