Title Tip: Homeowner’s Associations — They’ve Got The Power! 

Homeowner’s Associations are a divisive subject. Some people cannot imagine living in a neighborhood that does not have the benefits that they create. On the other hand, many prefer to avoid mandatory dues and do not want an additional governing body telling them how to handle their property. 

From the perspective of a title company, an HOA is just one of many factors that can affect a transaction. However, due to the power that an HOA wields, there are a number of potential issues that can arise during a transaction due to their involvement.

Resale Certificates

By ensuring prompt delivery of the resale certificate, potential issues with the buyer can be easily avoided. However, recent changes to Texas law have capped the total amount an HOA can charge for a resale certificate at $375, and the ability to guarantee a rush delivery for an extra fee has largely gone by the wayside. 

This means that those who are aiming for quick closing or have a short delivery timeframe are beholden to the ability of the HOA management company to deliver documents in time. Texas law gives them up to 10 days to deliver them to the customer – and while some are happy to release it as soon as they can, others will take the full 10 days, creating a complication for all parties involved. 

Information on The Resale Certificate

The resale certificate does more than just disclose the annual dues. It can also disclose conditions on the property that violate the HOA’s covenants. While these violations are not necessarily a title concern, they can be a red flag to the buyer. Rectifying these issues can take time, as they usually involve some work on the seller’s end, and either reinspection by the management company or approval by the HOA to remove them.  

However, according to Shannon Spizman, Global Real Estate Advisor with Briggs Freeman Sotheby’s International Realty and real estate law attorney, “Violations disclosed on a resale certificate are a clear issue for a buyer, but conversely, a failure to disclose a violation and/or debt at the time of sale constitutes a waiver by the HOA, and the property is effectively grandfathered into the HOA in its current state pursuant to Texas Property Code Section 207.005”. 

HOA Subordination Issues 

The power of a Homeowner’s Association derives from its ability to file liens on properties whose owners do not pay their dues or follow the rules. This ability is set out in the HOA’s Covenants, Conditions, and Restrictions (CC&Rs) that are filed when the HOA is created. Every set of CC&Rs contains different provisions, but almost all contain language that states whether or not their lien would be superior to a mortgage on the property. 

Most CC&Rs state that their lien claim is subordinate to, or beneath, that of a first lien mortgage. However, that is not the case for all HOAs. If the HOA’s lien is not subordinate to a mortgage, or the CC&Rs do not contain a provision about subordination, then the title company will have to request and obtain an agreement signed by the HOA that makes their lien subordinate to the mortgage to be able to issue a Loan Title Policy. This would not affect a cash transaction — but for a transaction with a loan, it can be a time-consuming process at best, and can derail a deal at worst. 

A Homeowner’s Association has the ability to inadvertently create a wrinkle in a transaction in a number of ways. For the purposes of buying or selling a property, it is always best to create a dialogue with the title company early on to ensure expectations are met and the transaction closes smoothly.