How to review HOA CC&Rs contracts before you buy a home

In my previous post, Buying a home or condo? 10 tips to check out the HOA, I touched on the importance of carefully reading the governing documents that apply to the home or condo you’re planning to purchase. This post explains how to review HOA CC&Rs contracts and other governing documents before you buy a home.

By Deborah Goonan, Independent American Communities

(Note: If you’re on the fence about buying into an HOA, be sure to read 9 good reasons to avoid HOAs. But if it’s hard to avoid an HOA in your area, and plan to purchase a home under HOA CC&Rs, read on.)

Always read the HOA governing documents before finalizing a sale agreement

Many homeowners skip the review of HOA CC&Rs during the home inspection period. They do so at their own risk.

Yes, I realize that HOA covenants and restrictions (CC&Rs), rules and regulations, and community or house rules can be lengthy and downright boring. Read them anyway. Don’t buy into any HOA without understanding your obligations and potential risks.

I must make it clear that I am not an attorney. I recommend that you make notes of anything in the HOA documents that makes you uncomfortable. Consult a reputable real estate attorney with any specific questions or legal concerns you may have during the inspection period.

That said, here are some important things to look for in the HOA CC&Rs and governing documents.

Can you live with all of the HOA rules?

Start your review and evaluation of the HOA CC&Rs by carefully reading all of the rules and restrictions in the Declaration of Covenants, Conditions and Restrictions or Declaration of Condominium or Co-op. (The common nickname for these documents is HOA CC&Rs, and, for the sake of brevity, I’ll use that in the remainder of this post.)

Be sure to also review each addendum to the Declarations, such as architectural standards, landscape requirements, and “house rules” for multifamily condo and co-op buildings.

Don’t neglect to read HOA rules pertaining to use of common areas such as laundry facilities, swimming pools, tennis courts, boat docks, beach access ramps, and any other amenities you hope to use and enjoy.

Warning: You may find some HOA rules to be a deal breaker.

For example, a condo association might have a 25-pound weight limit for your pet. That won’t work if you’ve got a Golden Retriever.

Another example: the HOA of a planned community might not allow you to park any vehicles on the street overnight — sometimes even on a public street. The rules say that all residents must park in the garage, and guests must park in the driveway. Will that work for you and your family? Will you have room to park all your vehicles in the garage? If you park vehicles in the garage, where will you store your tools and outdoor equipment?

How “green” is the HOA?

Many older common interest ownership developments were built before new green technologies such as electric vehicles and solar panels.

If this is important to you, review the HOA CC&Rs for acceptable uses of your private property.

You should first see what the governing documents say about adding EV chargers and solar equipment to your property. Some state laws protect an owner’s right to add EV charging stations and solar panels. State law may also override any outdated restrictions in the governing documents.

But a word of caution. You many even see a few homes with EV charging stations and rooftop solar panels. But do not assume your future HOA will approve your application to add these things to your home.

Find out what it will cost you to make these changes to your property. Will the HOA charge extra fees? Will you have to purchase additional insurance? Estimate your ongoing maintenance costs before making your decision about the property.

Likewise, if you’re hoping to plant a vegetable garden, or if you would prefer to plant a native landscape, will the HOA rules prevent you from doing so? Again, some states offer limited protection of rights for owners to grow their own food and plant drought tolerant landscapes. But don’t assume that the HOA will be cooperative.

If you have your heart set on any of these green home improvements, make a formal request to the HOA in writing before you finalize the sale agreement. You must insist on a written response to all of your requests. Have your real estate closing attorney assist with this process. You want to prevent the HOA from reversing its permission after you’ve already bought your home. (It happens!)

Beyond the rules, review your financial obligations in the CC&Rs

I cannot overstress this point. HOAs, especially condo and co-op associations, come with important obligations and responsibilities for homeowners.

HOA fees must be paid in full and on time

First of all, you’ll be expected to pay all HOA fees in full and on time, with no exceptions. That includes any surprise special assessments that could pop up at any time after you’ve been handed the keys.

Most HOA boards, and virtually all condominium and co-op boards have strict collection procedures. The HOA should have a well-written, specific policy that outlines late fees, interest, application of late payments, and a timeline for handing delinquent accounts over to collection agents.

If you fall behind on HOA fees, once the account goes to collections, look out! You’ll be on the hook for hefty attorney fees and collection costs. In most cases, the HOA can file a lien against your property for nonpayment of fees and collection costs. The HOA can then collect on that lien through garnishment of wages or assets, or by foreclosure on the property. A co-op can order an eviction of a shareholder that isn’t paying fees on time.

Yes, you can actually lose your home if you’re not able or willing to pay HOA fees. Let that sink in.

Hopefully, you will avoid falling behind on your financial obligations. But you must be fully aware of the consequences if you do.

How does the HOA board set fees and assessments?

You should make sure you fully understand how the HOA determines its annual budget. Does the HOA have sole authority to take loans and issue special assessments for big renovation projects that aren’t covered by regular fees?

In some states, HOA governing documents can require a formal membership vote to approve or disapprove of special assessments. But in other states, HOAs can skip the voting process. This is especially true if repairs are necessary for structural safety of occupants. HOAs usually don’t have to consult owners on approval of assessments ro recover from an emergency such as a fire, hurricane, or flood. Insurance may cover only a portion of the loss, leaving HOA members to pick up the tab for uncovered losses.

Check to see if the HOA governing documents include an official policy on payment plans. But don’t expect to find one, as it’s not required by law in most states.

Carefully consider whether you can maintain a sizable emergency fund to pay unexpected HOA assessments in the future. It’s possible that the HOA has a healthy reserve fund and great insurance coverage. But the majority of HOA reserve accounts are not fully funded and many HOAs have inadequate insurance coverage. (See my previous post for details)

What maintenance costs belong solely to homeowners?

In condominiums and townhouses, the homeowner is usually (but not always) responsible for the cost of replacing doors, windows and private or shared driveways. These items may not be “included” in regular maintenance fees charged by the HOA.

In planned communities, lot owners often bear responsibility for routine maintenance of easement zones, including sidewalks, curb strips and shorelines of retention ponds. HOAs may be tasked with replacement of cracked concrete or erosion repair around storm drainage areas. But don’t assume this is the case. Each party’s specific duties should be spelled out in the governing documents.

The Bylaws – how is the HOA governed?

Many people confuse the Bylaws of an HOA with its Declaration of CC&Rs. Technically, these are two separate documents.

CC&Rs spell out obligations and responsibilities of the HOA and its members. Bylaws spell out administrative governance procedures for the HOA.

Powers of the board

Although some of this information may be referenced in the CC&Rs, the Bylaws should include a list of the HOA board’s duties and fiduciary responsibilities to its members. State laws may require specific duties and procedures for HOA or condo boards. Most state laws enable HOAs with certain powers ordinarily reserved for government. These include:

  • the power to enact new rules (consistent with CC&Rs),
  • the power to fine owners for violation of the CC&Rs, and
  • the power to place and foreclose HOA liens against private property.

It’s critically important to understand the potentially broad powers of your future HOA board. Make note of any limitations on HOA authority as well.

Voting allocations

The Bylaws specify how voting powers are assigned to each owner. Planned communities generally allocate one vote per home owned. An owner of one home gets one vote. But the owner of three homes gets three votes – one for each property owned.

Condominiums and co-ops determine voting interests by the proportion of floor space of each unit, as well as each unit’s relative value in relation to other units. Thus, a 1,500 square foot penthouse condo will have more voting power than a 2nd floor studio condo with a view of a neighboring building.

Election procedures

Some states spell out specific procedures to help ensure the integrity of the vote. Many states do not, or they defer to whatever procedures exist in the Bylaws of the community.

The Bylaws will tell you if the HOA uses double envelope paper ballots or e-voting or a combination of the two. Bylaws will tell you if the HOA board selects a nominating committee for each election. Or it may state that owners can make nominations from the floor on the day of the election.

Make note of how the votes are to be counted, and whether cumulative voting is allowed or prohibited. Some HOAs allow proxy voting, others do not. Some state laws forbid proxy voting. Your attorney can advise you on the laws in your state.

Recall procedures

How difficult is it to recall one or more board members? Most often, Bylaws deter owners from staging a recall, especially if multiple board members are the target of recall. Note any requirements for the immediate election of new members to replace those who have been recalled.

Amendment procedures

The process of amending CC&Rs is usually difficult. That’s because most Declarations require at least a two-thirds voting interest of all unit or parcel owners to vote in favor of changes. That’s a good thing if you agree with the terms of your CC&Rs. It’s a bad thing if you and some of your neighbors think the terms of the CC&Rs are onerous or unfair.

And there’s an additional point to consider. If ownership in the community is dominated by a large voting bloc of investors, or if it is still under the control of a developer, ordinary homeowners have virtually no say over amendments to the CC&Rs. The cosnumer’s legal and financial obligations can change overnight, often to their disadvantage.

Developer rights and control

Real estate developers are the original creators of common interest, common ownership communities. It’s not surprise that CC&Rs and other HOA governing documents are generally written in their favor.

A developer will appoint the HOA board as long as he is building and selling homes. And, during this time, he will have weighted voting interests. Typically, each unsold lot/home package is worth 3 to 7 votes, compared to one vote per home that has already been conveyed to an owner. I once read CC&Rs that allocated nine votes per unsold parcels owned by investors that purchased land from the original developer in bankruptcy.

Situations like this tend to limit the property rights of individual homeowners, while also increasing risks for home and condo buyers. Those risks are beyond the scope of this post. For more information, see 4 risks for homeowners in developer-controlled HOA communities.

What are the conditions for turnover of HOA control?

The CC&Rs should indicate if the HOA is controlled by the Declarant (developer or successive investors) as well as when and how control of the HOA board will transition to an owner-controlled HOA board.

The Declarant may be obligated to allow homeowners to elect some board members prior to completing construction. But generally a Declarant appoints a majority of the board of directors until nearly every unit or lot is sold.

Note that the transition process can take years. Under some circumstances, a Declarant may retain control of the HOA indefinitely.

Look for a section entitled “Declarant Rights.”

In addition to the right to control the business of the HOA by way of appointing board members, the Declarant may retain or transfer private ownership and vested rights to common recreational amenities. A Declarant or a subsidiary business can own the community’s clubhouse, restaurant, pool, or golf course. Or a developer might hold onto the parking areas, boat docks, beach accesspoints, or any other common amenity.

When this is the case, the CC&Rs will often give the Declarant the right to collect mandatory amenity or social club fees from the owners of each lot or unit. The owner of the amenities could choose to sell them to another buyer, without consent of the HOA or homeowners.

A Declarant or successive private amenity owner could also retain authority over the community’s architectural modifications committee. For example, I am aware of some owners of golf country clubs who restrict additions of fences, play structures and private pools in the back yards of homes visible from the golf course.

Special considerations: Large and mixed-use communities

If you’re considering a home or condo in a master planned community with hundreds or thousands of homes, or a retirement community, or a condo in a building with ground floor commercial storefronts, you can expect a more complex governance structure.

Master HOAs

In larger communities, it is common to have 2 or more layers of owners’ associations — one for the building phase of your home or condo, and another umbrella HOA for all of the phase or “sub” HOAs in the development. Master HOAs have different voting structures, and often require fees in addition to your condo or townhouse fees.

If you will be a member of more than one HOA, you should read the governing documents of all HOAs that would apply to your home.

If this applies to your purchase decision, you can read more about Master HOAs here:

What is an HOA “Master Association?”

Special Districts

Larger subdivisions and condominium communities may also be funded, in part, by one or more Special Tax Districts.

Typically, these are limited purpose government districts. Sometimes they are public-private partnerships. Districts will exist in addition to HOAs and will collect money in the form of taxes from each property owner.

The funds are commonly used for construction and ongoing maintenance of subdivision roads, utility lines, or water supplied from wells, to name a few examples.

Special Districts are created as divisions of local government rather than property restrictions or contracts. Contact the District(s) directly for information about their scope of services and your financial obligations.

You can also learn more about Special Districts and Development Districts in these two previous posts on IAC:

Passing the buck: development tax districts, HOA fees make housing unaffordable

Don’t confuse Development Districts with Special Tax Districts

Mixed-Use Communities

Mixed-use refers to either single buildings or whole communities that combine residential and commercial uses. For example, you might buy a condo in a building that has a restaurant on the ground floor, and garage in the basement.

Or you might be interested in a townhouse condo in a walkable community with sidewalk cafes and small grocers. The commercial common areas might be owned and maintained by an HOA, a commercial district, or some combination of the two.

Mixed-use communities can be as small as a single building or as large as a city, even though they are self-governed.

The commercial and residential portions of these communities will often have separate HOA governing documents, in addition to documents for a Master Association. If you’re considering a home purchase in a mixed-use situation, be sure to read all governing documents, not just the ones pertaining to your condo or home.

Read more about the pros and cons of mixed-use communities here:

Higher Density/Mixed Use Communities – Pros & Cons • Independent American Communities

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