Title Tip: When Buying or Selling, How Do You Deal With an HOA?

By Lydia Blair
Special Contributor

Dear Diary,

OMG. My HOA is sooooo horrible. They’re, like, the worst ever. I mean, it’s like the mean girls of the school. I can’t even. They’re just trashing my entire experience. Like, totally! Turns out my condo isn’t warrantable. As if. And that rush fee they charged ate my swag money. Hashtag whatever.

Signed,

Throwin’ Shade Gal

Hey girl. I hear ya. But you might as well chillax, ’cause all HOAs (Home Owner Associations) are typically a hassle when you’re buying or selling a property. Seriously.

A property with mandatory HOA always adds another pile of paperwork to the transaction. And additional costs. Some more than others. You may be dealing with a Home Owners Association that governs the neighborhood where you live. Or you may be in a condominium under HOA management. These associations enforce restrictions, oversee common areas, supervise maintenance and repairs, … and generally ensure everyone follows the rules they’ve all agreed to.

Paragraph 6E (2) on the residential contract addresses mandatory property ownership associations. When there is a mandatory association, an addendum is attached to the contract that states when the HOA documents and resale certificate must be delivered to the parties. It’s worth reading if you’re buying or selling in an HOA community. Several other caveats are included in the addendum.

For condo sales, the standard Texas Real Estate Commission condominium contract deals with the documents, restrictions, etc. right on page one. And it seems like most resale problems for buyers and sellers are regarding condominiums.

“When you get a contract, or a listing, on a condominium, address the warrantability first thing,” advises Mortgage Banker Alan Baugh of BB&T. “Warrantable is a Fannie Mae term that, over the years, has been adopted across the mortgage industry to determine the risk level of condominium projects. There is a set of criteria that defines warrantable.”

Some of the reasons a condo may be non-warrantable include if the owner occupancy ratio is too low, the reserves are not sufficient, the HOA is involved in litigation, or the HOA is in financially in the red. If the condo project doesn’t meet the criteria for warrantability, lenders typically don’t want to issue a loan for it because the risks are too high.

“When I get a contract, one of the first things I do is contact the HOA. I can tell right away if it is warrantable. Before we order an appraisal and go through the process, I want to find out right away if we have a reasonable expectation of funding,” says Baugh.

“When you’re dealing with a condominium, we like to see 50 percent or better owner-occupied units,” he adds. “No one person or entity can own more than 10 percent of the total units to be warrantable. If a builder or developer owns it, that doesn’t fall into this category.”

Additionally, the HOA must be collecting 10% of their budget as reserve unless they have a reserve study that indicates a lesser amount is acceptable. These kinds of issues can surprise both buyers and sellers. “If the people running the HOA don’t know any better, they can allow a project to slip into the non-warranty category,” warns Baugh. “It happens if you don’t understand the lender criteria or if there is no one to watch it.”

While both lenders and associations have their own sets of rules, some requirements are fixed for all Texas transactions with mandatory associations. The HOA documents and resale certificate need to be ordered and delivered to both parties. The title company will usually order them, but either the buyer or seller must pay for them – in advance.

That tends to surprise people. HOA management companies usually expect payment for their services upfront before they will process an order. By Texas law, they have 10 business days (usually 14 calendar days) to deliver the documents once the order is placed and payment is received.

We often see contracts with less than 14 days for document delivery. If you contractually have less than 10 business days to deliver the documents, the HOA will usually charge a rush fee ranging from $50 to $350 on top of the cost of the resale certificate.

To avoid rush fees, always allow adequate time in the contract for these documents to be delivered. Whenever possible, allow 15 to 20 days for delivery. The HOA may also charge fees for items like common area access keys for the buyer. Or they may be transferred from seller to buyer, depending on the HOA.

Some people love their HOA. Others hate them. If you have one – or are buying into one – you should become informed. At least try to save yourself money and headaches by understanding your HOA.

The opinions expressed are of the individual author for informational purposes only and not for the purpose of providing legal advice. Contact an attorney to obtain advice for any particular issue or problem.