Q: I represented a Buyer who needed to acquire rental property as part of an exchange. A unit came on the market that was already tenant occupied and the Seller made it clear that the purchase of the unit had to be made subject to the Tenant’s rights. This suited my client’s needs and escrow closed.
A couple of months after closing, my client received a notification from the HOA asking when will the tenant move out? When my client asked why the tenant should move out, the HOA indicated that although the prior owner could rent out the unit, as a new owner, my client must wait 24 months before he can rent out the unit. My client is livid. He is concerned that under the current state of the law that he will have an extremely difficult time in even trying to remove the tenant to placate the HOA. He is even more concerned that if he does remove the tenant, then the unit will not be income-producing property which could impact the validity of his exchange and he will not be able to meet the mortgage payments without the rental income.
I advised my client to consult with his own qualified California real estate attorney to answer any questions about what he should do. My client is now threatening to sue me and everyone else who was involved in the transaction. How can the HOA change the rules about renting my client’s unit? What should I do now?
A: The answer to your second question is that you need to immediately notify your Broker that you have been threatened with a serious claim that needs to be sent to your Errors & Omissions carrier. You should not do anything further in connection with this claim until you are advised to do so by the attorney who will be representing you.
With respect to your question about the HOA, the answer is simple, YES the HOA Board of Directors can modify their rules with the approval of their members and they can create rules that limit or forbid certain types of activities for new owners that differ from the rules imposed on existing owners.
Many HOAs have concerns about the percentage of tenant-occupied units versus owner-occupied units; these ratios impact securing financing and other issues. Since it is generally difficult to make rules retroactive, the HOA rules often differentiate between existing owners and owners who acquire the Property after the creation of the new rules. The most common rule changes that only impact the new owners relate to the ability to rent units on either a short-term or long-term basis.
Buyers and Agents should never assume that simply because a HOA unit is currently used for rental or any other use that the new owner will be able to do the same thing.
Hopefully you properly warned your clients, in writing, of the need for them to carefully review all of the HOA documentation prior to removing their investigation contingency to determine for themselves whether or not the Property meets their needs. All too often Buyers do not take the time that is needed to review the HOA material; the large stack of HOA documents can be daunting and many Buyers do not even attempt to read the rules that they will need to follow if they own a unit in that HOA. Agents should be encouraging their clients to take the time to read through everything or retain the services of a qualified professional to review the material for the Buyers. For example, accountants can evaluate the financial aspects and attorneys can evaluate the legal effect of the HOA documentation.
Broker Risk Management created a Buyer Advisory about the need to read Homeowners’ Association documents which several of our clients are using. That form was originally distributed in 2017.
See Weekly Practice Tip: Advising Buyers About the Need to Read Homeowners’ Association Documents (08/11/2017)
CAR has yet to adopt that form but PRDS has done so. Had one of these HOA Advisories been used, the Buyer would have been warned of the problem because these forms state:
“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.”
PRACTICE TIPS:
- When representing a Buyer acquiring rental property, encourage the Buyer to have all relevant documentation, leases, estoppel certificates and HOA documents (if the Property is in a common interest development) reviewed by the Buyer’s own qualified California real estate attorney.
- When representing a Buyer acquiring a unit in a common interest development, be certain that you document that you have warned the Buyer of the need to carefully review all of the HOA documentation. The best way to do that is to provide the Buyer with an Advisory about the Need to Read the HOA Documents, such as the one attached to this Tip, prior to or at the same time that the Buyer receives the HOA Documents.
- When representing a client who wants to do an exchange, make certain that you use the right forms and do not rely on simplistic catch phrases such as “Buyer to cooperate with Seller’s exchange at no cost.” Protecting your client requires reaching agreements on several issues including, but not limited to, if the exchange is not feasible, does your client still have to perform?
a. For Buyers use the CAR Buyer’s Intent to Exchange Supplement (Form “BES”).
b. For Sellers use the CAR Seller’s Intent to Exchange Supplement (Form “SES”)
See Advisory below.
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.
© Copyright Broker Risk Management 2020 11/06/20
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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: ____________________