Buyers wary of surprise HOA costs now have a safety net
HOA Warranty, a growing startup, aims to keep sales on track by offering protection against unexpected special assessments in buildings with low HOA reserves.
Key points:
- An estimated 369,000 homeowners associations operate in the U.S. — and around 70% of them have inadequate reserves.
- HOAs with a shortage of reserve funds face elevated risks of postponed maintenance and special assessments, which can lead to unplanned costs for homeowners.
- HOA Warranty, a company launched earlier this year by Chicago-based Realtor Rhett Graves, offers buyers and sellers a safeguard against surprise assessment fees.
Chicago Realtor Tori Gwin's client struggled to sell their unit in a 12-story building dating back to 1893.
The challenge wasn't due to a slow market. Buyers hesitated because the homeowners association (HOA) had only $2,000 in reserves.
"It gave people pause," Gwin told Real Estate News.
The concern was that a costly repair could quickly deplete the reserves, leading to a hefty special assessment soon after purchase. It's a scenario that is not uncommon among the hundreds of thousands of HOAs across the country.
To reassure buyers, Gwin turned to a new startup called HOA Warranty, which protects against unexpected special assessments. Gwin's seller paid $800 for a three-year warranty, and the deal closed on June 23. This was the second sale in the building where the seller purchased the warranty.
Startup seeks to address a rampant problem
Rhett Graves, a Chicago real estate agent with seven years of experience, launched HOA Warranty earlier this year after witnessing many sales stall or fall apart due to concerns over surprise HOA assessments.
"When buyers discover something during a transaction — whether it's a real issue or just a perception — it often creates major friction," said Graves, a second-generation real estate agent with a background in finance.
"Buyers usually expect the worst, while sellers naturally assume the best," he told Real Estate News, adding, "The gap between these viewpoints can be so large that deals fall apart."
Graves set out to bridge this gap by offering a safety net for buyers and giving sellers confidence that they can close deals — even in today's slow market.
HOA Warranty offers coverage options that include one- to three-year policies that range in cost from $380 to $800. Each covers up to $10,000 for a one-time event. For sellers, this may eliminate the need to place $10,000 in escrow for one or two years to facilitate a sale.
Buyers can negotiate or purchase a policy during the closing process. Agents, mortgage lenders and attorneys can also offer an HOA Warranty plan as a value-added service to help move deals forward, even when concerns about HOA finances exist.
HOA Warranty operates in 6 states — with more on the way
HOA Warranty is now available in Illinois, Indiana, Michigan, North Carolina, Ohio and Pennsylvania, and will expand into other states soon, according to the company's website.
"We cover houses, townhouses and condos — anything with an association of five or more units at this time," Graves said.
The market for this product could be large. As of 2024, there were 369,000 community associations in the U.S. that represented nearly 29 million housing units, numbers that have steadily grown since 1970, according to the Foundation for Community Association Research. Meanwhile, U.S. Census Bureau data indicates 67% of newly constructed single-family homes are in HOAs.
Why are HOA reserves dwindling?
While regular dues are meant to cover maintenance and reserve funds, unexpected repairs or disasters can drain money fast, forcing HOAs to levy special assessments. These unplanned costs, which can reach thousands of dollars per homeowner, are increasingly common.
Approximately 70% of HOAs lack sufficient reserves, according to Casey Arnett, president of Capital Reserve Analysts. In a September 2024 post on LinkedIn, Arnett noted that the standard benchmark is to have at least 70% of future capital expenditures set aside in reserve funds.
"Associations with a percent funded level of 70% and below have a greater risk of special assessments and deferred maintenance," Arnett explained.
Replacing a roof is often one of the largest expenses for townhome and condo buildings, like the one where Gwin sold a unit. Pools are a major cost for communities with detached homes.
Another challenge arises when HOA owners fall behind on their assessments. Graves recently heard from an agent who said many residents had stopped paying their unit fees. "The building got on the blacklist, so now they can't get Fannie or Freddie loans, and now everything's cash," he said.
Graves hopes his product can help facilitate sales even in challenging scenarios.
If a cash buyer is required, "You could maybe say, we'll give you three years of coverage to help facilitate this sale, to give them a little bit of hope," Graves said. "I don't think anybody should ever feel helpless."