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It’s important to do your due diligence with the help of a legal and accounting professional prior to buying a home in a homeowners association (HOA). Here are some aspects to consider first:
1. Get to know the HOA. Read the HOA rules, regulations, publicly filed covenants, restrictions and declarations — and take them seriously. Buying into an HOA is not like buying a house, where owners are free to do as they wish. Rather, when buying into an HOA, owners agree to abide by certain rules and regulations for the common benefit of those living in that community.
Therefore, by reading the documents mentioned above, potential owners can get a glimpse of some of the community’s shared values. Plus, if owners don’t comply, they can be fined, which can vary depending on the particular HOA. (And, if the HOA attorneys become involved, legal and collection fees will need to be paid, as well, so the cost could be substantial.)
2. Examine the financial statements (FS) and minutes of the HOA. This will allow you to better understand and gauge the priorities and competency of the HOA. An FS will also provide you with some numbers and insights into how the HOA is being managed. Meanwhile, the minutes should shed further light on any potential issues in the FS, as well as major issues and general housekeeping items. Some potential issues to look for include:
- Material drawn down in cash reserves and the reason for doing so.
- Trend of capital expenditures: The goal of most HOAs is to maximize property value. Is capital spent on important items, such as roofing and systems? Or, are they for non- essential items, such as replacing pool deck furniture? Granted, the latter may be important to maintain the value of the property in certain neighborhoods. However, you should note that:
- If the current maintenance and reserves do not support this type of expenditure, then future owners could face an unexpected assessment or a permanent increase in maintenance.
- Not every owner shares the same priorities, such as minimizing their monthly obligations. Others prefer investing money into the property to improve the quality of life in the common areas of the HOA.
- Reference to a soon-to-expire loan: The HOA may incur noticeable refinance costs and/or its refinance rate may not be as favorable, which would lead to higher monthly payments. Therefore, a prospective buyer should try to determine the effect that this would have on maintenance payments going forward.
- Potential disturbances to the owner’s overall quality of life: There are many potential items, so having a sense of whether issues are addressed quickly, fairly and efficiently is important.
- Signs of inappropriate HOA board member behavior: This could range from incompetence to outright potential fraud, abuse and/or misuse of HOA powers. Keep in mind that:
- HOA board members are usually volunteers and may not be properly trained to manage real estate, deal with financial issues or be involved in a management position in general.
- There could potentially be a conflict of interest and deal-making between members to get measures passed that benefit only a few, as opposed to all of the members of the HOA.
- Additionally, if there was misconduct, check whether:
- It was addressed properly.
- There are safeguards in place to address future misconduct to shield owners?
Ultimately, the effectiveness of this part of the process depends on the quality of the documentation, which can vary noticeably from HOA to HOA. Important details can be omitted, whether unintentionally or intentionally, based on the quality of the board.
As a result, sometimes even those who live in the HOA may be unaware of important developments. For this reason, speaking to people living in the HOA may be another good resource, even if they don’t necessarily know all of the inner workings of the HOA.
3. Consider the age and condition of the building itself and recent maintenance history: New York is an old city — by North American standards — with many older buildings that can be underfunded and improperly maintained, thereby leading to undesirable living conditions. So, it’s important for buyers to obtain this information from the HOA prior to purchase.
Every component of a building has a useful life: After a set number of years, components likely either need major repair or replacement. Taking this into account is important since the last thing any purchaser wants to do is live in an unsuitable living environment and/or be faced with an increase in monthly obligations. Some important items to consider are the roof, elevator, plumbing, boiler and façade.
That said, even some newer buildings can have problems. For instance, sometimes, in an effort to attract buyers/investors into an HOA, the reserves and maintenance are underestimated — only for owners to discover years later that the HOA does not have sufficient funds for major repairs/replacement.
Obvious evidence of this is when there have been multiple increases in maintenance or impositions of assessments within a year or two around the time of a repair/replacement cycle. While there are some safeguards in place by way of the offering plan, it’s not always foolproof since there are many variables that affect maintenance charges.
4. Inquire whether your lender will approve a loan in the HOA or if it’s on a preapproved list. If it’s not, make sure you have an out in your contract if that occurs.
5. Submit a questionnaire to the HOA. With the assistance of your attorney, request any information — within reason — you’d like from the HOA. Make sure to be clear and detailed so that you get the response you need. Attorneys generally have their own forms, which include questions such as what services and utilities are included in the common charges. If you can’t find answers based on your initial investigation, this is the best time to do so.
6. Ensure you have a comfortable debt-to-income ratio before purchasing. Unlike buying a regular home, where you can simply forgo maintenance on your property for however long you wish, this is not an option in an HOA. For this reason, having financial flexibility to deal with unforeseen events is essential. This has been especially important during the last few years due to the astronomical increase in inflation, which has hit every aspect of our lives. Think of it as insurance.
Editor’s note: This was part 1 of a two-part deep-dive into the intricacies of buying a home in an HOA. Part two will follow in late March.
John Pak serves as the Real Estate Chair at the Law Offices of Pardalis & Nohavicka. He is a transactional attorney specializing in acquisitions, dispositions and leasing. A graduate of Brooklyn Law School, he received his BA in Political Science from New York University. Prior to joining PN Lawyers, John owned his own private law practice for 15 years and a title company for 6 years.
Taso Pardalis is a founding partner of the Law Offices of Pardalis & Nohavicka, a leading full- service NYC law firm with offices in Manhattan, Queens and WeWork. Taso may be a well-known attorney with many cases making headlines in major media outlets, but at heart, he is a true entrepreneur that believes in supporting the small business community. His areas of concentration are: Intellectual Property, Trademarks, Corporate, Business Law and Real Estate Law.