The buyer in a real estate transaction certainly is advised to do their “due diligence” in making the decision to complete a purchase. Due diligence is the process of systematically researching and verifying all information needed to make an informed buying decision. For the purchase of a residential condominium this includes researching the Condominium Association, its organization and management. These factors can impact the plans of a prospective buyer.
Someone contemplating buying a condominium should keep in mind that they’re not only buying real estate, but joining an organization as well. Beyond investigating the physical property, investigation of the organization is important.
Buying a condominium differs from buying a single family home. All states have laws that govern condominium sales. These laws mandate that information be provided to potential condominium buyers. The mandated information is often in detailed and thick documentation and also overlooked by buyers as mundane or burdensome. The documents can also be very revealing for the buyers and failing to consider them may be the source of regret. The right to review and to rescind based upon the review should be included as a contract contingency in a purchase offer.
Documents to Review in Evaluating a Condominium Association
This information typically includes the following:
- Declaration of Condominium
- Condominium Association Bylaws
- Association Financial Records
- Minutes of Association Directors Meetings
Declaration of Condominium
The Declaration is the constitution of the association, it provides the structure by which the association is initially organized and managed. The developer of the complex files the Declaration with the county recorder of deeds. It defines important elements of the property, such as the common areas and limited common areas.
The Declaration may provide for amendments, but only in a very difficult way, such as the unanimous vote of all property owners. Typically the Declaration provides that the Association is originally governed by the developer and when a defined percentage of the units are sold, a process to turn over governance to property owners and the initial election of officers to the Board of Directors.
Duties of the Board of Directors, the terms of office, selection of officers and authority of the Board are defined by the declaration. The Board Members and Officers are unit owners themselves, and should be knowledgeable about condominium rules and regulations. The Board normally has the final say is what is done in the complex. That say is expressed through the bylaws.
The Bylaws of the Association set forth the rights and responsibilities of the unit owners. Bylaws set the election rules for officers after the first election and define the rules the owners will live by. Rules related to pets, maintenance, even Christmas decorations can be addressed by the bylaws. The Bylaws are generally freely amended by the Board of Directors.
Financial and Management Records
The condo buyer is entitled to inspect the financial and management records of the Condo Association. These can tell the buyer if the organization of which he would be a part is managed in a way comfortable to the buyer.
When reviewing the above listed materials a prospective purchaser of a condominium should consider the following:
- Has there proper budgeting?
- Has spending stayed within the budgets of the past?
- Are the property reserves adequately funded?
- For what items are reserves in existence?
- What is the history of monthly assessments and what is the current assessment?
- Is the Board currently contemplating a special assessment?
- Has a current reserve study been completed?
- Is insurance adequate for liability and damage to common areas?
- Is there errors and omissions insurance for Board Members?
- What are the policies on renting units? Are there rental restrictions and how many units are presently rented?
- What limits have been placed upon unit owners? (Such as limits on pets, age restrictions on residency)
- Do those limits and related rules meet with the plans the buyer has for use of his unit?
- What system of communication exists to keep owners informed of actions by the Board of Directors?
Those are questions someone in the market for a condominium should have answered before buying. The answers should be contained in the Declaration, Bylaws, Financial Statements, and Board Meeting Minutes. While the buyer may like a property, he should also like the organization that he would be joining and be certain that the rules of the organization are consistent with the intended use.
In the situation where the single family home is part of a Home Owners Association, there are similar considerations.
A developer creates the Declaration that includes matters mandated by state law and also other consideration that the developer feels meets the needs of marketing the property, such as age restrictions on residency or pets.
Common elements are areas of the development for the use and enjoyment of all property owners and are owned collectively among all the property owners.
Limited common elements (areas) are portions of the development designated or assigned for the exclusive use of one or more, but less than all, of the unit owners. Examples include parking areas, shared balconies or patios.