News > Buying a Condo? Examine the HOA During Escrow!

2023-09-08

You've found the perfect condo and negotiated a price with the seller. Now you're in escrow and everyone is focusing on your financing and the inspection. But wait! There is one very important review that you need to focus on during your inspection period and that is the condo's Homeowners Association (HOA) document package. The homeowner's association manages the condo or townhome community common areas, and usually handles maintenance of the outside of the buildings, so as an owner, you'll want to make sure that the maintenance is in capable hands. You'll also want to make sure you understand the financial health of the community so as to avoid unplanned condo assessments.

The Homeowner's association is required by law to deliver a set of documents to the buyer within 10 days of being notified of the sale. Here are some of the important documents that you should receive:

• The operating budget
• Annual financial report
• The reserve study
• The CC&Rs (Covenants, Conditions and Restrictions>
• Bylaws and rules
• Notice of any pending litigation in which the association is involved

What to Look For in HOA Documents

Those that aren't accounting and numbers people may be losing attention at this point. But you'll want to at least check on the following information you find in these documents:

The association rules

HOA rules and regulations are appreciated and maligned at the same time. If you buy in a community fully understanding the rules, then you will be less likely to be one of those that are unhappy with the restrictions. Rules can include how many and what size pets are allowed, rental restrictions (which can sometimes be found in the CC&Rs), what you can put on your balcony or patio, where you or your guests can park, and when and how you can use the pool and fitness room. If you only review one thing in the HOA documents, it would be the association rules. And don't assume that the rules are not or will not be enforced because you see violations in the community. HOA boards can tighten enforcement at any time and those owners assuming a rule was a suggestion will be out of luck.

Reserve funding

Reserves are the funds set aside for future maintenance that the association plans, like roof replacement, swimming pool resurfacing, fitness center equipment replacement, painting, and more. Reserves are not generally used for maintenance that recurs monthly or yearly. Larger HOAs usually do a periodic "Reserve Study" and this is one of the documents you should receive if it has been done. There is usually a summary that explains how close to fully funded the reserves are (see example above). 100% funded would be the ideal, but anywhere between 70-100% would be typical. Lower reserves might indicate a future need for an assessment.

Pending Litigation or Major Issues

A lawsuit can come from many sources - a homeowner, the HOA board (suing an outside party, like the builder), or even neighboring residents. They can be expensive, causing an uncertainty whether future assessments will be required. You should be informed by the HOA or the seller of any pending litigation.

Also, if the community has a major issue, like a rooftop pool that's leaking or a building structural issue, you should be informed of this at least by the seller. It's important to find out as much information as you can about the potential affects on the financial health of the community before you decide to move forward with your purchase.

What is the Association Responsible For?

Usually a condo association is responsible for maintenance and repair of "walls out." For example, if there was a serious roof leak and water damage occurred on your flooring, you would be responsible for replacing your flooring since the flooring is within your walls (here's where we remind you to purchase condo insurance after close of escrow). However, for townhomes, you could potentially be responsible for the roof. This information would usually be in the CC&Rs but would also be available in the association's insurance policy. If the homeowner is responsible for the roof, make sure your inspector has the roof on his inspection list.

I See Problems. Should I Cancel my Purchase?

If you see issues with information in the HOA documents, contact your real estate agent. You have the ability to cancel the contract as long as you are within the contractual time periods. However, you may find that the issues may be things you are willing to live with. For example, a lower funding of reserves may just mean you'll have to budget for a future assessment. But for serious issues uncovered during escrow, you and your agent can consider negotiating a lower purchase price.

A real estate purchase is complicated, but can be made less so when you are represented by a professional real estate agent. Contact us today to get started!

 

Though not guaranteed, information and statistics in this article have been acquired from sources believed to be reliable.

Related Links

• Scottsdale Luxury Condos
• Scottsdale Condo Buyers Guide