Buyer Beware!

Anyone who is considering the purchase of a condominium or a home in any type of common interest development (CID) would be well-served to become as educated as possible about the laws that govern CIDs in the state where the property is located. Of particular interest to a prospective home buyer are the disclosure laws that govern real estate transactions in the state.

In some states, HOA disclosure laws are very succinct and provide the prospective buyer with a considerable amount of information than may be used as negotiating leverage by an informed buyer.

In those instances where state law does not empower the buyer by providing them access to HOA records prior to purchase, it is imperative that a buyer’s offer include language that obligates the seller (who is usually entitled to the records) to provide them to the buyer as a condition of the sale.

All buyers should instruct their real estate agent to include a contingency in the offer that states the seller will provide the HOA legal documents in addition to the following items:

  • Current or most recent reserve study
  • Current approved operating budget
  • Year-to-date financial statement[1]
  • Year-end financial statement for the most recently concluded fiscal year
  • Audited or reviewed financial statement for the most recently concluded fiscal year[2]
  • Current insurance certificate (1 to 2 page summary, not a 300-page master policy)
  • Board meeting minutes for the previous 24 months[3]
  • Loan agreements or borrowing resolutions for any outstanding loans owed by the HOA
  • Inspection reports ordered by the Board of Directors within the previous 3 years

[1] The term financial statement refers to a document consisting of a balance sheet and an income statement (sometimes referred to as a profit & loss statement).

[2] Audited financial statements may or may not be required  under state law. HOAs that are less than a certain size or have less than a minimum amount of annual revenue are typically not required to have the annual financial statement audited.  Some states, including California and Oregon require that the annual financial statement by reviewed by a licensed CPA. The review process is a formal exercise must conform to standards established the generally accepted accounting principles recognized in the United States.

[3] HOA boards do not always meet on a monthly basis. Some do not meet on a regularly scheduled basis. Therefore it is advised that the offer include a request for the meeting minutes for all meetings held during the previous 24 months.

If a buyer is planning to engage the services of someone to review the documents they should establish communications with the service provider prior to receiving the documents so that the consultant is aware that their services will be needed. Typically the buyer will only have 3 to 7 business days to review the documents before the offer expires, depending on the terms agreed to by the seller. As a result it is imperative that the consultant who is engaged to review the documents is given advance notice so that they are prepared to start on the project as soon as the documents are delivered by the seller.

The CID Homeowner Association Due Due Diligence Report™ is available to buyers in any state assuming the required documents are made available. To learn more about the CIDA REPORT™ service or to order a report, you may visit the CIDA website or contact our office at 800-218-0302.