Homeownership can be complicated, but we also think it’s one of the most rewarding ventures out there. In our series, Ask an Edina Realty Lawyer, we are hoping to demystify some of the trickier aspects of buying, selling and owning a home.
In this edition, one of our lawyers discusses special assessments and how they impact buyers, sellers and homeowners.
Dear Edina Realty Legal,
We have been looking at some properties in a particular area and many sellers have mentioned that they have received notice about a potential special assessment. What does that mean and how does it affect us as buyers?
If the government wants to make an improvement, like repaving a road, it may charge the cost of that work to the homeowners directly affected by the improvement. In order to make this charge, the government must go through the special assessment process.
Ultimately, this could result in the property owner owing money for their share of the improvement — that charge is called a special assessment.
What is the special assessment process?
A special assessment usually starts with an idea at the local government level (often the city or county) about some necessary improvement project. Most commonly, these are projects to repair or build:
- Sewer systems
- Sidewalks and curbs
In order to impose an assessment, the government must follow a specific process.
Stage one: The assessment hearing
Because the project will have a financial impact, affected homeowners must be given notice of the project — and an opportunity to object to (or show support for) the project and the assessment.
Before the government can start the improvement, it holds a hearing. All homeowners who may have to pay an assessment are given notice of the hearing.
If sellers have received notice of a potential improvement project that could result in an assessment, they must disclose that to prospective buyers. If you’re looking at a property and learn that the seller has received such a notice, you should inquire further about the status of the project to see how it might affect you.
Stage two: The assessment becomes pending
At the improvement hearing, the government will consider the need for the project and the assessment. It will then vote whether to move forward with the project. If the government votes to proceed, the assessment is typically considered “pending.” While in the pending stage, the assessment amount for each property is estimated, but nothing is actually owed yet.
In the standard Minnesota purchase agreement, the buyer and seller will negotiate who is responsible for pending assessments. The parties may agree that the seller will escrow funds to pay the assessment once it is finalized, or they may agree that the buyer will assume the obligation to pay the assessment.
Note: In Wisconsin, buyers typically assume the cost of the future or pending assessments. Sellers will typically pay an assessment that has already been levied.
Stage three: The assessment is levied
When the improvement project is complete, the government will take action again, by voting to approve what is called the assessment roll. The assessment roll is the list of specific assessments that will be charged to each property. When the assessment roll is approved, the assessment becomes “levied,” or charged.
A levied assessment often isn’t required to be paid in full immediately. It is added to the taxes for the property and is often payable in installments over many years, which lessens the financial burden on property owners.
In Minnesota, just like with pending assessments, the purchase agreement will address whether the seller will pay off the entire assessment at closing or whether the buyer will be responsible for making those payments over the next several years. This is an important decision as it can have a significant financial impact on the parties. In Wisconsin, sellers usually pay an assessment that’s already been levied.
Note: In rare cases, an assessment cannot be paid off early and must be assumed by the buyer.
Condo and townhouse assessments
The government is not the only entity that can impose a special assessment on a property. If you live in a condo or townhouse, the homeowner’s association (HOA) can also impose special assessments.
HOAs take a certain amount from the monthly dues they receive to reserve for repairs and projects. But sometimes the reserve is not sufficient to cover the cost of the project, particularly if it was unexpected. In that case, the HOA may assess the cost of repairs, then charge a special assessment to the owners.
The responsibility for these costs would also be addressed in the purchase agreement, with the buyer and seller negotiating to determine who will pay the final charge from a special assessment.
The Edina Realty Legal Department serves as in-house counsel for Edina Realty and does not represent private clients. This Insight is not intended to provide legal advice.