QUESTION: I recently represented a Buyer in the acquisition of a condominium unit. I received over 300 pages of documents from the HOA and, when I sent that material to the Buyer, she refused to read any of it. I told her over the phone she needed to do so but she said she did not have the time; she closed escrow without knowing about the HOA rules and regulations. Now she is upset with me because the HOA rules prohibit her from using the property as she intended. My Broker is going to settle the claim but I want to know what should I do to avoid this type of problem in the future? I have checked the CAR forms online and there is nothing currently available other than the basic HOA forms detailing all of the HOA information and the list of documents. Is there a form that I could have used to better protect myself?
ANSWER: At present, there is no specific real estate industry-wide form available but this Practice Tip will provide you with the answers you really need.
Too many Buyers do not follow the excellent advice in standard real estate industry forms to read all transaction documents and it is especially difficult to convince Buyers that they need to read the voluminous material provided by HOAs. Sadly, when Buyers learn after escrow closes that there is negative information in the material that they did not read, Buyers tend to blame others, especially their own agent, for failing to protect the Buyers’ interests.
The fiduciary duty of a Selling Agent includes the obligation to give Buyers all of the advice that their Buyers need to make an informed decision about the property they are buying and/or how to proceed in the transaction. Too many Buyers simply do not want to take the time to protect their own interests and it is important that Buyers’ agents document:
(1) that they have provided sufficient advice to help the Buyers make informed decisions;
(2) that the client is proceeding at their own risk if they do not follow that advice; and
(3) when transmitting documents, they have advised the client that the agent has not verified the information supplied by others.
The current CAR HOA forms do not necessarily document these three steps.
The best practice when you send the HOA documents is to provide the Buyers with a written explanation about the various types of documents that are provided. Selling Agents should explain how those documents can impact the Buyers’ use and enjoyment of the property and should also emphasize the importance of reading that material carefully. Although many real estate professionals do tell their clients to read everything, it is important to make certain that the Broker file contains written proof that the necessary advice and information was, in fact, given to the Buyers in a timely fashion.
Part of the advice that Buyers need to receive about HOA documents is that they should consider retaining the services of someone who, for a fee, can analyze the financial stability of the HOA. It is also best to clarify that the Broker cannot provide that type of financial analysis and has not investigated any of the information provided by the HOA. Although CAR does not currently have an Advisory which covers these topics, Broker Risk Management was recently asked to prepare such a form for consideration by the CAR Forms Committee. Our proposed draft document is attached to this week’s Practice Tip. The bold print warning on the first page is hard to miss:
AS A BUYER, YOU ARE STRONGLY ADVISED BY YOUR BROKER TO REVIEW ALL HOMEOWNER ASSOCIATION DOCUMENTS, WITH APPROPRIATE PROFESSIONALS, IF NECESSARY, TO UNDERSTAND THEIR CONTENTS, AS THESE DOCUMENTS WILL GOVERN, AFFECT AND, IN SOME CASES, LIMIT YOUR CURRENT AND FUTURE USE AND ENJOYMENT OF THE PROPERTY.
The best practice would be to provide the information contained in the attached Advisory before sending the HOA documents to the Buyer or, at the very least, to provide that type of form with the HOA documents. This type of Advisory helps to establish that a Selling Agent/Broker is meeting its fiduciary duties by not only explaining the significance of the information in the various types of HOA documents but also explaining why Buyers need to read that material. There are often significant financial consequences for Buyers who are not well informed about the ability of the HOA to maintain the common area and/or to meet their other obligations.
If any client advises you that they do not want to follow advice that you have provided and/or the advice that is contained in any written Advisory or Report (e.g., they do not want to take the time to read documents, obtain recommended further inspections or retain the services of a qualified California real estate attorney), the best practice is to send the client an e-mail (a copy of which should be put into the Broker file) which summarizes the advice that has been provided, details why the client does not want to follow that good advice (e.g., “my friends tell me not to waste my time or money”) and that the client is proceeding against your advice and recommendation. A simple format that can be used to document that the client is proceeding against your advice is as follows:
I have advised you to [e.g. secure further inspections noted in a report, check on the status of permits or obtain legal advice] . You have advised me that you will not follow this advice because (be as specific and polite as possible about the Client’s reasons). If you intend to proceed with this transaction without following my advice, you will be proceeding at your own risk.
It would also be prudent if HOAs make comparable, strong recommendations to potential homeowners to thoroughly familiarize themselves with the HOA disclosures, especially the rules and regulations when they provide the legally-required documents. That type of approach could be beneficial for everyone involved.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
HOMEOWNER ASSOCIATION DOCUMENT ADVISORY FOR BUYERS
When selling a property located in a Common Interest Development (“CID”), the law requires Sellers to provide Buyers with several types of documents that are created and maintained by the Homeowners Association (“HOA”). Because the HOA material often consists of numerous pages, Buyers may not take the time to thoroughly review these important documents prior to removing their HOA document review contingency and/or proceeding with their purchase. It is critical that Buyers carefully review all HOA documents to determine for themselves if the property they are acquiring meets their current and future use and enjoyment of the property.
AS A BUYER, YOU ARE STRONGLY ADVISED BY YOUR BROKER TO REVIEW ALL HOMEOWNER ASSOCIATION DOCUMENTS, WITH APPROPRIATE PROFESSIONALS, IF NECESSARY, TO UNDERSTAND THEIR CONTENTS, AS THESE DOCUMENTS WILL GOVERN, AFFECT AND, IN SOME CASES, LIMIT YOUR CURRENT AND FUTURE USE AND ENJOYMENT OF THE PROPERTY.
While it is important to review and understand all transaction documents that you receive, you should pay special attention to the following issues which are frequently areas of concern for Buyers of property located in a CID:
1. Covenants, Conditions and Restrictions: The CC&R’s are the main provisions governing the HOA, how it is run, and basic rights, duties and obligations of the HOA and individual members. CC&R’s are recorded documents and after the HOA is formed, it is extremely difficult to change the CC&R’s.
2. Rules and Regulations: If promulgated by the HOA, the Rules and Regulations usually detail how the HOA will handle routine, day-to-day matters often affecting common area usage, expenses, etc.
3. Minutes: Most HOAs prepare Minutes summarizing their Board of Directors’ Meetings. The Minutes often detail past, current and future (proposed) events, issues, and expenses such as existing or planned litigation, repairs, improvements or needed changes in the dues and/or additional assessments. The Minutes must be reviewed thoroughly because these documents are often the best source of information as to what will be happening with the common area, the individual units and your ability to use and enjoy the property after escrow closes.
4. Financial Information: To the extent that there are detailed financial accounts regarding the funds that have been paid to and/or owed to the HOA, you should pay particular attention to the rate of delinquency, the adequacy of the funding of the reserves, any current or planned assessments, and any operating losses. The financial information from the HOA may be contained in numerous documents, including but not limited to: Pro Forma Operating Budget, Assessment and Reserve Funding Disclosure Summary, Financial Statement Review, Assessment Enforcement Policy, Insurance Summary, and Regular, Special and Emergency Assessments.
A. It is essential that you understand the financial status of the HOA: For example, have the reserves been properly and adequately funded? Are there many delinquent dues and assessment payments, etc. The financial status of the HOA could impact your future costs of owning the property.
B. Any documented comments regarding pending or future assessments are critical information and will usually appear in the Minutes of the Board of Directors, and on the HOA disclosure form itself.
C. If there are special or emergency assessments, Buyers need to know if those assessments are currently due in full or whether they are due only in monthly installments. If you are not certain, you should request that the HOA clarify that information. The Purchase Agreement will determine whether the assessment payment will be paid by the Seller at Close of Escrow, or whether the payments are prorated and you, as the Buyer, will be responsible for the monthly payments after Close of Escrow.
D. If you have any questions or concerns about the financial status, strength or stability of the HOA, contact your accountant who may be able to provide a professional assessment of the HOA’s finances.
E. There are independent services available which will review the HOA documentation and give an opinion of the financial status of a HOA for a fee, which is typically $300.00 to $500.00 depending upon the services to be provided and the extent of the HOA documentation. Buyers should consider this to be a good investment when buying CID property. Your real estate broker can provide additional details about these services but real estate licensees are not qualified to assess the financial viability of any HOA.
5. Noise: Due to noise and other factors, HOAs often restrict the type of floor and/or wall material that can be used in certain units and/or the number of pets. You should directly contact the HOA Board to determine whether or not the property can be used for your intended purposes. You should also determine whether or not the property meets your subjective personal preferences and needs.
6. Common Areas: Those portions of a CID that are not wholly owned by the individual homeowners are designated as “Common Areas.” Usually, the CC&R’s and/or the By-Laws will define what constitutes the Common Areas, how they are used, who gets to use them, and who is responsible for maintenance. Some Common Areas may be available for use by all members and their guests, such as a lobby or garden. However, some Common Areas may be “Restricted” or “Exclusive Use” Common Areas with access limited to homeowners (this is often true with swimming pools and spas), or may be restricted to just one homeowner, such as a roof deck, balcony or patio. In some instances, the homeowner may be responsible for maintenance of certain Restricted or Exclusive Use Common Areas. You should determine for yourself whether there are any restrictions affecting the Common Areas which could impact your intended use and enjoyment of the property.
7. Parking and Storage: You should determine for yourself whether or not the allotted parking space(s) are adequate to park your vehicle(s) in the assigned spaces by actually parking in those spaces. Parking space(s) and storage space(s), if any, may be described in a Condominium Map or in the Preliminary Report issued by a Title Company. The actual markings, striping and numbering of these space(s) may not accurately reflect the actual spaces and may be in conflict with the space(s) designated in the recorded documents. It is therefore crucial that you personally determine if the parking and storage space(s) that are designated in the recorded documents are actually the space(s) being transferred to you and that those space(s) are acceptable for your needs and intended uses.
8. Litigation: Many CID’s have been involved in, or are presently involved in, or may become involved in, litigation regarding the design, construction, maintenance and/or condition of all or a part of the Development. Whether or not these lawsuits are successful, litigation is expensive and the cost of such legal actions may impact not only the adequacy of the HOA reserves but also the amount of current or future assessments.
9. Special Needs: HOA documents may limit the number and size of pets but only if the HOA accommodates “service” and/or “companion” animals. HOAs on their own, or because of local ordinances, may limit or completely ban smoking and/or vaping in common areas or units. The ability for new Buyers to rent units and/or ability to operate any type of business in the units may also be limited or completely forbidden. Therefore, it is important that you review ALL HOA documents to ascertain whether there are any limitations on your particular needs or planned use of the property.
10. Brokers: Real estate licensees who forward HOA documentation to you have not verified and will not verify that information unless they agree to do so in writing.
The undersigned Buyer acknowledges receipt of this 2-page Advisory.
Buyer: _____________________________ Date: ____________________
Buyer: ____________________________ Date: ____________________