When you purchase a property in a common interest development, often referred to as a homeowners association (HOA), the documents that go along with that purchase can cost $400-$1,000. Many buyers are not excited about paying for these documents or only pay for some of them to save money.
While these documents do contain vital information that you absolutely need to review to protect yourself when buying property, about 95 percent of buyers won’t bother reading them before signing on the dotted line.
HOAs are complicated business entities, and all types of issues come along with owning property in one — from legal and management issues, to owner occupancy percentages, reserve studies, financial statements, budgets and insurance policies. If you don’t read the documents ahead of time, you don’t have any ability to analyze what you are buying.
Here is a sampling of what you need to review and why:
- Budgets – To make sure the HOA is prudently spending money.
- Financial statements – To make sure the HOA has some savings and is solvent.
- Insurance information – To make sure you procure the proper type of insurance.
- Board meeting minutes and newsletters – To see whether you should be aware of any major issues that could cost you money.
- Reserve study – To see whether the HOA is saving money for long-term repairs and replacements.
- Covenants, conditions and restrictions, and bylaws – To make sure you are willing to live within the rules of the community.
- Condo unit demand statement – To check for any issues, violations or fines on your particular unit.
- Bank condo certification – To see whether your financing bank has any issues with the community that you should be aware.
Reviewing all those documents takes significant time, energy and effort. You probably should get your lawyer and accountant involved in this review, too. Critical information can be found in the pages, and if you don’t review them, you may miss an issue that will cause you significant financial pain down the road.
In fact, many smart buyers won’t even consider properties in HOA-governed communities.
So before you spend money on the documents, ask yourself: Am I willing to put in the time necessary for due diligence?
- What Is Real Estate Due Diligence?
- What to Review in HOA Documents When Buying
- Real Estate Investing: Single Family vs. Condo
Leonard Baron, MBA, is America’s Real Estate Professor®. His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.