Buying and Selling an HOA Property: Let’s Get This Thing Right
Guidance homeowners need—either as a buyer or seller—to operate with confidence regarding the home transaction.
Overview
The most significant financial transaction most folks will make in their lifetimes is the buying or selling of a home. Beyond the money, rarely does such a transaction have such an impact on day-to-day life. It is unlikely that property investors need an emphasis on the fact that this transaction needs to be done right.
For folks purchasing or selling a property that is under the jurisdiction of a Homeowners’ Association, comes the added obligations as HOAs have their rights when it comes to a home sale.
Whether property owners are buying or selling a home that is a party to an association, we know how important it is to complete the transaction the right way so as not to upend the lives of homeowners and their families.
Today’s article will provide the guidance homeowners need—either as a buyer or seller—to operate with confidence regarding the home transaction. We will address where these disclosures come from, how they balance the rights of buyers and sellers, and clarify once and for all the difference between disclosure and transfer fees.
These HOA Disclosure Laws are Less Novel Than at First Impression
Although the prevalence of HOAs can only be traced to the middle of the 20th Century, the relevant common law has its roots back in English law (Spencer’s Case of 1583, for example).
The necessary disclosure procedures we are about to address relate to what are called covenants on homeowners’ property. No law student has ever declared Property law to be his/her favorite subject, and with good reason—this topic gets quite complicated from here, (no unpacking of the term “privity” will occur today, no need to worry).
What we must know is that so long as certain obligations are abided by, it is legal for a rule to be enforced on subsequent property buyers—even if these subsequent buyers never agreed to the condition.
An example of such a covenant that “runs with the land” could be as simple as a prohibition against planting a certain type of tree on the property. For properties not under the purview of an HOA, these covenants need to be attached to the deed, among other necessary elements for enforcement.
However, HOA covenants often will not appear on the deed of the home, and instead appear in the community’s declaration of covenants, conditions, and restrictions (the “CC&Rs). Because potential buyers will still be responsible for abiding by these terms, buyers and sellers of HOA properties must have a firm understanding of whom is responsible for disclosure of these obligations.
Balancing the Interests of Buyers and Sellers
When buyers consider a home purchase of an HOA property, it is evident that the seller of the property will be much more familiar with the HOA covenants and rules than a prospective buyer.
However, conversely, there also needs to be a clear, upper limit to what can be required of a potential seller, or the conveyance of real property would be practically impossible. The drafters of these laws, in turn, did their best to balance these competing interests.
Like we say with all our HOA discussions, homeowners must realize that these laws are state-specific—do not assume laws of one state apply in another. Depending upon where owners live, the particular state may have enacted statutes that prescribe how such disclosures are to occur, (done in the same spirit of easing the conveyance process). California provides a good example.
Under common property law (historical cases), it is a general rule that a seller must disclose any material fact that affects the value of the property. Readers that are familiar with how lawyers make their money might already know that the term “material” has been sliced and diced into little pieces by now.
To ameliorate this issue, the California legislature revised Sections 4525-4545 of the Civil Code to specifically dictate what is required by the seller to be disclosed. The statute lists ten specific documents to be disclosed to the “prospective purchaser…as soon as practical.” Of note, the list includes a copy of all governing documents, any restrictions of use, and a copy of the minutes of board meetings conducted over the previous 12 months.
Section 4528 provides the actual checklist (and even prescribes that no less than a 10-point font be used) that a seller should use to ensure all the necessary documentation is disclosed. Section 4530 provides practical assignments of responsibilities to assist transactions.
Like in most states, California law dictates that it is the “responsibility of the seller to compensate” the association for the accumulation of the documents, from which the association may charge a “reasonable fee”—more on this in a bit.
Not all HOAs are as well run as others. What if a seller does not have access to the prescribed documentation and has a board that—to put it kindly—could be a bit more responsive. Some states, like California in Section 4530(a)(1) of the Civil Code, protect the interests of the seller by requiring that an HOA provide a copy of the necessary documents within 10 days upon receipt of a written request.
Liability in California for violations of the above statutes, by either a seller or an HOA board, is the same: a fine of up to $500 plus reasonable attorney’s fees.
One more issue to address before we head to fees. Given that HOA bylaws are private, there is just no telling by a prospective buyer whether these terms are reasonable. For this reason, it is recommended that before submitting an offer on an HOA property that a buyer request this documentation, but sometimes life and big purchases do not work out as planned.
Homebuyers may have initiated the closing process without having the bylaws in hand. What recourse is there if said buyer discovers upon disclosure some draconian bylaw that s/he finds completely untenable?
Most often, like in Texas, a buyer is permitted a grace period to review these, up until then, unknown conditions of the purchase (remember from the first section, these covenants run with the land and must be complied with). Three days is the period in Texas in which a buyer may receive a full refund of the earnest monies paid.
If the seller in good faith or bad omits the “subdivision information” from the sale, the buyer “may terminate the contract at any time before closing.” Notice the balance in interests: a buyer cannot make a good-faith purchase without complete knowledge of the community bylaws. Likewise, the seller needs assurance that a sale is final at some juncture so that the proceeds of the sale may be allocated as s/he sees fit.
Homeowners have also heard about the different fees that are associated with an HOA property conveyance. Let us provide some much-needed clarity.
Reasonable Disclosure & Transfer Fees
Everyone hates being ‘nickeled and dimed’ by fees in a transaction. It is funny how a few hundred dollars on top of a six or seven-figure purchase can cause so much consternation—hopefully, this subsection will bring homebuyers some peace of mind. At least prospective buyers will know that the following fees are customary, reasonable, and legal.
First up is the disclosure fee that we discussed in the previous section. Usually, the seller is assigned the responsibility to pay this fee to the HOA board to account for the time needed to collect all the required documentation to sell a property.
Some states, like Arizona, have a statute on the books that explicitly sets an upper limit to how much an HOA may charge a member for this service ($400 in Arizona). Generally speaking, prospective buyers can expect an HOA disclosure fee ranging from $200 up to Arizona’s $400 limit.
Although state-specific, if an HOA board is asking for more than $400 for the disclosure fee (a significant amount more), it would be worth the time to investigate—why the fee is so exorbitant.
It is a common error to conflate HOA disclosure fees with transfer fees. There have seen multiple inquiries where folks state something like, “I thought the law said they could only charge me $400, and now I see a $4,500 fee to sell the property.” We will not make this mistake.
Transfer fees, as opposed to disclosure, are the fees the HOA board charges a member property to transfer ownership to a new member. Although some of our more pessimistic friends see transfer fees as a secure means to raise revenue for a community, there is at least some overhead in updating community databases and security measures. Does such work cost as much as some HOAs are charging? That is for another day.
Right now, we must inform the public that so long as the transfer fee is prescribed in the bylaws, (no reasonable transfer fee may appear out of thin air), then HOA boards have wide latitude in what courts will tolerate as a “reasonable fee” and thus, legal.
Often, these bylaws will state that a fraction of a percent of the purchase price will be assessed to a transaction to cover the costs of the HOA: for a $500,000 home, a $4,000 fee is possible.
Unlike the disclosure fee, in most cases, the transfer fee is negotiated as part of the purchase price (like a membership fee for a health club). Often the buyer pays the fee, but negotiating a split of the fee between buyer and seller is not out of the ordinary.
It is worth noting that more than a dozen states have outright prohibitions of transfer fees. For example, Florida statute Section 689.29 is entitled “Prohibition against transfer fee covenants,” yet disappointingly does not apply to HOA properties. With a careful reading of Section 689.29(2)(c)(7) you will see that under the list of “not transfer fees for this section” is “[a]ny fee, charge, assessment, fine, or other amounts payable to a homeowners’, condominium, cooperative, mobile home, or property owners’ association pursuant to a declaration or covenant or law.”
Also, homeowners do not want to mistake the applicable law for Section 718 of the Florida Civil Code. If our readers have done a little Googling before joining us today, they may be under the impression that there is a Florida law that caps the total for a transfer fee at $100. This law applies only to condominiums and explicitly not to properties that require membership in an HOA.
The relevant Florida statutes are in Chapter 720 of the Florida Civil Code, which provides model forms for disclosure as we saw above in California. Under point six of “Other Information,” the HOA is required to disclose what the transfer fee will be.
Given that the Florida legislature explicitly chose not to provide an upper limit for transfer fees (like condominiums), it implies that the state feels HOAs, through the democracy of board elections, are best equipped to determine what transfer fees are best for the community.
A couple of takeaways from today’s discussion
For Buyers:
Like any significant purchase, the more information prospective buyers have before submitting an offer, the better. Request HOA disclosures, which will include the cost of the transfer fee, before submitting a written offer to save the hassle. If buyers want to split the transfer fee with the seller, addressing the issue upfront will help.
For Sellers:
Keep in mind the broad range of what is considered reasonable costs for disclosure (in the hundreds) and transfer (in the thousands) fees, so that if you are assessed a charge outside of that range, you will know something fishy might be going on. Also, remember that most states have a statute that requires a timely response (often ten days) to record requests so that the sale of your home may not be unreasonably delayed.
