September 14, 2016
Does an HOA Disclosure Packet Effectively Protect a Home Buyer?
There is an interesting September 14, 2016 article in the Washington Post by Ilyce Glink and Samuel Tamkin entitled, “Why you should look carefully at an HOA’s plans for that community before buying a home there.” The article responds to Virginia home buyers who have great questions that aren’t answered in an HOA disclosure packet. The purchasers know that the roads the HOA owns need major repairs. It is overall a great article. The HOA disclosure packet doesn’t say how this will be paid for. They are concerned that their dues might increase from $1,000 to $3,500. This is a make or break question. Virginia law entitles the buyer to disclosure of HOA governing documents, corporate records and financial reports before going to closing on purchase of property. These disclosures are supposed to educate buyers about their rights and responsibilities to the HOA for as long as they own the property. In reality, buyers have many things on their minds during this exciting and stressful time. Their busy lives are consumed with urgent matters. They attend the home inspection and negotiation of any repairs. They come up with the down payment and approval from their mortgage lender. An excited family member may be dismissive of any questions or red flags about the property. The purchase will require the buyers to move and have their lives disrupted. Many home buyers feel worn down by demands of the process. They want to avoid cancelling and starting all over. All the buyers know about the HOA may be from seeing neighboring houses, maybe some common areas like a pool or playground. What’s in the HOA disclosure packet or condominium resale certificate give the association great influence over the financial affairs and home life of the buyers. Virginia law requires that HOA disclosure packet to include the following statements and documents:
1. Name and registered agent of the association.
2. Approved expenditures that will require a special assessment.
3. Ordinary assessments or mandatory dues or charges.
4. Whether there are any other parties to which the lot owner may be liable for fees or charges.
5. Reserve study report or summary.
6. Current budget and financial balance sheet.
7. Any pending lawsuit or unpaid judgment that could have a material impact.
8. Insurance coverage provided and not provided by the association.
9. Whether any improvement to the property being sold is in violation of the governing documents.
10. Flag display restrictions.
11. Solar panel use restrictions.
1. Declaration & any amendments.
2. Articles of incorporation, bylaws & any amendments
3. Rules, regulations or architectural guidelines
4. Approved minutes of the board and owner meetings for previous six months
5. Notices of any pending architectural violations
6. Disclosure Packet Notice Form prepared by the Virginia Common Interest Community Board
7. Annual Report form filed with the state with officers and directors and other information
8. Federal Housing Administration lending approval statement
While many people aren’t familiar with these kinds of documents, they reflect the family’s future financial obligations to the HOA and restrictions on the use of the property. The 2008 subprime mortgage crisis was caused in part by mortgage lenders giving borrowers loan documents that they didn’t understand. The HOA covenants are also a source of confusion. Many buyers would never buy a home without using a home inspector, but they try to tackle the HOA disclosure packet themselves. Unfortunately, it is easier for an unaided consumer to eyeball things in the home that need repairs than make sense out of the HOA documents. The federal government requires mortgage lenders to provide borrowers with simplified statements of the loan terms to make them transparent. For HOAs, consumer protections are weaker. Virginia law gives the buyer only three days to cancel the purchase contract after receipt of the HOA disclosure packet. That might give a professional working in the real estate industry enough time to digest them. However, many ordinary consumers struggle to make this three-day review period a meaningful part of their decision-making. A buyer could negotiate with the seller for this three-day period to be lengthened in the language of the sales contract. Few ask for this because the disclosures in the sales contract do not suggest to the buyer that additional time might be necessary.
As more HOA horror stories appear in news articles and social media posts, consumers are more likely to read the HOA disclosure packet and ask questions like in today’s Washington Post article. Even if the buyer is familiar with community associations law, the governing documents may be vague, ambiguous or unclear about issues critical to the buyer’s use and enjoyment of the home. This is what the home buyers in the article discovered. Glink and Tamkin recommend that the buyers knock on the door of the HOA president and ask her point-blank about how the road repairs will be paid for. An officer who understands their leadership responsibilities well might provide a sufficient answer upon a direct request. However, in most situations this probably won’t achieve a satisfactory result. Educated officers and directors know that the HOA or condo board is only required to provide the information and documents referenced in the statutes. If the buyer is unsatisfied, they have to either exercise the contingency within the deadline or negotiate for an extension of the cancellation period and a follow-up request to the board. The HOA could employ dilatory tactics, inducing the buyer to inadvertently waive the right of cancellation while pursuing an answer to the question. The road expense issue is probably already a hot-button issue for this board with lots of HOA politics in play.
There is a disturbing issue about the facts described in this newspaper column that isn’t addressed by the article. The HOA is managed by its board and not by a property management company. The monthly dues for the property are $1,000. This means that the officers and directors are handling a huge budget themselves, making day-to-day property management decisions. Maybe the board consists of retired real estate professionals who do this as a hobby to benefit the community at no added benefit to themselves. Given the commitment required to manage such a large budget, this is probably not the case. This would be my number one question.
If the purchasers have questions about what the documents mean, they might ask their real estate agent. Realtors provide a lot of value to their clients because they negotiate sales transactions all the time. The agent may not be the best person to ask because she won’t receive a commission on the sale if the buyer gets cold feet and backs out. The disclosure packets contain legal documents that are designed to enforce restrictions in court should disputes arise. If an attorney or real estate agent might struggle to make sense out of the disclosure packet, a buyer who is not familiar with HOAs may only read a few pages before setting them aside and focusing their attention elsewhere. If consumers understood the HOA disclosure packet and made an intentional decision to go to closing or back out based on what they read, consumer trends and demands might force home builders to make HOAs more owner-friendly.
In theory, a buyer can retain independent attorneys and CPAs to review the HOA disclosure packet and answer questions. This would allow an educated decision whether to cancel within the short deadline. In reality, if the buyer doesn’t already have an attorney and/or CPA lined up at the beginning of the three-day period, it may already be too late. Let’s say the buyer spends a day trying to make sense of the HOA disclosure packet on his own. If the family cannot figure things out themselves, on the second day he might start calling around for an attorney. Unfortunately, almost all community association lawyers represent the associations themselves, big investors or developers. They do not normally represent homeowners. My firm is an exception – in my solo practice I never represent HOA boards. General practice attorneys often represent individual persons. However, to effectively advise the purchaser on short notice, the attorney must be familiar with the appellate court decisions concerning the HOA statutes and governing documents. Much of the law pertaining to community associations matters is found in court opinions, not just acts of the general assembly. Many general practice lawyers are very good but may not be familiar with these things. Assuming that the buyer does find an attorney who is a good fit, there still are time constraints. The buyer has to talk to the lawyer, hire him, and provide the documents. It may take the attorney more than an hour or two to review the documents to prepare to provide an overview and answer questions. All of this must be completed within 3 days (or whatever extended period agreed with the seller) so that the buyer can make a meaningful decision to exercise or waive the HOA contingency. Otherwise the buyer might lose their deposit and some other fees if they want to get out of the contract. The three-day period might work if the buyer hired the attorney beforehand. However, the terms and disclosures in the sales contract do not alert the buyer that such might be desired.
Don’t get me wrong. The HOA disclosure packet provides critical information and documents to consumers and does contain a right of cancellation. Doing away with it entirely would be a huge setback to property owners. Unfortunately, the deadlines and procedural features of the disclosure laws don’t do enough to protect consumers. My professional experience working with owners leads me to believe that many of them go to closing unaware of what they are getting into. This is not really their fault. Sometimes they don’t understand the extent of some restriction or obligation that the property is subject to. Also, owners have rights that they are often unaware of and could improve their situation if they knew about them.
One of the key statements in the packet is the Virginia Common Interest Community Board Disclosure Notice Form. This is a kind of “Miranda” warning to consumers about what it means to live in an HOA or condo. The current version is useful but could be improved. It doesn’t mention fines for rule violations. It states that the buyer is subject to all of the decisions of the Board. Yet an adverse decision of the board might be legally void or voidable if the owner acts promptly. The notice does not reference the statutes or common law principles that may dramatically affect the rights and obligations of owners. The packet notice does not point out to the buyer that they have a right to have their own attorney review the documents and answer their questions. If the buyer received a useful disclosure notice form at the time they signed the contract, then they might more carefully consider whether to hire an attorney, CPA or other professional to help them with the HOA disclosure packet. Also, if the statute allowed for a longer period of time for the contingency than three days, the buyer would not need to negotiate that in advance. These additional protections are necessary because the system that exists has a practical effect of limiting home buyers’ right to counsel.
Based on my own personal experiences with real estate, the stories I have read about other people’s experiences and homeowners I have spoken to, I believe that on a practical level, the HOA disclosure packet is an ineffective system of consumer protection. This is shown by the surprise that owners experience when they are victim of an abusive debt collection practice, an arbitrary architectural review decision or any other infringement of their property rights by an association. Fundamentally, the HOA disclosure packet procedure doesn’t work because consumers don’t understand how its contents help them find answers to any questions they might have.
What does a buyer need to know that isn’t found in the HOA disclosure packet? The courts are the branch of government that oversee HOA boards. The Supreme Court of Virginia has repeatedly held that the declaration is a written contract or agreement between the owners and the HOA. If you go to the Virginia Code looking for guidance on something not explained in the packet you might not find the answer there because of the nature of the legal system. The declaration, along with other real estate contracts are interpreted by court precedents for many issues. For example, if a party breaches a contract, they are entitled to remedies which might include money damages, attorney’s fees or an order for the other side to do something. An owner has an interest in knowing whether the declaration even makes the association qualify as an HOA. The system of remedies for breach of covenants is very important in the HOA context because that’s where the owner finds means of enforcing his rights. A wide variety of rules that pertain to HOAs are found in court opinions that aren’t neatly summarized in the disclosure packet or even in legislation.
Because the governing documents are written in legalese interpreted by court opinions and legislative enactments, the disclosure packet is not effective as a summary of the rights the HOA has over the property. The Washington Post column illustrates this. A buyer does not have the time to take a law class on community associations or enforcement of real estate covenants in the three days in which the disclosure laws give them to review it.
I hope that the General Assembly amends the statutes to provide stronger protections for buyers. If buyers knew what they were getting themselves into beforehand, they would be better educated to be owners or even board members. In the meantime, home buyers should prepare to retain advisors to help them understand the documents. If necessary, the buyer and seller can agree to expand the three-day waiting period. Ultimately, families must work with their own team to stick up for themselves and protect their rights. Owners owe it to themselves to adequately understand all of the rights and burdens that may come with the sacrifices made to purchase the property to begin with. Buyers should retain a qualified attorney to help them understand the documents before they even receive the HOA disclosure packet or condominium resale certificate.
For Further Reading:
Ilyce Glink & Samuel Tamkin, “Why you should look carefully at an HOA’s plans for that community before buying a home there,” Washington Post, Sept. 14, 2016.
Common Interest Community Board – Virginia Property Owners’ Association Disclosure Packet Notice
Va. Code Section 55-509.5 (Contents of association disclosure packet; delivery of packet)
Va. Code Section 55-79.97 (Va. Condominium Act – Resale by Purchaser)
160404-neighborhood-sidewalk-morning-clouds.jpg via photopin (license)(does not depict property referenced in blog post)