Transactions involving an HOA: what every Realtor should know

Glenn Shelhamer

Glen Shelhamer is a Los Angeles real estate agent with The Shelhamer Real Estate Group

Ask two homeowners their thoughts on living in a community with a homeowners’ association (HOA), and you may find one kicking and screaming for vindication and the other perfectly content.

The difference in opinion comes from their individual experiences and personalities and the efficiency and competence of their HOA board and management.

As a Realtor, you should take the time to understand your clients’ needs and wants, and guide them toward properties that meet their search criteria.

You’ll point out the benefits and the drawbacks of life in a specific HOA community, because you have taken the time to educate yourself about specific buildings and neighborhoods where your clients are interested in owning property.

Make sure your clients understand a condo is basically like buying an apartment, but you own the interior airspace. You own only the “airspace” inside the unit you purchased, not the land below. That defines the difference between a condo purchase and a single-family home.

Both a condo and a townhouse share common spaces and, sometimes, amenities — such as shared walkways, landscaping, parking and recreational facilities like pools, gyms, steam rooms and saunas. These common amenities are shared by all of the unit owners in the development. In most cases, the more amenities — luxury or not — the higher the monthly HOA fees are.

This is all good, but what are the risks to you, the agent, in transactions involving HOAs? And how can you protect yourself against an unhappy client pointing fingers in your direction and jumping on the telephone with your broker?

Let’s say an HOA has sued the builder because of defects in plumbing — such as faulty drainage or mildew issues.

If the suit is successful, the builder pays the association a damages fee, which the HOA then either uses to make the repairs or distributes to the homeowners to get the work done themselves.

You just read a potential red flag.

What’s important is that if the repairs were not completed by the HOA, or by a homeowner who simply pocketed the excess funds for a rainy day, the hazard may still exist — and Realtors who sell a unit that was not repaired can be sued if they fail to disclose a past lawsuit and the buyer later discovers the defect. Ouch!

The good news is when selling a property in Los Angeles, you’ll be required to get a copy of the covenants, conditions and restrictions (CC&Rs) as well as the HOA’s financial statement, including the reserves.

Make sure to find out about the type of insurance for liability, fire and other perils that the HOA maintains. For example: Do they carry a separate policy of earthquake insurance?

I like to check for any pending lawsuits against the development or the HOA, as these can lead to large special assessments levied against each unit.

If a lawsuit is pending, be sure to review the documentation to determine what the dispute is about and its likely impact on the development. Encourage — in writing — for your clients to consult an attorney to evaluate the matter to ensure they won’t be financially affected by the outcome.

Some banks will simply not provide financing for a mortgage on a condo with pending litigation, so always seek your lender’s opinion about the nature of the lawsuit and whether or not the bank would be willing to lend on the property.

I cannot stress understanding the importance of the HOA’s finances enough. Make sure you do your homework. It’s very important to determine whether the HOA is in debt or has a balanced budget and sufficient reserves to cover normal maintenance and emergency situations that may arise, as well as updates like a new roof, plumbing, stucco, painting, air conditioning and so on.

Realtors are not required to personally evaluate the above documentation, but for your protection, you should be aware of what HOAs must disclose in your state and refer your buyers to an attorney, an accountant or to a company that specializes in reviewing HOA documentation.

At the very least, you’ll most likely cover yourself this way!

Email Glenn Shelhamer