Understanding Your HOA
A homeowner association (HOA) is a legal entity that is created by a real estate developer when a residential real estate development is constructed. In the majority of cases, the HOA is organized under the corporation laws as a not-for-profit corporation. The purpose of the HOA is to enforce the covenants, conditions and restrictions (CC&Rs) which are rules that govern the use of the land under the jurisdiction of the HOA. These rules are codified in a legal document that is recorded in the official property records of the county where the HOA is located.
The HOA is governed by a Board of Directors who are elected by the HOA membership. In almost all instances, Board members must be owners or co-owners of a lot or unit within the HOA. There are occasions where the governing documents will allow a tenant (renter) to serve on the Board of Directors, or documents that allow a non-owner to serve on the Board in exchange for compensation, but both of these circumstances are somewhat unusual.
The primary role of the HOA manager is to oversee the administrative functions of the corporation. If the HOA is very small, a single individual may be responsible for a wide range of tasks. In the case of larger HOAs, and in particular, those that warrant hiring an independent management company, the various admin duties may be assigned to any number of different people.
The most common type of management model in most parts of the U.S. is the so-called portfolio management company, which refers to a business model where the company manages a portfolio of HOAs; some small, some large, some condominiums, others large expansive planned developments with sprawling campuses that can resemble small cities. Where there are management companies that specialize in one or two types of HOAs, the historical practice has been to take on one and all clients, without regard to whether a particular HOA is a good “fit” for the company’s skill set.
What is a reserve study, and replacement reserves?
The terms planned development, planned unit development (PUD) and planned community, refer to real property development strategies that share certain characteristics. The most important difference between a PUD and a condominium is in how ownership of the land is handled. See the next question for more about this topic.
The distinguishing feature of a condominium is that the land is not subdivided, but is instead left intact, resulting in the land being treated as a common element of the condominium. The owner of a condominium is said to own an undivided and indivisible interest in the land, while the individual ownership of the condominium unit is defined by a boundary description that encompasses the air-space within the unit boundary. The boundary is legally defined in the condominium declaration. In certain respects, the unit boundary definition is similar to the legal description of the land that is conveyed in a traditional property deed.
The short answer is NO. As a unit owner in a condominium, you are said to receive an undivided and indivisible interest in the land. A buyer who purchases a condominium, does not receive a deed that conveys title (ownership) to real property (land).
Both of these housing designs can be developed as a condominium or a PUD. A buyer who purchases a rowhome in a development platted as a condominium, does not receive a deed that conveys an interest in the land beneath the unit or beyond the boundary of the unit, such as a front or back yard, even when such outside spaces are designed for the exclusive use of the unit owner. The buyer who purchases the same rowhome platted as a PUD would receive a deed that included a plat illustrating land beneath the unit and perhaps beyond the unit boundary, depending on the circumstances. The same is true for most townhouse settings.
The Declaration of Covenants, Conditions and Restrictions (CC&R) is a legal document that sets forth covenants, restrictions and conditions which determine how a parcel of real property may be used. The parcel can be a residential lot or a commercial tract within the HOA footprint. The CC&Rs are a legally binding contract between a homeowner association (HOA) and the property owner who purchases a property that is subject to the HOA’s jurisdiction. The CC&Rs are considered a contract of adhesion that contractually binds the property owner to membership in the Association as well as the legal constraints set forth in the CC&Rs.
The Bylaws are the rules that determine how the HOA will be operated. In this respect they are no different from the Bylaws of any corporation. In those instances where the Bylaws impose a stricter standard of performance than the prevailing statutes, the HOA is bound by the rules set forth in the Bylaws.
The Rules & Regulations (R&R) are the rules which govern the behavior of the HOA members. By extension, the R&R apply to the children and guests of HOA members, with the member legally responsible for the behavior of children and guests.
The allocation of interest which appears most commonly in the CC&Rs, determines each member’s percentage of ownership in the HOA. The two most common methods are to divide the whole interest (100%) by the number of individual units in the case of a condominium, or the number of lots in the case of a PUD. In the case of condominiums where the size of the units varies considerably, it is common to allocate the interest by comparing the square feet (SF) of the individual unit to the total SF of all units. Using this method, a 2,000 SF condominium unit, in condominium development consisting of 100,000 SF of floor space, would be allocated a 2% (0.02) interest in the condominium. In this situation the condominium owner would be responsible for 2% of all financial obligations of the HOA.
In HOA vernacular, the terms assessment and special assessment refer to a financial obligation imposed on the owners which results in annual or monthly payments to the HOA - also referred to as regular assessments. Special assessments are those assessments which are not necessarily required every year or on a recurring basis, with the exception of a special serial assessment, which is a form of special assessment that allows the owners to pay off the special assessment in a series of installments.
It depends on how the Bylaws and in some cases, the CC&Rs are written. The more common legal practice in the modern era is for the Bylaws to grant complete authority for levying special assessments to the Board of Directors. Back in the “good old days,” it was not uncommon for the Board’s power to levy assessments to be restricted by requiring a vote of the membership for all special assessments, or at least when the amount exceeded a specified dollar limit.
From the perspective of a HOA member/owner, nobody is ever going to look out for your financial interests as well as you will. Not your neighbor, who happens to be on the Board. Not the hired manager, who may or may not know which house you live in or which condo unit is yours. If you are an owner of a home located in a HOA, you are an investor in a not-for profit corporation and you are liable for a share of the corporation’s financial obligations for better or worse. If you choose not to become a proactive owner, you are leaving your financial destiny in the hands of others.
Pre-Purchase Due Diligence
Pre-purchase due diligence refers to an investigative effort undertaken by a homebuyer before they purchase a home located in a HOA. In this context, we are talking about any type of HOA whether it is a condominium, PUD or a real estate cooperative. HOA due diligence is not unlike the effort an investor would undertake before investing in the stock of a publicly traded company. CIDAnalytics has been a pioneer in the in the field of HOA due diligence after introducing the concept to West Coast real estate markets more than ten years ago.
The HOA due diligence process works in much the same manner as a home inspection. Buyer should order a due diligence report after an offer has been accepted but before the period of review agreed to by the seller, has expired. The outcome of the examination is the CIDA REPORT™, which provides a wealth of information designed to educate and inform the buyer. The result is an empowered buyer not only with respect to negotiating the best possible terms of sale but also as the buyer moves forward and becomes a member of the HOA.
All investors should perform due diligence prior to making any investment. Purchasing a home in a HOA is tantamount to investing in a corporation, which carries even more inherent risk due to the reality that, as a member of the HOA, you are also liable for a share of the financial obligations of the organization.
Theoretically, the seller. As a member of the HOA the seller is the party to the sale who is legally entitled to the HOA documents, unless state law requires the HOA administrators to provide certain documents in the event of a sale. As a third-party consultant, CIDA is not legally entitled to HOA documents. Therefore, we do not obtain this information for a buyer.
CondoCerts is a private, for-profit company that provides document archiving services to HOAs. Like any company, CondoCerts, and other archiving services, are is in business to make a profit. By charging buyers to retrieve the documents, they are able to offer their services to the HOA. The laws in some states limit the amount that may be charged for HOA documents while some states require that specific documents are provided free of charge under certain circumstances.
Once a buyer receives the documents, they have two choices: 1) read them and attempt to make sense of the morass of information or 2) hire an expert like CIDA to conduct a due diligence examination of the HOA on your behalf. If you value your time and the expertise of the most experienced common interest development due diligence examiners in the country, you will order a CIDA REPORT™ and subscribe to the CIDAnalytics HOA data service when you find your dream home!
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