Previous articles have discussed hidden costs, property taxes, HOA fees, and the overall financial burden of living in a homeowner's association. However, during these discussions, there has always been an implicit mention that HOA dues directly impact the value of a home. Every homeowner, whether buying, owning, or selling, should be conscious of an HOA's financial roadmap. This will determine when the home is at its optimal price point (low when buying, high when selling).

Over the years, I have personally witnessed homebuyers pulling out from deals due to high dues or a bidding war due to low HOA dues. Hopefully, this article can shine some light on the direct impact of dues on property value.

Capitalization Rate

While this terminology is not required to understand the discussion below, numbers-oriented readers can benefit to understand the underlying theory. Specifically, every business and sector has a "capitalization rate", or cap rate. This represents the income to business value, or in this case property value, which measures the productivity of a given asset.

In the world of real estate, the capitalization rate is calculated by dividing the net income by the property value. The net income, in this scenario, is the rental rate of the property. For example, a $1,000,000 home renting for $72,000 annually has a capitalization rate of 72,000 / 1,000,000 = 7.2%.

A reasonable cap rate for the real estate market is 6-8%, but can fluctuate depending on the market. For riskier assets (where the property value can fluctuate a lot), investors want a higher cap rate (or asset productivity) around 8-10%. Less-risky assets can tend to hover around 4-6%. This article will assume an average home asset risk of 6-8%.

Actual Cost of the $100-HOA Theory

From a high level, appraisers and agents utilize a common rule. Every $100 of monthly HOA due increases results in a $15-20k drop in property value. This is calculated by computing annual HOA dues ($100/month = $1200/year), and dividing it by the capitalization rate (6-8%).

For example, imagine a home costs $1M and it rents for $72k annually. This results in a capitalization rate of 7.2%. If HOA dues increase by $1200/year, this value is divided by the capitalization rate ($1200 / 7.2% = $16,667), resulting in an approximate $16,667 drop in property value.

Importantly, this rule is an approximation, but can be exercised by existing homeowners or board members to measure impact of financial decisions when anticipating home purchases or sales. The theory/rule is widespread because it's simple to understand, holds true under most markets, and provides material numbers rather than guesswork when purchasing into a neighborhood.

Why HOA Fees Hit Harder than Mortgage Costs

The $100-HOA Theory (name is coined by me, but the theory has existed for a while) is a great measure of the impact of HOA dues on property value. However, corresponding mortgage costs do not work in a similar fashion. For example, a $100/month mortgage increase does not result in a $15,000 drop in property value.

This is because mortgage costs highly fluctuate due to rate changes or re-financing. In other words, mortgage payments can increase and decrease, but HOA fees in practice almost never decrease. This stability in HOA fees results in underwriters accounting for them when writing a loan. If a buyer has a $3000/month budget, but the HOA is $500/month, then they can only afford a $2500/month mortgage, resulting in less home and more financial overhead. The buyer can only afford a smaller home with lower property value, due to the HOA, and once those HOA dues inevitably increase, it further hurts the property value, resulting in two separate problems.

This is useful knowledge for both homebuyers and investors when determining whether they want to purchase within an HOA or not. Many do not like purchasing condos, since they almost always belong to an HOA. This subsequently results in a lower rate of return on investment value. The Harvard Joint Center for Housing Studies observed a 4.7% appreciation of single-family homes in 2024.[1] Condos tend to lag by 1-2%, so it's safe to assume condos appreciate at about 3-5% annually and single-family homes hover around 5-7% annually.

Exception to the Rule

High HOA fees don't always mean the end of the world. Some homeowners seek out HOAs with high fees because it implies more amenities that aren't provided elsewhere. These include security, concierge, business rooms, spas, saunas, hot tubs, better panoramic views, and other luxury features not found in communities without an HOA.

Country clubs are another example. Increased dues indicate exclusivity and elevated lifestyle. These communities are a bit rarer and also don't fit the median homebuyer, but the point still stands. The luxury of not having to worry about the building is a nice-to-have that can be sought-after, especially in retirement communities.

How to Circumvent the $100-HOA Theory

Special assessments are generally viewed in a negative light, fittingly so. However, their major benefit is they are not included in the home listing. When the property is put up for sale, only the base HOA fees are mentioned. This can lead to the illusion of a lower HOA cost, due to a hidden special assessment, resulting in more prospective buyers.

For example, will somebody be more interested in a home with a flat $700/month HOA or a home with a $500/month HOA plus a $200/month special assessment set to expire in a year? Both have the same financial cost for the next year, but one is seen as short-lived and more attractive. This should be exercised by both the HOA and homeowners when selling a home and aiming to attract as many buyers without sacrificing the integrity of the building.

Takeaways

When buying, take into account the current HOA dues. Ask about the history of fee increases, upcoming special assessments, and the percent funded from the most recent reserve study (look for at least 30% funding).

When selling, try to utilize special assessments to make a more attractive deal to the buyers and emphasize short-term costs that they won't have to pay years down the road.

If currently living in the HOA, advocate for financial health of the HOA. Try to avoid surprise expenses, knock out line items from the reserve study, and get the reserve fund up to 30% funding at least. This will increase future property value for all homeowners.

No matter the scenario, HOA fees impact property values and the subsequent decision-making. Homeowners should be aware of all tricks and numbers being utilized in the process and how to use them to their advantage. This can be done by visiting our free HOA Lookup Tool to ensure you're getting the best deal in your neighborhood.