Why Research Your Homewoners Association?

What you need to read! by Doug Hutchins, Douglas County Real Estate

Realtor Doug Hutchins and his clients did their homework before getting to a closing table.

When most folks are buying a home or condo, the last thing in the world they think about is researching homeowners association.  That sounds pretty boring compared to the excitement of planning to move in a new home.

So, it’s a good thing to have a Realtor who won’t overlook the details that can be disclosed by homeowner associations. An interesting situation arose recntly with clients who were purchasing a condo.  These Buyers had fallen in love with a newer condo complex and had gone under contract to purchase a unit in the complex.   The purchase was moving along smoothly until the Home Owner Association (HOA) documents arrived for the Buyer and me to review.

The Colorado contract to purchase real estate calls for the Seller to provide the HOA documents to the Buyer and gives the Buyer an opportunity to review these documents.  The HOA documents include board minutes from the last six months of board meetings, the HOA budget, the most recent HOA financials and the covenants, conditions and restrictions for the community.  This is a lengthy stack of information for Buyers to review and Buyers always ask me if they really need to look through this information.  I have always exclaimed “YES – READ THESE DOCUMENTS”.  This situation illustrates why this is so important.

I believe the board minutes and the financials are the two most critical pieces of the information provided for the Buyer to read.  The board minutes give Buyers a feel for the community and the major issues that arise in the community that have to be dealt with by the Board of Directors.  The financials tell you whether the Association is well funded and has adequate reserves to repair or replace assets owned by the Association.

It was quickly apparent when I started reading the HOA board minutes for this condo complex that something was amiss.  For three months in a row the HOA board went into “executive session”.  Executive sessions allow the board to meet privately to discuss issues that they do not want made public.  After three executive sessions the following board meeting minutes showed a decision by the HOA board to commence the first steps of a lawsuit against the builder of the condo units.  Very few details were provided in the board minutes, though, about the lawsuit and the reason behind it.  In addition, the Seller had not disclosed any information related to a potential lawsuit, which the Seller is required to do by Colorado law.

Once I read this I called the Buyers to ask them if they had heard any rumblings about a lawsuit from the homeowners they already knew who lived in this condo community.  The Buyers had not heard a word of this from the other homeowners they knew.  Our next call was to the HOA board president.  She provided some additional information about the possible lawsuit and referred us to the HOA property manager.  The HOA property manager ended up sending us an additional 30 pages of documentation relating to this lawsuit.

It turns out the condo association had been fighting with the builder of the condos for the last year about construction defects within the community (the last units had been completed in early 2007 in this complex).  Some of the defects were for the outdoor common areas and some were for defects within the condo buildings themselves.  Part of the documentation provided by the HOA manager included an 8 page inspection report by an engineering firm hired by the HOA to evaluate the construction defects.  This inspection report pointed out numerous errors in the construction process for these units.  The documentation also provided details that the Builder had agreed to fix a few of the items in the inspection report, but there were many items the Builder was not willing to fix.  Unfortunately, there were no cost estimates available for the repairs the Builder was not willing to make.

In my opinion, this is one of the worst issues that can arise for a Buyer or Seller in any Homeowner Association.   There is the threat of pending litigation by the HOA but the situation was still in the early stages, so there was no way to quantify the risk to the Buyer (or Seller).  In general, the Buyer’s overall risk in purchasing a unit in this association is their share of the cost to fix any construction defects the builder would not fix.  But without cost estimates or knowing if the Builder would eventually fix all the issues, the Buyer was faced with a potential liability of an unknown amount.

For example, if the Builder did not decide to fix construction defects that would cost the HOA $1,500,000, then the Homeowners in the association would be liable for the repair bill.  This complex had roughly 300 units, so the share of the repair costs for each unit would have been $5,000.  Since the HOA is new there are no reserves set up for this large of a repair, therefore the only way obtain the money to fix these items is to levy a special assessment on all the homeowners in the community.   Wouldn’t this be a surprise if you just purchased a $200,000 condo and then were told you had to pay an additional $5,000 to fix the construction defects in the community?

Without an estimate of the repair cost, it was impossible to predict the risk to the Buyer.  The repair bill could have been $5,000,000 or it could have been $500,000.  If the Buyer was going to purchase in this complex, the Buyer would have to be willing to take on this risk.  If you were the Buyer would you take on this risk?

When you find an HOA with substantial pending litigation, it is often impossible for Sellers to sell their units.  Buyers are unwilling to take a large risk when they purchase a home, especially in this real estate market.  To make matters worse, these lawsuits can often take years to settle.  The only way to successfully sell units in this environment is to substantially discount the sales price to make Buyers willing to take the financial risk.

If we would not have read these Board minutes, my Buyers could have easily purchased this condo and not understood the risk involved in the purchase.  The more unusual item in this situation is that very few of the existing homeowners knew anything about the pending lawsuit.  The Board of Directors had communicated very little, if anything to the homeowners in the community at the time my Buyers were purchasing.  So the Seller did not disclose any knowledge of this because they were unaware of the situation.

So what did my Buyers do?  They did end up completing the purchase on this property.  They negotiated additional concessions from the Seller in price to help mitigate the risk of any future repair costs that might be levied.  They loved the unit and they felt the deal they obtained on this unit was worth the risk.  These Buyers were long term purchasers, so they were not concerned about any resale issues if it took a few years to work out this lawsuit and repair costs.    As their Realtor, I advise them of risks, but ultimately they make the decision on whether to buy or not.  I am eagerly waiting to see what does happen with this lawsuit and Builder.  If the Builder does agree to do the repairs, my Buyers will have done extremely well on this purchase.  If the worst case scenario does happen, the concession negotiated will hopefully be enough to cover any special assessments.  Only time will tell how this decision will work out for the Buyers.