House hunting is an overwhelming task in today’s market. With the growing number of community associations, there is a whole other layer of red tape buyers have to contend with to get into their dream home. Don’t let the closing process turn into a nightmare. Here are 5 things to keep in mind when buying in a community association, whether it be an HOA, COA or other mandatory association.
Homeowners’ Associations and other Common Interest Communities are becoming a more common part of homeownership. We’ve discussed some of the pros and cons of living in an HOA previously.
So, if you’ve decided that buying a home in an HOA is right for you and your family, here are 5 key things to keep in mind before and during the closing process.
1. Any unpaid fees and violations from the previous owner becomes your responsibility
If you are thinking of buying a bank owned or HOA foreclosed property at auction because it will be a steal, think again. These properties are often sold AS IS and they come with a lot of problems and often multiple liens from the HOA, lenders, and municipalities.
We’ve heard some tragic stories of homebuyers that were stuck with huge bills from associations because they failed to request an HOA estoppel or certificate before closing. This typically happens on cash deals when there is no lender involved requiring due diligence and a traditional title search.
Even when it is a typical sale, the buyer should always request information in writing from the association to confirm there are no violations, outstanding fees, or that the property isn’t in collections. The fact of the matter is, that many units in associations will have unpaid dues or code violation fees attached to them.
In just the first quarter of this year, our property analysts uncovered an average of $2,085.63 in HOA fees due at closing.
The payment of these fees must be negotiated between the buyer and the seller while the property is under contract. The only way to make sure that the buyer will not be held responsible for the unpaid HOA fees and forced to bring violations into compliance is to request an Association Estoppel or HOA Resale Package that will disclose all of this information.
2. HOA code violations can become liens
Resale Packages, sometimes called Association Estoppels, verify if there are any outstanding fees or violations on the property. If these violations have fees, they can become liens at anytime before, during, or after the closing process.
If an HOA has a lien on a homeowner’s property, it may foreclose on that property—even if there is a mortgage on the property—as permitted by the CC&Rs and state law. HOAs have this “super-priority lien” status in 21 states.
As a buyer, you want to make sure that a title search is conducted by a real estate attorney or title agent on the property before closing so that your investment is protected not only from liens placed by a mortgage holder but also HOA liens that could affect your right to ownership.
This is especially important if you are buying the property at an HOA lien auction. Having an owner’s title insurance policy will guarantee that your investment is protected from any of these recorded liens should they be missed in the title search before closing on the property.
Even if the seller, in good faith, reports there are no liens on the property, that’s no guarantee that they’re correct.
There are three major reasons an HOA lien may not be divulged by a seller before you buy.
- The current owner is simply unaware of the lien.
- A lien was filed on the property by mistake or a release was not subsequently recorded.
- The seller isn’t aware of all the associations governing their property.
The title search is imperative to uncover these recorded issues so that they can be resolved before closing or the buyer can cancel the deal.
In addition to the title search, a buyer should also request a Resale Package to ensure there are no current violations that could eventually become liens they will be responsible to pay. If there is a current violation waiting for a correction, it will NOT be found in a title search and will not be covered by your title insurance policy.
Disclosure Statements vs. HOA Resale Package
Many buyers erroneously assume that a seller is required to disclose all issues with a property, but it really depends on your location and the type of issue. If intentional deception or neglect on the seller part can’t be established, there’s usually limited legal action that a buyer can take to either reform or void the contract.
A Disclosure Statement includes information related to the safety of the property and recorded liens. This isn’t an exhaustive list and some items may vary depending on your state’s regulations, but you can expect to see things like:
- Construction done without a permit
- Lead-based paint
- Appliance, HVAC, and electrical malfunctions
- Property line or zoning disputes
- Termite issues
- Weather damage
- Deaths occurring on the property
- Fire hazards
- Leaky windows, doors, and pipes
- Unusual odors
- In the state of New York, sellers are required to disclose if the property is believed to be haunted.
Resale Packages will also vary from state to state, but typically you’ll find the following type of information:
- Dues amount and schedule
- Outstanding dues
- HOA Code violations
- Annual financials
- Articles of Incorporation
- Declaration of Covenants, Conditions, and Restrictions (CC&Rs)
- Insurance Declaration Page
- Regular Meeting Minutes
- Reserve Report
- Rules and Regulations
3. Ask if the association performs HOA Resale inspections
Failure on behalf of an association to enforce rules set forth in their covenants over a period of time could result in nullification. Not all associations have the ability to constantly monitor their communities for code violations, so some HOA’s will implement a Resale Inspection Rule. This rule allows them to keep up to date on their covenants. This can apply to condominium units as well as traditional single-family units.
The Resale Inspection Rule means that a seller or their real estate agent must alert the association when the property is being listed. This will lead to an inspection of the property to determine if there are any current violations that need to be corrected.
The Catch-22 of Obtaining Full Disclosure on HOA Properties
While this rule is a cost-effective way for associations to manage their communities, it can lead to new owners violating HOA rules without any intention to do so.
Some sellers may not be aware of their association’s Resale Inspection Rule while others may request the mandatory inspection and not disclose the report. In these two cases, the buyer usually has legal recourse should a violation be revealed after entering a contract with the seller or after closing because there was negligence or intentional deception on the seller’s part.
However, if the seller requests this inspection, but the report is not received prior to closing or the inspection occurs and the report is received prior to closing, but after the purchase contract becomes binding, the buyer may be limited to remedies. This means that the buyer will most likely have to pay to correct these violations.
In a hot seller’s market with low inventory, a desirable home may sell so quickly that the HOA inspection and report aren’t completed before the closing contract is drawn up and the buyer and seller are both completely unaware of an existing violation.
To avoid being held responsible for any current violations, be sure to thoroughly research the HOA’s rules before you make an offer and read the seller’s disclosure statement. Make a written request to the seller to answer the following questions:
- Does the HOA require an inspection when there is a sale?
- If so, have you complied in all respects to with that requirement?
- Are you as a homeowner currently in compliance with all HOA rules?
- Is the property currently in compliance with the association’s rules and covenants?
- Has there been an HOA inspection or report related to your property in the past 2 years?
- Do you expect to receive any report from the HOA prior to, during or after closing?
- Please provide the names and contact information for all current HOA officers.
Follow up with your real estate agent to see about adding a contingency to the contract should the HOA require an inspection that will not be completed before closing.
4. Check your closing contract for HOA addendums
After you made an offer that’s been accepted, be aware of how your state’s standard contract may affect your ability to negotiate. Many have a specific addendum for HOA’s. Depending on your state’s standard closing contract, you may have a short window to review all the documents you will receive from the seller and the HOA.
There may also be stipulations on what is considered a valid reason for cancellation of contract depending on your state’s regulations. If you don’t like some of the HOA rules and bylaws, you may have limited ability to cancel the contract after a certain time or it may not be a valid reason to cancel at all, and you will potentially lose any deposit you put down when you entered into the contract.
The seller is typically required to alert a buyer if there are any changes in mandatory fees exceeding a particular percentage of the amount previously stated to exist and copies of any other substantial and material amendment to information provided by the HOA.
Negotiate a cap in outstanding HOA fees
Some properties are governed by more than one association. If an additional association is missed before writing the contract, or before closing, the buyer can still be held liable for current unpaid fees if they weren’t recorded liens. This is because while your title insurance will cover any missed HOA liens, it will not necessarily cover violation fees that have yet to be recorded.
Having a negotiated cap for any undiscovered outstanding fees that you will pay in your contract will give you extra protection from a missed association scenario.
Always cancel a contract in writing. If you cancel within the terms of the contract, you should be entitled to a refund of any deposit you made on account of the contract.
5. Work with real estate professionals that perform complete real estate due diligence
This is probably the most important piece of advice to follow, especially for first-time homebuyers. If you are thinking of going it alone, you may want to reconsider. Having an experienced real estate professional on your side during negotiations who understands the local and state rules affecting your closing is priceless. They will be able to provide valuable advice and guidance.
If you have more questions about the homebuying process, be sure to check out our Real Estate Due Diligence for Home Buyers series.