So, you’ve found a condominium or a home in a planned development you’d like to buy. Maybe you are attracted to the gated security, or you love the amenities, such as the pool, the gym, or the private beach. These are all great reasons to buy in a development.
However, they do come at a price. By buying property in a development, you agree to be a member of the homeowners' or condominium association (the “Association”), which runs the development. And you agree to comply with the terms, conditions, and restrictions contained in a set of documents governing the use of the development (the “governing documents”). This may govern everything from how much you’ll pay in assessments to whether you can rent out your condo to what color you can paint the exterior. With so much at stake, it’s worth taking the time to actually read what’s in these documents!
First, to learn the basics on what each of the governing documents contains, see Nolo’s article “What Are in the Basic Governing Documents of an HOA.” In this article, we’ll go into detail regarding how to conduct a review of these and other relevant documents.
Getting Copies of the Governing Documents, Financials, and Meeting Minutes
To become familiar with the terms and conditions you must abide by as the owner of property in a development, you should request copies of all its governing documents and more, including:
- articles of incorporation
- Declaration of Covenants, Conditions & Restrictions ((“CC&R’s), sometimes called the “Declaration”
- rules and regulations
- a statement of the current periodic assessment (or homeowner’s dues) amount
- copies of the financial records of the Association (covering at least one previous year), and
- copies of the Association’s meeting minutes from the past year or two.
You should be able to get these documents either from your real estate agent (if you have one), by contacting the Association directly, or from the title company handling the purchase and sale transaction.
Although you do not need to study every provision in each item on the above list (thank goodness!), reviewing them can help you understand the major issues that will impact you as an owner.
Reviewing the Association’s Articles of Incorporation and Bylaws
You don’t need to take more than a passing glance at the articles of incorporation (the “Articles”). They usually contain only basic information about the Association, such as its name and address.
The regulations governing the Association are found in the bylaws. Review these to become familiar with the powers of the Association, as well as the restrictions on it.
The bylaws generally describe things such as the voting rights of the members, meeting requirements, and budget and assessment procedures. The Association is run by a board of directors (the “Board”), and the bylaws typically specify the number of members on the Board and the length of their terms.
Look especially hard at what actions of the Association (such as raising assessments or creating rules) can be done without a vote of the members, since this could directly affect affordability and your enjoyment of living there.
Will the Association’s First Board Be Appointed by the Developer?
Here’s something to pay particular attention to within the bylaws: If you are buying into a new development, the first board is likely (for practical reasons) to be controlled by the developer (sometimes called the “declarant”). In fact, it will probably include the developer and the developer’s employees.
This can cause difficulties, because the developer’s interests may conflict with those of the owners. For example, a developer-controlled board may choose not to investigate problems that crop up with a common element such as a pool or clubhouse. Although doing so would be in the best interest of the homeowners, it may not in the financial interest of the developer (who could be responsible for fixing the problems).
After a certain percentage of the property in the development has been sold, state laws or the CC&Rs will require the developer to turn over control of the board to the members. The bylaws typically describe election procedures.
Reviewing the Declaration of Covenants, Conditions, and Restrictions (CC&Rs)
The CC&Rs contain detailed information about the development, its configuration, and its operation. If you become an owner in a development, you are agreeing to abide by all the rules, restrictions, terms and conditions found in the CC&Rs. (The good news is, so are the other owners, creating a certain amount of predictability within the community.)
What if the CC&Rs provide that no owner is allowed to rent his or her property, or that owners are only allowed to paint their homes certain shades of blue? If you hate the color blue, and were counting on renting your property out every summer so you could travel, then this development is probably not where you want to live.
Reviewing the Rules and Regulations
Another document to pay careful attention to before buying in a development is the “rules and regulations,” which many (but not all) Associations create. These are typically more detailed (and sometimes more annoying) than the restrictions in the CC&Rs.
The rules and regulations often govern the use of the common areas. For example, there may be rules requiring owners to shower before using the pool, or limiting free-swim hours to between 10 a.m. and 2 p.m.
The rules and regulations typically also include restrictions on owners’ use of private property. For example, you might find out that the lovely fast-growing hedge around the property you hope to purchase is not allowed to exceed six feet in height (better be prepared for annual trimming!), or that you may not hang your laundry over your balcony railing to dry (are you ready to get reacquainted with your clothes dryer?).
If you are not comfortable with the rules and regulations for the development (or with the fact that the Association may change or add to them), you may decide living there is not for you.
Reviewing the Association’s Assessment Statement, Financial Documents
As an owner, you’ll be obligated to pay periodic assessments (sometimes called dues). The Association must adopt an annual budget for the development, set assessment amounts, and periodically collect assessments from each owner.
You may have already been told, or seen on the assessment statement, the amount of regular assessments you will have to pay, and how often you will need to make these payments.
But what about new or increased fees? Assessment amounts are often increased periodically, to deal with increases in maintenance costs for the development. By reviewing the bylaws and CC&Rs, you’ll find out the procedures for setting and raising assessment amounts and whether there is a limit on annual assessment increases.
Don’t forget that in addition to regular assessments, associations typically also have the power to levy special assessments for emergencies or certain projects not in the annual budget. Again, the bylaws or CC&Rs should specify the procedures for any special assessment, and whether or not a special assessment requires the vote of the members (owners).
By reviewing the Association’s financial records, you can often determine whether or not it is well organized and financially solvent. Does the Association collect sufficient assessments to meet its annual budget requirements? Does it have an adequate reserve fund? (What is “adequate” depends on various factors such as the amount of the annual budget and how much the Association intends to rely on special assessments.)
If the Association has been run too lean, or hasn’t collected enough assessments to meet the budget, you can guess that the common areas are not well maintained, and that as an owner, you might be in for a large emergency or special assessment down the road to fix a problem that happened due to a lack of preventative maintenance.
For example, if you find out that the Association has not maintained the clubhouse roof due to poor management and a lack of funds, you can guess that it won’t be long before the Association must collect an emergency assessment from each owner to fix the roof when it collapses.
Reviewing Association Meeting Minutes
You can also find out important information from the minutes of the Association’s meetings. Look for any conflicts or issues that repeatedly crop up, and try to get a general sense of how well the Association is run.
For example, if the minutes show that most meetings involve lengthy arguments between neighbors, or owners chastising the Association for not enforcing rules, you can guess the Association is not well run. In such a case, you might wish to talk to the board members, or to a number of owners in the development about your concerns.
Concerned About the Development’s Documents? Where to Get Help
Once you’re familiar with the terms of the documents relating to the development, you will be in a better position to determine whether owning property in that particular development is right for you. However, if you have questions, or aren’t sure you really understood what you were reading, a real estate attorney in your area can help. The attorney can review the documents with you or on your behalf and alert you to any potential concerns. Hopefully you’ll find out the development you like is well-run, with restrictions and regulations you can live with.