Nathan Flora: Buying a home in a homeowners’ association can be a great deal if you know what to look for.
Female: Welcome to Community Wise, brought to you by Wise Property Solutions.
Joe Wise: When you’re looking at property in a condominium or homeowners’ association there are some important questions you need to ask to have all the information necessary to understand the true value of what you’re buying.
Nathan Flora: A lot of times I see people come in to homeowners’ associations, neighborhoods that have these associations and they’re really attracted to them. They see a pool. They see tennis courts or a club house, the homes have a nice polished, well-maintained look, and so they’re very eager to buy, but just as curious as a homeowners’ association may be for someone who’s never lived in them. Also the buying experience and what to expect in the transaction with a homeowners’ association is equally unfamiliar to buyers.
Joe Wise: That’s right. And I think it’s helpful when you contemplate the buying decision in a common interest community, whether it be a condo or an HOA, is to think about what those questions should be but also why you should be asking them. When you buy in a condominium or homeowners’ association, you are buying a position of ownership in common property. And so many people make the mistake of looking at their individual home or their individual unit, and in many cases they really need to be looking around at the property more broadly. The clubhouse, the pool, the other buildings on property to really ascertain the condition of the asset they’re buying. To that end, it’s important that you have the same sense of research in what you’re association or perspective associations overall financial and operational health is. And so a lot of times when you’re buying in those common interest communities, all of the sudden you’ll need to get your mortgage approved and you’re being told that you need a mortgage questionnaire filled out, or if you’re going to closing and you’re needing an Estoppel letter or a demand letter, statement of account to release any liens that may be against the property in a master deed.
Nathan Flora: And the other side of that process, one, becoming familiar with the variety of documents that might be asked and the variety of reasons is tracking those items down. Depending on how an association manages itself, obtaining that type of information that your lender might want or your closing agent might need or even for your own interest, governing documents about how that neighborhood works. That can be a feat trying to track all that information down.
Joe Wise: We recommend that you ask your seller for a disclosure package. In fact, in Virginia, it’s part of the law that governs common interest communities. That’s not true in other states where we work. It outlines a list of documents that sellers need to have available for buyers, and that includes everything from financial statements, from documentation of insurance coverage, from a statement of the associations reserve to any known or pending litigation against the association and really begins to give a buyer a true sense of what they’re getting ready to buy in to.
Nathan Flora: Another thing that you might expect or look for when buying in to these neighborhoods are something called capital contributions or a reserve contribution. Sometimes these even look very similar to what the monthly assessments are, but on…
Joe Wise: But it shouldn’t be confused with the monthly assessment.
Nathan Flora: Exactly.
Joe Wise: Because it’s the – additional fee representing essentially the capital contribution.
Nathan Flora: Right. It goes to the reserves, which is what that community sets aside for long-term capital improvements and maintenance. That’s another item you should look for when buying in to these neighborhoods. Have they appropriately planned for future expenses on the common property that you’re now a part owner of.
Joe Wise: The questions that you’re asking really are, as a buyer, to get at the true value of the property you’re buying. I have worked with a number of different communities and I’ve seen situations where seemingly identical communities – they’re assessments are largely similar, the number of homes are largely similar, the balance on the balance sheet appears to be essentially the same, and yet in one community you’re probably buying a couple thousand dollars of equity in the homeowners’ association and then in the other you might have unfunded long-term capital expenses that represent a $10,000 or $15,000 liability. And many buyers buy in to those communities without having any real sense of the fact that there is that difference, and so you need to know the questions to ask. What does the association cover and does it have the money to cover it. Is the association presently embroiled in a lot of litigation and, if so, what sorts of costs might the association incur as a result. These are all things that you as a buyer need to know to make a fully informed decision.
Nathan Flora: Another thing I think buyers in HOAs and these types of neighborhoods will latch on to are the HOA fees. Kind of reminds me of a podcast where we talked about how low HOA fees may not be the best.
Joe Wise: That’s right. And it’s worth giving that one a listen. As far as the topic today, this kind of builds off of that. How do you go about assessing the readiness of an association, the financial position of the association, and really that disclosure package, those sorts of questions are the right questions to ask and look to your buyer to provide third party documentation of those things. If you’re looking at a community that’s professionally managed, professional management companies will have a mechanism through which you can obtain that information and it’s really important to look for it. It makes a difference in what you’re buying.
Nathan Flora: It’s important to have that verified, even by a third party. So if the account statement is incorrect that could cause you problems. When you walk into your new home and you’re excited about living there and all of the sudden the HOA sends you a bill for several hundred dollars that you did not expect.
Joe Wise: That’s right. We saw that happen with a community here not that long ago where a person bought a property, the title company did not make contact with the association to determine the status of that association’s financials and the seller had neglected to mention to anybody that the neighborhood had just imposed a special assessment. A special assessment he had notice of as the owner, went to closing, let the buyer buy the property and then 30 days later the buyer’s getting a notice reminding him that he still hasn’t paid the $500 special assessment that he had no knowledge of. Had they gone through the process of obtaining those critical resale documents or that documentation, that disclosure material they would have known that a special assessment was going to be due against the property and they could have dealt with that more equitably in the context of the real estate closing. So making that information available is critical on the part of the association and if it’s using professional management, that’s professional management company, but it’s also important that buyers look to their realtors, their closing companies to obtain that information in advance of making any final decisions.
Nathan Flora: So just a quick review of some of the key documents that a buyer may look to. The governing documents are important because that’s going to guide you in what you can or can’t do in how you manage your home. The association’s financials are important to obtain. What are a few others that key documents buyers may look at when purchasing a home?
Joe Wise: Reserve studies. Yeah, is there a reserve study. Is it being fully funded. Is there not a reserve study? Why? What is the scope of the common elements? Is there adequate provision being made for those future costs? Those are the kinds of things you want to get at. Ultimately as you’re buying a property in a common interest community, you want to ask a macro question and a micro question. The big question is the financial health of the community. It’s reserve study, it’s balance sheet, it’s litigation. All those kinds of big picture things to ascertain is the assessment funding the long-term capital costs. The small picture, the micro picture, is are all the assessments on the property I’m buying paid. Are there any special assessments outstanding? Is the individual property that I’m looking at out of compliance with the associations governing documents and a potentially an issue for me in the future. And getting all of that information ahead of time is critical to getting off on the right foot. It’s a wonderful way to live; these are wonderful communities to live in and take the time to fully understand the differences. Just as every community is different that you’re looking at for a home right now, every community association is different. And you want to make sure that you’re paying the right price and getting the right value from the community that you’re looking at buying in.
Nathan Flora: Buying a home is a joy but it’s also overwhelming and it’s one of those critical moments of life where it’s important to have the best information and to be informed. Management companies, the homeowners’ association, they can help you through the process. It’s just important to be asking the right questions.
Joe Wise: Ask the questions, review the answers and make an informed choice when selecting a home in a common interest community.
Female: This episode of Community Wise was hosted by Nathan Flore and Joe Wise and is a production of Wise Property Solutions. For more helpful information, visit us on the web at wisepropertysolutions.com where you can view our blog and sign up for our eNewsletter.