HOA Guide for Buyers/Brokers
When purchasing a condominium, townhouse, or another type of property in a planned unit development (P.U.D.) such as a gated community, leased land property, or typical subdivision you are obligated to join a Homeowners Association (HOA) & pay monthly or annual dues for the upkeep of common areas & in most cases, building exterior maintenance. If you’re considering purchasing this type of property you should factor in, not only whether the obvious lifestyle choice you’ll be making suits your needs but, some additional factors that may impact your decision long-term…regardless of whether you elect to become an active participant in the process or not.
To arrive at a point where you’re considering purchasing a property managed by an HOA you most likely have already determined that it’s a suitable lifestyle choice for you thus, you’ve progressed to exploring the possibility of having your Broker submit an offer on your behalf. In conducting due diligence there are issues that are ‘black & white, such as what you can & can’t do and what happens when a violation of those rules takes place…those can be found in the C.C.R.’s (covenants, conditions & restrictions). In today’s world, these can typically be found on an organization’s online website, and carefully reading thru it can help you determine in short order whether you can adhere to those rules or not. In addition to C.C.R. you should have access to by-laws, meeting minutes, financials (including reserve studies), special assessment notifications, amendments, insurance policy coverage (including Directors & Officers policy – D & O), notifications of safety or structural integrity issues & of course, contact information for Board members.
Analyzing any of the above mentioned items, including the ‘black & white C.C.R.’s, really requires further examination in order to uncover certain issues that may not have revealed themselves where you might have expected to initially find them thus, assistance from your Broker in determining what effects any of these issues can have on your future financial situation is crucial. Depending upon the size of the Association and how well (or not) it’s run you could easily find that there are no monthly meeting minutes or perhaps just one meeting has been held in the last year. This second category of subjective information or ‘taking it at face value really brings us to the essence of the 3rd category, face-to-face old School due diligence. The fact that there might be missing or incomplete information can be troubling enough however, you shouldn’t leave any stones unturned here. Speaking directly with a Board member or attending a meeting, if you should be so fortunate as to be permitted to attend & there is one scheduled, will give you far greater insight into how things really work. After all, it’s your purchase & how you feel about individuals you will have to cooperate with in the future is a decision that only you can make, not your Broker. As a previous Association President, I found it insightful to see who the ‘players’ were & how they interacted with one another before making commitments to purchase or eventually take on that position. From a buyer’s standpoint, you may say “I’m purchasing this type of property because I want things taken care so, why should I be concerned with what happens behind closed doors ?”…the short answer is you should. With most everything that appears ‘black & white,’ your intuition still plays an important role in protecting your interests. The D & O insurance I referred to earlier not only covers the misappropriation of funds by Board members but, also situations wherein a Director/Officer may slander an individual. Regardless of whether you want to take an active role in the future dealings of the Association you are still being represented in your absence. The obvious parallel that comes to mind is Agency between you & your Broker wherein, speaking as an Oregon Licensed Principal Broker, what your Broker says on your behalf may have unintended negative consequences for you thus, carefully selecting representation that is tempered with practical application of State Law & delivered with some degree of diplomacy is crucial.
In addition to making certain that the above-mentioned due diligence items are available to you there are some considerations worth mentioning that you and your Broker can further examine as everything isn’t always ‘black & white. For example, going beyond whether or not the Associations Master Policy (different from the D & O) has enough dollar coverage there may be a fast-approaching limitation to the number of rentals allowed that is not stated elsewhere & may cause rates to either escalate, cancellation of the policy or your inability to rent out your unit, even though other information you’ve obtained seems to indicate it’s O.K. Perhaps the Association hasn’t addressed an issue in any amendments that were made available to you that pertain to matters of insurance, such as requiring certain types of dryer duct material being used & licensed contractors being required to clean it on an annual basis. Obviously, monthly dues, as well as reserve funds for capital expenditures, are considerations that go well beyond whether it fits your budget or not. With your Broker’s guidance, you’ll want to determine whether dues are appropriate for the area, size, age & condition of the property. As you are already aware, your lender looks at monthly dues as additional debt while you may have already calculated the monthly expenses that are now included as a help to your overall monthly budget…two different ways to look at it but, the lender is what matters. Ultimately, a future buyer’s qualification for a loan could be hindered by excessive dues, not to mention that dues above the norm could be an indicator of less-than-stellar management. Of course, the pendulum swings both ways thus, below-market dues could mean deferred maintenance & a future special assessment when you least expect or can afford it. The Association I was involved with in the past as President would fall into the latter category, very low dues however, because it was ‘Grandfathered’ in and wasn’t required to at the time it was founded, we had no reserve fund for future capital expenditures. This would be yet another example of a situation wherein a buyer would want to add any personal interaction into their due diligence in order to make a well-informed decision about the people running things on their behalf.
Finally, in gathering information to help you make a well-informed decision you’ll use various websites, your trusted Broker, perhaps an Attorney, and a Title & Escrow Company. The resources that have been gathered by Title Companies, along with the knowledge of the Escrow officers, assistants, Title researchers & Attorney has made the chore of gathering critical information so much easier that I’m not sure what Broker would do without them. Like most anything else, the information we get out is only as good as the information that goes in thus, an Association that doesn’t keep up to date on things could easily forget to note or record a lien. Again, this is where that ‘old School’ in-person due diligence comes back into play as again, at least here in Oregon, a standard General Exception to a Preliminary Title report will make exceptions for items not shown or recorded that could have been ascertained by making an inquiry. Bringing some additional knowledge to the table is beneficial to your knowledge as much about a property with an HOA (or any other for that matter) & as for the Broker, simply being able to point out as many potential pitfalls along the way will certainly make for an appreciative client.
Bob Zawaski G.R.I.
Oregon Licensed Principal Broker
Investors Trust Realty