Anytime I am working with a buyer who is considering a home in an HOA, I explain upfront that the HOA has real power over your homeownership, including the ability to foreclose on your home if you fall behind on dues. On top of monthly dues, an HOA can levy a special assessment at any time, which is a one time fee to cover capital repairs the HOA failed to save for adequately.

Right now, three things are creating a perfect storm for HOAs across California, and particularly in San Diego. 

#1 The Fire Insurance Issue

The fire zone maps were redrawn last year, and now more than half of San Diego County sits in a very high fire severity zone. Major carriers like State Farm have stopped writing new policies in California altogether, and getting fire insurance for homes in these zones has become difficult and very expensive.

HOAs are a particularly brutal case because the entire complex has to be insured under one master policy. Carriers do not want to touch that risk. Many HOAs are being forced into specialized, expensive coverage, and some cannot get coverage at all.

When that happens, the complex becomes unwarrantable from a lending standpoint, meaning no one can get a loan to buy a unit there. It guts the value of every home in the association. Whatever it costs the HOA to get coverage gets passed on to homeowners through rising dues and special assessments.

This law was enacted in response to the tragic Miami building collapse in 2021. Starting last year, it requires any building with three or more units to have all exterior elevated elements, meaning stairwells and balconies, inspected by a structural engineer.

Many San Diego HOA communities were built in the 1970s and 80s, and these elements have never been structurally inspected. The inspections required under SB 326 are uncovering dry rot, water intrusion, and major structural repairs that the HOA has not been saving for over the past forty plus years. This is a major driver of special assessments in the tens of thousands of dollars range.

And again, conventional lenders won't write a loan in a complex unless all critical repairs have been completed, so we're seeing many situations where homeowners are trapped with massive special assessments and they can't even sell because no one can get a loan for a unit in their complex until the repairs are completed. Some of these are major projects that will take 6 months or more. There is a very well known complex in Pacific Beach right now that is in this exact predicament.

The upside is that SB 326 has now been in place for about a year and a half, so buyers today get the structural engineer's findings upfront instead of buying in blind the way buyers did just a couple of years ago.

Even HOAs that have been responsibly saving for capital repairs are getting blindsided, because inflation since the pandemic has pushed repair costs to roughly three times what they originally budgeted for. Combine that with fire insurance costs and Balcony Bill structural repairs, and you have the current wave of special assessments hitting almost every HOA in the county.

None of this means you should avoid HOAs altogether, nor realistically can you because the majority of San Diego homes are in HOA communities. These communities can still be great starter homes and a smart way to start building wealth at a lower price point. You just have to go in with your eyes open.

When you buy into an HOA in California, you are entitled to a packet of HOA disclosure documents, and reviewing them is one of your contingencies, meaning one of your legitimate reasons to cancel the purchase without penalty. One of the most important documents in that packet is the reserve study.

Every HOA in the state is required to have a reserve study performed at least once every three years. An independent consulting company evaluates the condition of every component the HOA is responsible for, estimates its remaining useful life, projects the cost to replace it, and compares that against what the HOA actually has saved. That comparison produces a funding percentage.

• Under 30% funded is considered weak, with a high risk of special assessment
• 30% to 70% funded is considered fair, with a medium risk of special assessment
• 70% or more funded is considered strong, with a low risk of special assessment

It used to be common to see HOAs around 50% funded. Now, I am seeing almost every HOA at 30% or less, which is the red flag zone.

Here is a caveat I learned firsthand. Even a fully funded reserve can turn quickly. When I bought my office condo, the reserves were over 100% funded. The operating budget still could not keep up with expenses, and my dues have gone up 20% every year I have owned it.

We thankfully have not had a special assessment, but after some major capital improvements like a new roof, reserves are now around 60% funded and my monthly dues have gone from $375 to $550 in four years. Takeaway: A healthy-on-paper HOA can still cost you more than you anticipated. 

I will also say plainly that my broker's license does not allow me to advise on budgetary documents. Always have your CPA review the HOA's financials, including the reserve study. Consider this a guide to what to look for so you don't waste your time getting emotionally attached to a home in a nightmare HOA, not accounting advice.

Getting the reserve study before you write an offer is genuinely hard. HOA management companies gatekeep it closely because they charge a substantial fee for the full disclosure bundle once you are in escrow, so they will not hand it over to a prospective buyer, and often not even to the listing agent. The seller, however, is entitled to a copy and receives it with their annual disclosure from the HOA. 

We always ask the listing agent to request it from the seller. Unfortunately, a lot of sellers are out of touch with their HOA's finances and cannot easily track down their own copy.

If we can't get the reserve study directly, I'll reach out to the agents who represented buyers in recent purchases in the complex and see if they can tell me anything about the HOA's reserves. Unfortunately, most agents will not touch HOA documents at all for fear of liability, so they usually don't know.

But it's always a good idea to try to get the reserve study before you go through the process of writing an offer, opening escrow, doing inspections, paying for an appraisal, getting emotionally attached to the home, only to then find out that the HOA is a financial mess and you're likely to be hit with a $10,000 special assessment soon after closing. 

In this case, it's worth it to write the offer and open escrow, but write into the offer that the seller has to order the HOA documents on the first day of escrow and pay for a rush fee.

HOA management companies are notoriously slow to produce these documents, but will usually produce them within a day with the rush fee. You should have them before you have to deposit your earnest money with escrow and before you've paid for home inspections and appraisal, which can cost upwards of $1,000 between the two, and are not refundable if you cancel. 

If the reserves are dangerously low, you can then walk away before becoming emotionally and financially invested in the purchase. 

Another note based on experience: the management companies never produce everything that's required on the first pass. I always have to go back and forth with them to receive everything that the law requires, so expect that even on a rush, it will take some time to get the full picture of what's going on with the HOA. 

If you get the documents back and the HOA's finances are shaky but you still love the home, your options are to accept the risk or find a way to offset it. In one recent deal, I helped a buyer negotiate for the seller to prepay $10,000 directly into the HOA account on the buyer's behalf, because the reserves were only 10% funded and the reserve study made a special assessment in that range look likely.

The seller understood the risk and agreed. If they had not, my buyer would have walked. And we're glad that we negotiated that because less than a month after closing, my buyer got a letter from the HOA saying that a special assessment would be coming. 

A closing cost credit works similarly to keep more cash in your pocket instead of you having to pay for your closing costs. A price reduction doesn't work so well, because most financed buyers are putting 20% or less down, so you only save a fraction of the price reduction in terms of cash flow right now.

San Diego's real estate market can get competitive enough that buyers waive contingencies to win in a multiple offer situation. You should never do this with the HOA contingency, especially with everything currently going on. 

Thankfully the market for homes in HOA communities is not as competitive right now as the market for detached homes, which is exactly why we have had room to negotiate the types of concessions described above. 

But in some cases, you deal with an unreasonable or unrealistic seller, and they won't agree to the concessions necessary to make you feel comfortable moving forward, in which case you will exercise your HOA contingency and cancel the purchase. I will be the first person to tell you to walk away from a bad deal, and I have done so over HOA concerns many times. 

I'm a little bit of a Goldilocks when it comes to HOAs. Here's what I typically avoid off the bat: 

In my opinion, the sweet spot is around 20 to 40 units, because that's small enough that there's not a ton to maintain, and large enough that you have a decent pool of homeowners contributing to reserves. 

There are some changes to lending guidelines coming that will further impact HOA finances and home values.

In August, conventional lenders are retiring the "limited review" process that has applied to most HOA purchases when buyers put at least 10% down. That review used to be a simple questionnaire covering whether the Balcony Bill inspection happened and whether critical repairs were complete. Going forward, lenders will be required to do a full review, which can include budgetary documents, reserve studies, and HOA board meeting minutes.

In January 2027, conventional loan guidelines will also require HOAs to allocate 15% of collected dues to reserves in their annual budget. HOAs that don't do this will not qualify for conventional financing, and many that start before January will likely need to raise monthly dues to make the budget work.

Expect a more demanding documentation process, longer escrows, higher fees, and more uncertainty about whether a given complex will qualify for financing at all. Home values in HOAs will likely stay soft in the short run as more complexes run into financing issues, while dues and special assessments will continue climbing as HOAs work to get their finances in order.

There is an exemption for projects with 10 units or fewer, which stay under the limited review process. That makes financing easier on paper, but as noted above, smaller complexes tend to be underfunded to begin with, so buyers in those communities still need to do their own due diligence.

It will likely take several years for most California HOAs to reach healthy funding levels, and I expect home values in this segment to stay mostly flat in the meantime. California still has to address the underlying cost of insurance in fire zones, and it will be worth watching what direction the state takes on that.

If you are buying into an HOA community, plan to stay in place for at least five years. That is a good rule of thumb for building wealth in real estate generally, and it matters even more in HOAs that are working through a financial turnaround. Make sure you genuinely love the home, and keep extra cash set aside for special assessments and rising dues. 

To complement the action items noted above, I created a comprehensive HOA Due Diligence Checklist to help you. It includes the full list of disclosures you are legally required to receive from the HOA, tips on how to interpret them and what to look for, optional documents to request, questions to ask, and more red flags to look for. Download below, and when you're ready, click the button in my website header to book a discovery call with me.

Live well & invest smart!

This post reflects my experience representing buyers in HOA communities across San Diego and is general market information, not financial, legal or accounting advice. Always have your CPA review budgetary documents and the reserve study before removing contingencies.