Homeowners Association (HOA) expert Jacquie Berry, owner of Community Association Data Source, recently informed Silicon Valley Association of Realtors members there are 55,000 HOAs in California. Community Interest Developments (CIDs) currently account for about 80% of all new construction.
"In the next 10 years, I expect CIDs, mainly condominiums, will comprise at least 50% of the marketplace," said Berry.
Berry said it is important for buyers to know that a unit's HOA is well-funded to avoid unexpected special assessments. Disclosure packages from HOAs need to be read carefully. Often, the package is either incomplete or documents are not updated. Some HOAs are not even civil code compliant and do not follow the Davis-Stirling law regarding disclosure.
The PRDS advisory form for Santa Clara and San Mateo counties and the California Association of Realtors form emphasize the importance of obtaining the HOA documents. PRDS is an extensive line of paper and online forms for residential purchase and sales transactions. These forms are available online free of charge as a member benefit to all Realtor members of the Silicon Valley Association of Realtors and the San Mateo County Association of Realtors.
"Read all the documents in the package, investigate, request what is missing," said Berry. "Check the budget, the income, deficits and reserves. Ask if there is going to be a special assessment."
An HOA's reserve fund is used for major repair and replacement expenses without reliance on additional supplemental funds, such as increasing future assessments. If the HOA is underfunded, it could mean a larger assessment to the buyer later. If reserves are as low as 30%, expect special assessments in the future. HOAs that are funded in a level of 70% are better off, said the HOA documents expert.
Berry knows of new buyers who were slapped with special assessments amounting to thousands of dollars. She warned that the law requiring HOAs to have all exterior wood decks, balconies, stairways, and walkways inspected every nine years by a licensed structural engineer or architect, could cost an HOA thousands of dollars. The cost of these inspections could greatly impact an HOA's reserves. The HOA can be passed these on to the unit owner as a special assessment.
Insurance is another matter that should be checked. There are buyers who learn only after the fact that they cannot insure their unit. Check for a statement of insurance. Berry said there are only two insurance carriers that will cover HOAs in fire risk areas. The insurance commission is currently working with insurance companies to get the matter resolved.
Berry indicated all parties should have knowledge of the HOA's financial health regardless of which side of the transaction you are on. The buyer has the right to have someone review the HOA documents for them. In fact, a document review should be requested by the seller so they can review the HOA's reserves so they have a base.
Berry's firm reviews HOA documents. Having reviewed thousands of HOA documents, she noted she sees few that are complete or meet every aspect of the civil code.
The Silicon Valley Association of REALTORS® (SILVAR) is a professional trade organization representing over 4,000 REALTORS® and Affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.
The term "REALTOR®" is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of REALTORS® and who subscribes to its strict Code of Ethics.
Variations of this article have appeared in local area newspapers.
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