They say humans are born with only two fears: the fear of falling and the fear of loud noises. But as we get older, we learn to be afraid of lots of other things, from snakes to radio show hosts on the other end of the political spectrum from ourselves. (I kid. Sort of.)
But seriously, one of the biggest, learned fears of home buyers and home owners, old and new, is the fear of unpredictability in our home-related expenses, whether it be an unexpected one-time repair or just a trickle of little, monthly costs we didn’t account for.
The fortunate thing about this particular set of fears is that you can unlearn them by getting educated about the common surprise costs that arise and managing them systematically. Here’s a how to do just that:
1. Property tax increases. So, you got a 30-year-fixed home loan, and you set up an impound account with your bank so as not to have to worry about paying big lump sums for your property taxes twice a year. Fact is, the day could still come where you get a note from the bank advising you that your payment is going to go up – because your property taxes have increased! Property taxes are based on your home’s value, so as the value of your home rises, your property taxes will likely also go up over time.
Talk with your mortgage professional about how homes are reassessed for tax purposes in your area: how often they are reassessed, when, and whether there are any limits on how much your taxes can go up in a given year. Understanding how tax increases work and what their limits are allows you to predict and project your worst case scenarios in terms of extra costs, years in advance. It also helps to know that in a down market, your homes value – and property taxes – can also decrease, and to know that your property taxes are deductible on your income tax return. So, if you do have increases, you’ll have a corresponding tax break.
2. Utilities. Garbage, gas, water – these all cost money, something that’s easy to forget when your landlord is covering them. But when you own a home, you also own these bills. During the buying process, it can be very difficult to predict exactly how much these bills will run. Your best bet is to ask the seller if they will kindly provide you with copies or at least the amounts of their recent utility bills, so that you can have some sort of basis in reality for your own budget and spending plan. Also, it’s not a terrible idea, once you own the place, to go through and do an energy audit to find places where you can stop leaks of heat, cool air and water, and otherwise put a cap on those utility bills.
3. Unexpected repairs. Obviously, the reason we get disclosures and inspections and such is to minimize the likelihood of buying a lemon of a home – and minimize the spectre of unexpected repair costs. Your first line of defense at managing these costs is the one-two punch you have to execute during escrow: (1) reading your disclosures and inspection reports and getting repair bids for any issues that arise therein, and (2) obtaining a home warranty to cover things that arise later on.
Most people get #2 right, but don’t pay as much attention to disclosure and inspection report follow-up as they should. The other common fail is that people allow their home warranty to expire after a year, rather than paying the annual renewal fee (new home owners: expect to see this in the mail 10 or 11 months after closing). Don’t fall into either of these pitfalls: if you own a home long enough, chances are good that you’ll eventually have some unexpected need for a repair come up, whether it’s a plumbing snafu or a roof leak. Keep a handle on your home repair bills by keeping a home warranty in place, and keeping your home’s systems well maintained (see #6 on this list).
Beyond that, stay smart about your financial planning by diligently saving so you have funds to tap into in an emergency, and by making informed decisions about your insurance policies (e.g., exploring flood or earthquake insurance if you live in an area where these are common hazards). Ask your home owners insurance provider to brief you on what is and isn’t covered, to be sure you’re not unduly exposed to repair costs if bad things happen.
4. HOA dues increases. If you choose to buy a home in a Home Owner’s Association (HOA), you’ll be given a number of disclosures about what the HOA dues are during escrow, so the dues themselves should be no surprise. What can come as a surprise, though, is the fact that dues can go up over time – sometimes in relatively shorter order. I’d encourage you not to skim lightly over what may seem like the least important of the HOA documents you’ll receive: the newsletters and board meeting minutes. You might expect them to be full of minutae like stories about Mrs. Cranston’s rogue tabby cat – and indeed you might find that in there – but you’re also likely to find discussions of proposed HOA dues increases far in advance of them being enacted, as well as discussions about major building or complex repairs and upgrades that need to happen and how they will be paid for.
The other thing you can and should do to avoid getting blindsided by an increase in your HOA dues is to simply be a present and active participant in your HOA, including attending board meetings, sitting on the board or simply building relationships with your neighbors. The board makes many decisions which impact the HOA dues and assessments that will be levied on all members. So getting yourself on or in the room with the Board puts you that much closer to the power position for managing your dues.
I only have anecdotal evidence on this point, but I believe strongly that HOAs where the members have close interpersonal relationships are HOAs where the members are much less likely to default on their dues – even if they default on their mortgages! Associations nationwide have been plagued by high rates of dues default since the start of the recession, and when one or five or eight members default repeatedly, everyone else’s dues are likely to be raised to cover the shortage. Having your neighbor over for coffee on occasion or watering their plants while they travel boosts your chances of keeping a handle on your HOA dues and are just nice neighborly things to do – if they help keep a lid on your costs of homeownership, too? All the better.
5. Special assessments. There are two types of special assessments for homeowners. The first are assessments imposed by the City, County or State on top of your property taxes, to pay for things like street lighting, parks, first responder agencies and to help the schools out – these are often imposed after a city or district-wide vote, which helps you predict for them. If you’re planning to buy a home, often the seller’s tax bill – which you can get from them or even, in most areas, on the county tax assessor’s website – will list the existing special assessments separately from the property taxes, so you can know how to budget for them.
The second type are assessments imposed on HOA members when the building or complex needs a major repair that the HOA has insufficient funds saved up for, or a large, unexpected repair needs to be made. For example, I know of a number of California HOAs that imposed special assessments to replace the buildings’ roofs when many insurance companies stopped covering buildings with wood shake roofs.
Again, staying involved with your HOA and board helps keep you apprised and avoid being completely shocked by special assessments, but it also behooves buyers of homes in HOAs to look carefully over the HOA financials, including their reserve account statements and their plans for maintaining the buildings over the years. Many HOAs do a great job of planning to replace roofs, windows, private roads and walkways years in advance – and saving up for these projects – to minimize the chances of having to make surprise special assessments. And others, well, don’t.
6. Basic maintenance. When I bought my current home I gutted it to the studs and remodeled it completely, including all new appliances and systems,so I haven’t had to do many fixes on broken things – knock wood. Yet and still, every year, Spring rolls around and I end up spending a nice chunk of change just keeping the place in tip top shape, from having the gutters and carpets cleaned, to having the windows and exterior power washed, to having my backyard (known affectionately by my friends as Jurassic Park) weeded and the paint touched up inside and out. Being aggressive about maintaining your home on an ongoing basis allows you to avoid bigger, scary repair bills later on – but it does cost.
The only way I know to manage these costs are to plan for them – I keep a running spreadsheet of little fixes, touch-ups and mini-upgrades (e.g., putting in a dimmer, etc.) I want to do to my home. That allows me to plan and budget for them all year round, so that it’s fun and exciting when the time rolls around to do them. Some maintenance costs, like pest control, may be available on a monthly contract with your vendor, making them much more predictable. Finally, these are costs that are well-suited to being minimized by a little DIY weekend work – if you’re so inclined and you have the time, you might be able to do these sorts of basic maintenance items yourself to keep the costs down considerably.
All: Have you ever had a surprise cost burst your home ownership bubble? What was it, and what advice would you give for avoiding hidden costs to new home owners?