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Do association assessment fees change with inflation?


Monthly HOA fees pay for the upkeep of your building, but sometimes an assessment is required to pay for an unexpected repair.
Monthly HOA fees pay for the upkeep of your building, but sometimes an assessment is required to pay for an unexpected repair.
Medioimages/Photodisc/Thinkstock

Perhaps you've heard the saying, "A rising tide lifts all boats." Well, in this case, inflation is the tide, and the association assessment fee is one of the boats.

While monthly homeowners' association (HOA) fees pay for regular expenses associated with the upkeep of your unit and the community, assessment fees are used for unexpected or occasional needs. An assessment might be needed to paint the lobby of a condo building, for instance. If the price of paint goes up due to inflation, the painters will pass that added cost to the condo. Thus, the assessment will be higher as well.

The decision to impose an assessment falls to the homeowners' association. The HOA can't control inflation, of course. It can limit its impact on homeowners, however, by limiting the need for assessments. And the best defense against assessments is a reserve fund.

Like an assessment, a reserve pays for large expenses both planned and unplanned. Homeowners contribute to the fund as part of their monthly HOA fees, and the money is invested. With careful planning, and a little luck, a reserve may eliminate the need for an assessment entirely.

A reserve also allows the HOA to plan major expenses in a way that saves the community money. Suppose a condo building needs a new water heater. An HOA with sufficient funds can have the heater replaced sooner rather than later, after getting estimates and checking references from various companies. If, instead, the HOA has to wait until it builds up the reserve, the heater could go out at the worst possible time -- on the coldest day of the year, say. The HOA may then be forced to hire the first available company, who may not be the best or most affordable choice. Not only will owners have to pay an assessment, they may wind up overpaying for both the water heater and the work. That's especially frustrating and financially draining when budgets, and people, are stressed by inflation.

As a firewall between inflation and assessments, however, a reserve falls short in one important way. The HOA has a twin duty when investing a reserve: to protect the principle -- to not lose the money -- and to grow the fund to meet the community's short- and long-term needs. Typically, the HOA invests in a variety of safe, FDIC-insured products such as certificates of deposit (CDs) and Treasury bonds. But low-risk investments usually offer low returns. In inflationary times, higher prices may swallow up the interest the fund generates. Other investments like mutual funds offer the promise of higher interest rates. These products aren't insured by the FDIC, however, and investors risk losing everything, including the principle.

While nothing, including a reserve, can protect a homeowner from inflation, prospective buyers can protect themselves from unexpected assessments by investigating the financial state of affairs for each property they consider. Compare the HOA's budget and reserve figures with the age and state of the property. Will the funds on hand cover any imminent repairs or planned improvements? Also, it might be worthwhile to buy assessment insurance, which pays all or part of the owner's share if an assessment is levied.