Ask an Edina Realty Lawyer: What are special assessments and how do they affect me?

Homeownership can be complicated, but it can be one of the most rewarding ventures, too. 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 along with their potential to impact home buyers, sellers and owners.

Dear Edina Realty Legal,

We have been looking at some properties in a particular neighborhood and many sellers in that area have mentioned that they received a special assessment notice. What is a special assessment, and how does it affect us as interested buyers?

This is a good question, and it’s smart that you’re considering these assessments before you make an offer on a home. If the government wants to make an improvement to an area, like repaving a road, it may charge the cost of that work to the homeowners directly impacted by the improvement. To make this change and assign the associated fee, the government must go through the special assessment process.

Ultimately, this could result in property owners owing money (aka a special assessment) for their determined share of the improvement.

What is the special assessment process?

A special assessment usually starts with an idea within the local government. Typically, city or county officials will introduce improvement projects that are necessary for their jurisdiction. Most commonly, these are projects to repair or build:

• Streets
• Sewer systems
• Sidewalks and curbs

In order to impose such an assessment, the government must follow a specific process made up of the following stages:

• Notice and holding of an assessment hearing
• Estimation of pending special assessment costs
• A levied, or charged, assessment

Stage one: The assessment hearing

Because a special assessment will have a financial impact on homeowners, it’s required that notice of the project is given to all affected individuals. Additionally, all homeowners in the area must be provided with an opportunity to demonstrate their objection or support for the possible project and assessment in a hearing.

As a prospective buyer, you’ll know if a property has notice of potential improvement projects that could result in an assessment because sellers are required to disclose that information. 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 down the line.

Stage two: The assessment becomes pending

At the improvement hearing, the government will consider the need for the project and vote on whether to move forward with the assessment. 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.

Whether you’re interested in buying or selling a home with an existing special assessment obligation, your REALTOR® will help facilitate the negotiation of who is responsible for the pending fee. Typically the negotiation results in one of two scenarios:

• The seller will escrow funds to pay the assessment once it is finalized.
• 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.

Typically, a levied assessment isn’t required to be paid in full immediately. Instead, payments may be added to the taxes for the property and can be paid in installments over many years.

In Minnesota, 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 involved parties. In Wisconsin, sellers are usually required to 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.

HOA fees are typically based on a reserved budget for repairs and projects. But sometimes, the reserve is not sufficient to cover the cost of a needed project, especially if it was unexpected. In that case, the HOA may assess the cost of repairs, then charge a special assessment to the owners.

If a buyer is interested in a condo that happens to have an active special assessment, the responsibility for these costs would be addressed in the purchase agreement. Just like a single-family home transaction, the condo buyer and seller would work with their Realtors to negotiate who will pay the final special assessment charges.

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.