by Ron Rossi
One of the most complicated residential real estate sales is the sale of a common interest development property, commonly called a CID.
Common interest developments include condominiums and planned developments, essentially almost any type of residential project where there is a homeowner's association.
In addition to all of the normal disclosures required in the sale of single family homes, when a real estate agent is selling a common interest development property, the seller must comply with the Davis-Sterling Common Interest Development Act, which is part of the California Civil Code.
The act requires 27 disclosures in the sale of a common interest development in addition to those required by a non-CID property. The president of Community Association DataSource, Jacquie Berry, says that of the more than 700 transactions they handled in the last three years, not one homeowners association got a perfect score of furnishing all 27 disclosures.
It is very important that these disclosures be obtained and reviewed by the appropriate professional so that the buyer can make an intelligent decision as to whether or not to purchase the property.
Unfortunately, the disclosures are wide-ranging and extremely complicated and require a variety of expertise. Most sellers and buyers have no idea as to the complexity of obtaining and reviewing these documents and many agents do not understand or appreciate the complexities of the disclosures.
It is important that when dealing with this type of property, the agent be familiar with the Davis-Stirling Act. Some of the required disclosures and their importance are listed below:
The first category of disclosures are:
- Articles of Incorporation
- Bylaws
- Covenants, Conditions and Restrictions
- Rules and Regulations, Policies and Board Resolutions of the Association
The Covenants, Conditions and Restrictions must be reviewed to make sure that they are complete and current. Every buyer should review them to make sure that the rules and regulations and Covenants, Conditions and Restrictions meet with their expectations.
A recent example illustrates this problem. The original Covenants, Conditions and Restrictions allowed dogs. The revised Covenants, Conditions and Restrictions providing that all dogs had to be under 60 pounds. The buyer did not receive the revised restrictions and moved in with her 90 pound German shepherd. When walking the dog one morning, the president of the association confronted her with, "I hope that dog is a guest, because it is obviously over 60 pounds and cannot be kept at the premises."
The buyer is now in litigation with a variety of parties, including the agents and the homeowners association.
Timing is also important. Often these documents are delivered late into the escrow process and the buyer has already removed contingencies and has not had a chance to review them.
The next area of disclosures concerns the financial condition of the association. These are a real trap for the unwary and present problems that will bring a multitude of lawsuits in the future if not properly reviewed.
Many of the projects being sold in our area are becoming older. Therefore, they require more maintenance and more replacements. Many homeowners associations kept the dues so low that the fund is exhausted immediately to pay for the repair or replacement of a big-ticket item like a roof. One recent association surprised its current members by increasing dues $16,000 per member per year.
The pro forma operating budget must include estimated revenue and expenses. It must also include current estimated replacement costs, the remaining life and useful lives of all major components, such as the roof and other components. It must include the current estate of reserves actually set aside to fund these replacements, a current percentage of replacements funded and procedures used to calculate those reserves. Finally, it must include any current pending or contemplated special assessment.
Why are these seemingly complicated accounting issues important? Obviously, if you are going to be purchasing a unit, you want to know what percentage of various components have been funded for completion and repair. If only a small percentage has been funded, what's going to happen when the roof needs to be replaced, when the decks need to be refurbished? Who is going to pay for it? The current owners will probably get stuck with huge assessments.
The law requires that the financial statements of the homeowners association, which is the governing body of a common interest development, be reviewed by a CPA when the association meets certain gross income tests. These reviews must be distributed to each of the members.
The next group of disclosure requirements includes those disclosures requiring age restrictions, delinquent assessment collection policies, a schedule of fines and money penalties and a statement regarding alternative dispute resolution process, such as arbitration.
Insurance details also must be disclosed. The buyer must receive the name of the insurer, the type of insurance, the policy limits and any deductibles. A buyer should review these with their insurance professional.
The law also requires that the buyer receive one year's minutes of the board of directors. Hopefully, the brokers will also obtain all relevant newsletters to see what's really going on.
The law also requires the association to advise the buyer of any active or contemplated litigation.
The law requires that the seller, not the homeowners association, to furnish this information to the buyer. Of course, the seller has to get it from the association, which may charge a reasonable fee. The Community Association DataSource provides a form that lists the documents to be furnished. Because the law requires the request to be in writing, these forms can be forwarded to the homeowners association or the management company to ask them to provide the documents. Without these disclosures, it is impossible to make any intelligent decisions.
