Buyer Beware!

Anyone who is considering the purchase of a condominium or a home in any type of common interest development (CID) would be well-served to become as educated as possible about the laws that govern CIDs in the state where the property is located. Of particular interest to a prospective home buyer are the disclosure laws that govern real estate transactions in the state.

In some states, such as California, Oregon and Washington, the disclosure laws are very succinct and provide the prospective buyer with a considerable amount of negotiating leverage. In other states there are no laws that afford buyers access to the HOA’s financial records prior to the purchase of the home. Once you have purchased a home in a CID you will typically be allowed access to these records but by then it may be too late.

In those instances where state law does not empower the buyer by providing them access to association records prior to purchase, it is imperative that a buyer’s offer include language that obligates the seller (who is entitled to the records) to provide them to the buyer as a condition of the sale. In states such as Oregon, the buyer is entitled to the documents but only if they request them. Therefore it becomes a case of Caveat Emptor or Buyer Beware!

As a practical matter the easiest thing to do is to instruct your real estate agent to include a contingency in your offer that states the seller will provide the buyer with the financial records and meeting minutes of the HOA for a period of at least one year and preferably the previous two years. Then the buyer can either review the documents or engage the services of someone such as the CIDA Report to review the documents on their behalf.

The list of documents that is typical of what any well governed HOA should be able to provide includes the following items:

  • Current reserve study
  • Current approved operating budget
  • Year-to-date financial statement[1]
  • Year-end financial statement for the most recently concluded fiscal year
  • Audited or reviewed financial statement for the most recently concluded fiscal year[2]
  • Board meeting minutes for the previous 24 months[3]
  • Loan agreements or borrowing resolutions for any outstanding loans owed by the HOA
  • Inspection reports prepared for the association within the previous 3 years
  • CC&Rs
  • Bylaws
  • Rules & regulations

[1] The financial statement of any well run organization should include both a balance sheet and an income statement (sometimes referred to as a profit & loss statement).

[2] Audited financial statements are not typically required for HOAs that are less than a certain size. The exact requirements vary from state to state. Reviewed financial statements are similar to an audited financial statement. Both are prepared by a CPA. The HOA Detective advises buyers to request a copy of the audit or financial review, regardless of whether it is required by state law. If the HOA is not required to have its financial statement audited or reviewed then it is unlikely that the report will be forthcoming but by asking, the buyer is acknowledging that they want a copy of the report, if it exists.

[3] HOA boards do not always meet on a monthly basis and some do not even meet on a regularly scheduled basis. Therefore it is advised that the offer include a request for the meeting minutes for all meetings held during the previous 24 months.

If a buyer is planning to engage the services of someone to review the documents they should establish communications with the service provider prior to receiving the documents so that the consultant is aware that their services will be needed. Typically the buyer will only have 3 to 7 business days to review the documents before the offer expires, depending on the terms agreed to by the seller. As a result it is imperative that the consultant who is engaged to review the documents is given advance notice so that they are prepared to start on the project as soon as the documents are delivered by the seller.

CRC’s due diligence services are available to buyers in any state assuming the required documents are made available. To learn more about the CIDA Report service or to order a report you may visit our website or contact our office at 800-218-0302.