You’ve bought a home — condo, townhome, or zero lot line in a gated community for more relaxed living. Suddenly, there are new documents you have never seen before at closing. Welcome to the world of living in a homeowner’s association!
It’s a lot of paperwork. What are three of the most important documents to examine when purchasing in a homeowners association (HOA)?
We reached out to
SBB Management Company of Dallas and Keller for the answers. SBB Management is a DFW company that has been managing homeowners associations and communities for the last 40 years. Our readers hit us with questions such as this almost weekly, and SBB has come on board to help us respond:
First of all, congratulations. Unlike most buyers, you are actually taking the time to learn about your community association and what’s involved in the purchase. Even better if you actually read the CC & Rs. Consider that well-worn catch phrase: “location, location, location” when describing the three most important considerations of a real estate purchase?
Perhaps a lesser known, and much less sexy catch phrase when considering a home purchase in an HOA is “governing documents, governing documents, governing documents”.
Actually, that is not even a slightly known catch phrase. We just made it up. However, becoming familiar with the HOA governing documents is a very important step in considering the purchase of a home in an HOA. It may not be fun, certainly not sexy, and your head may spin. But trust us, we deal with this every day as professionals. If you neglect looking at the following three items, you could be in store for a miserable life in a condo or home that you also might not be able to re-sell…
Number One is to always, always read the HOA’s governing documents. Number Two is to examine the financial health of the HOA and its financials. Number three is to gauge the sense of community spirit. Here we go:
Governing Documents include all rules, regulations and restrictions that a homeowner is expected to follow. The Covenants, Conditions and Restrictions (CC&Rs), along with the Bylaws and Articles of Incorporation, are the formation documents of an HOA and are recorded in the county where the HOA is located prior to development. The CC&Rs contain the governance type of information such as regular or special assessments, maintenance responsibilities, deed and use restrictions and architectural requirements. The Bylaws cite the business practices of the association, such as Board of Director duties and responsibilities, as well as the purpose, authority and requirements for meetings held by the Board and by the members. The CC&Rs and Bylaws typically have a table of contents, so finding these key areas is easier than you might expect. Additionally, any rule or regulation promulgated by the Board must also be filed of record in the county to be enforceable and is therefore considered part of the governing documents. All of this material is available through the resale certificate process.
The Financial Health of an HOA is extremely important. No one wants to be faced with a Special Assessment or large dues increase without prior knowledge. Sometimes this happens! The HOA budget and replacement reserve status are also available through the resale certificate.
Community Spirit is more of an intangible aspect of the decision to purchase in a HOA. Buyers should research how well the HOA is governed by the Board of Directors and whether the HOA is professionally managed. Although some HOAs are self-managed, having a professional management company, along with an actively involved Board of Directors and engaged volunteer committees usually leads to a more successful HOA.
An informed buyer will investigate market value, as well as the structural soundness and many other aspects of a potential home purchase. It is also reasonable and prudent to extend that investigation to include all things HOA if your property is in one.
Chris Broach is Director of Client Services at SBB Management Company. He will cover homeowner and community associations questions and issues for us on a regular basis. Direct questions to Chris at [email protected]
In addition to all that homework (that discloses what an HOA CAN do and MAY do, a prospective buyer should investigate what the HOA actually HAS DONE with respect to its member-owners. Has it filed lawsuits against them? Has it filed liens against them? Has it threatened to take some coercive action against them? Answers to the first two questions can be found in the county court records and county deed records (which are available online in some but not all counties). Answers to the third question (threatened actions) are harder to come by. Real estate agents may have knowledge of this, but the best way may be to tour the immediate area on foot and speak to residents who are out and about. HOA’s can be beneficial managers to a neighborhood, but they can also be authoritarian tyrants who can make life miserable for a homeowner. Horror stories abound on both sides of the equation. The old adage “Buyer beware” was never more applicable than in the case of a purchase in an HOA neighborhood.
Amen
The other questions: Has the HOA been sued repeatedly by owners? Has the management company itself been sued a lot by owners from different projects? Does the HOA win or lose these suits? Is there a pattern?
,
Of course reading the documents buyers are supplied is a big first step. Almost no one reads.
Nice plug for yourself!