Why You Should Review the HOA Documents
If you are purchasing a property where there is an HOA in Carlsbad, whether a detached single family, a condo, a town home, or in some other type of common interest community, an important part of your due diligence will be to investigate the HOA.
Your investigation can include talking with the neighbors, doing some research online, asking questions directly of the HOA if there are particular issues that concern you (e.g., pet limitations), but most of your investigation will be wading through the HOA documents.
Buyers sometimes ask – is it necessary to review the HOA documents?
The answer is a resounding YES.
The HOA documents are an important contingency in the typical Residential Purchase Agreement, or RPA, here in California. If there IS an HOA the seller, per the contract, is to provide the documents from the HOA during the due diligence period so you can review them. Normally escrow will order HOA documents soon after escrow is opened, a cost that is typically borne by the seller (also part of the contract).
Bear in mind that the HOA documents, once ordered, can take time to reach you. Some HOAs have documents online, with services like CondoCerts, but others do not. For whatever reason, they don’t happen overnight, and HOAs will tell you they have 10 calendar days to provide them to you. And sometimes they are late!
HOA documents, in my experience, can vary substantially depending on the size of the HOA, among other factors.
But typically you will receive a copy of the Certificate of Insurance, CC & Rs (Declaration of Covenants, Conditions and Restrictions), Board Meeting Minutes, Rules and Regulations, financial records including the budget and perhaps the most recent reserve study, Articles of Incorporation, By-Laws, and other documents that may be specific to that HOA (e.g., age restrictions, bill collection).
So why read this stuff?
First of all you want to be comfortable with the Rules and Regulations set forth by the HOA. Some are pretty explicit and detailed, while others are not. There may be a relatively short list, of many pages of rules. Some HOAs are pretty diligent about pursuing violators of rules so be sure you are OK with them.
The Board Meeting Minutes can be very enlightening and will tell you more about how the HOA operates – do they address concerns from the residents and how? What projects and improvements are they working on or planning? How do they deal with violations of the rules (e.g., parking, noise) and are fines levied? Are any special assessments needed or planned? Are they discussing changing the HOA fees? Are they experiencing any financial difficulties (e.g., HOA fees not getting paid, being over budget)?
While you may not be an accountant, don’t pass by the financial records, budget, and any related documents. You want to feel comfortable that the HOA is fiscally responsible, pays its bills, and has money in the reserve for improvements and repairs (e.g., new roof).
A reserve study completed by an independent accounting firm, if part of the HOA docs, will weigh in on the issue of whether the reserve is sufficient for the size of the HOA and their income and expenses, based on standard accounting principles.
Along with other due diligence, a review of the HOA documents takes time, but is essential so you can feel comfortable about moving ahead with your purchase.
And if you are getting a loan, your lender will be obtaining information from the HOA to review as well. Issues such as a limited reserve, a high percentage of non-owner occupied residences, litigation against the HOA, and a percentage of owners who are late on their HOA payments by 30-days or more that exceeds guidelines can raise concerns.
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