Pacific Reserve Studies
Checklist for Buying a Condominium
Following is an important checklist of things to do before purchasing a condominium in California. Please keep in mind this is a partial list only. You should never purchase a condominium unless you are represented by a qualified, licensed real estate agent who is knowledgeable about condominium associations.
Checklist for Condominium Purchases:
- Read the CC&Rs (Covenants, Conditions, and Restrictions) and Operating Rules before you make a written offer to purchase a condominium. These governing documents set forth what you may do and what you may not do with your condominium. Restrictions will likely apply to your ability to modify or improve your unit, your right to rent your unit, pets, parking, visitors, use of the common areas, your right to operate a business from your unit, and more. If the CC&Rs were written before the current calendar year, you should read the Davis-Stirling Act in order to acquaint yourself with the current law that will apply to your ownership of a condominium. Keep in mind that if the CC&Rs are more than a year old, they cannot possibly reflect the current law, because the law is amended annually. The Davis-Stirling Act can be accessed through this website.
- Review the homeowner association (HOA) budget for the current fiscal year as well as the prior year’s budget in order to determine how the association’s funds are being spent, and most importantly, the percentage of members who are delinquent in paying their HOA assessments. Determine whether the association’s actual revenue and expenses vary from the budget projections. If the revenue and/or expense variances are material, you should determine the reason. Pay careful attention to the payment of attorney’s fees and the reasons for such expenditures. Determine whether the association is actually collecting and setting aside reserves as budgeted and whether the amount budgeted is the amount recommended in a current Reserve Study. Determine whether the HOA is collecting special assessments and the reason for any special assessments. Special assessments are the result of poor planning, a lack of fiscal discipline, or unforeseeable circumstances. Thus, the reason for special assessments is important.
- Review the association’s most recent Reserve Study. California law requires associations to obtain a reserve study every three years and to make the report available to all members of the association. A reserve study is a report that informs the board of directors of an HOA, and its members, as to the amount of funds that must be set aside in a reserve account each month so that adequate funds are available for future maintenance and replacements such as roofs, exterior painting, repaving, and more. If the amounts being set aside are inadequate, the building will deteriorate or special assessments will be required. If the HOA does not have a reserve study conducted within the last three years, is not in compliance with California law. This would be a poor reflection on the board and the association.
- Determine the percentage of renters living within the HOA. Mortgage lenders are usually very concerned when the percentage of renters reaches 20% and many will not consider making loans on condominiums within an association if the percentage reaches 30%. Likewise, many buyers who have experience with condominiums will steer away from communities when the percentage is near 20% or will reduce their offering price to compensate. Those lenders that make loans within condominium associations with high percentages of renters nearly always charge higher interest rates and fees.
- Determine whether the association has ever been involved in a construction defect lawsuit against the developer. These types of lawsuits are not uncommon and should not automatically discourage you from purchasing a condominium in a community that has made a claim against its developer. What is important is to determine whether the actual defects have been repaired. If the answer is yes, you can safely proceed. If the answer is no, you should investigate to determine how any remaining defects will affect you if you purchase. A price adjustment may be justified.
- Determine whether the HOA is involved in any current litigation and how it may affect you financially, your ability to obtain a low rate mortgage loan, or otherwise.
Attend at least one board meeting. While a board can legally exclude non-members of the association from attending board meetings, it is not a good sign if you are excluded. Most boards permit prospective buyers and renters to attend board meetings. Board meetings present an opportunity to evaluate the individual board members as well as the management company representative. Ask yourself these questions:
- Are they fair and objective?
- Are they knowledgeable and professional?
- Do they place the interest of the association and its members ahead of their own interests?
- Do they demonstrate a sincere concern for the members of the association who express a concern or have a problem relating to the association?
While board members can change and management companies can be replaced, you cannot count on it. Therefore, you must ask yourself whether you are comfortable with the current board and management company:
- Review past minutes of board meetings for a period of at least two years. The minutes should reveal any significant problems and how they were handled.
- Talk to some of the homeowners. Select them randomly, but include one or two near the condominium you are considering. Ask if they are happy living within the community, whether they would purchase today if they were in your position, and whether they are aware of any problems you should know about such as noise or criminal activity.
What is a Condominium?
In California, a condominium is defined as a common interest development in which a buyer acquires a separate interest called a unit, and an undivided interest in common area property. The unit is generally the space located within the perimeter walls. The common area is generally the building, land and any amenities such as a pool.
The form of legal ownership of property should not be confused with architectural styles or design. A condominium building may be constructed as townhouses, stacked units, or detached homes. Townhouses (or townhomes) are built in rows and are attached on the sides. No unit is located above or below another. Stacked condominiums are built in stacks or one above another. Condominiums may also be constructed as detached homes. This arrangement exists where two or more condominiums are built on a single lot. The lot may be divided with fences or walls to create the appearance of separate lots. Each detached condominium owner owns a separate interest which includes the entire home plus an undivided interest in common area. In addition, each condominium owner receives an exclusive easement or right to use what appears to be their individual lot.
Coast Management of California