Condos: less money, more strings
GET TO KNOW HOMEOWNERS ASSOCIATION BEFORE YOU BUY
By Sue McAllister
Mercury News

Condominiums are frequently a less expensive housing option than houses -- and with prices for many houses soaring above $700,000 in Santa Clara County, condos are in demand. Nearly 7,600 condominiums changed hands in Santa Clara County last year, or 27 percent of total homes sold.

But buying a condo -- or a house in some master-planned communities -- comes with a set of issues that other home buyers don't have to face.

They don't simply become homeowners once all the papers are signed. They also become part of a homeowners association. Because a homeowners association is essentially a corporation, it's important to check out its rules and financial health before becoming one of its owners, experts say.

``You need to look at not only the packet they give you, but talk to people in the development. What do they understand are the problems of the development?'' said Sam Chuck, a real estate attorney with Rossi, Hamerslough, Reischl and Chuck in San Jose.

The business of an association is paying for maintenance and repair of all mutually owned parts of the community -- like roadways, sidewalks, pools and roofs -- and enforcing the rules of the association. Owners pay monthly fees to fund these activities.

The ``packet'' Chuck referred to is typically a stack of documents that should disclose to a potential buyer all the pertinent facts about the operation of the homeowners association -- the do's and don'ts of homeowner behavior and the financial health of the association. The packet is usually provided to buyers once they are in escrow.

Buyers with short ``contingency periods'' in their purchase agreements should be warned: It can take anywhere from a day or two to a few weeks for an association's property management company to produce the documents.

Among other things, the packet should include copies of the association's articles of incorporation and bylaws, its rules and its ``conditions, covenants and restrictions,'' commonly known as ``CC&Rs.'' It also should include minutes from a year's worth of association meetings, a copy of the association's budget and a financial statement. Often, association newsletters are included as well.

San Jose condo owner David Zippin said he thinks reading an association's newsletters is a good way to get familiar with community issues, and to learn about the association's property management company ``and whether they have their act together or not.'' Meeting minutes also are useful for this purpose.

Zippin and his partner, Tom Engels, bought their condo five years ago, despite newsletters and other disclosures that told them the association was in the process of suing the project's developer over water-related damage.

The suit was settled last year in favor of the homeowners, he said, and he was impressed both by the settlement amount and the way the association's board navigated the process.

``So, yet another example of why homeowners should check out their homeowners association and their board members,'' he said.

Know the rules

Chuck says few people bother to read more than a page or two of their CC&Rs, but they should read sections that seem pertinent to their lives. The documents can specify things like what color door a home can have, what color paint and trim, what kind of fencing can be used, how big a dog an owner can have, how many pets are allowed, even how big a party an owner can throw.

``I've seen CC&Rs that limit what children are allowed to do,'' Chuck said. Skateboarding might not be allowed, for example.

Robert Rosenberg, an executive with Massingham & Associates, one of the largest property-management companies in Northern California, said, ``We have people who move into communities and really have no clue they can't play their music at 2 o'clock in the morning, and that's just a basic understanding of the governing documents.''

He said sellers' agents should get the documents as soon as they get the listing, so buyers have plenty of time to read them. ``Everyone's always rushed around, and in the end I think the person that is short-changed is the buyer,'' he said.

Real estate agent Jeff Hansen of Keller Williams Realty agreed that buyers should ask about any rules that affect their daily lives. Hansen, who specializes in selling downtown San Jose condos, said ``the things that people are bothered by over time tend to be practical,'' like parking.

Some associations strictly limit guest parking, or forbid street parking, for example.

And in the Silver Creek Valley Country Club development, which is made up of single-family houses, association rules say that owners ``can't have more cars than you can fit in your garage,'' said Bonnie Griffith, an agent with Windermere Silicon Valley who lives in the development. In addition, homeowners must be able to close their garage doors. Have a long-bed truck? Might need to trade it in.

Griffith also said prospective buyers should find out exactly what their association dues will cover. Water? Garbage service? Landscaping? ``They're all different, so that's an important question to ask,'' she said.

Buyers also should find out whether dues have gone up over the years. If not, that could be a sign of future trouble, because an aging community will certainly need maintenance, and the association may not have raised enough funds to cover it. New buyers may be hit with steep increases in dues. ``You can't say, `Hey, I just got here and nobody told me,' '' Chuck said.

Buyers should also check out what kind of insurance the association has -- does it have an earthquake policy, for example? And what are the deductibles?

Any pending or ongoing litigation also should be disclosed.

Hansen said buyers often shy away from condos that are part of construction-defect lawsuits because the legal action adds a layer of complexity to an already daunting financial transaction.

``You're scared anyway, and then you hear, `Oh, I'm part of a lawsuit,' '' he said. Hansen two years ago bought into a condo association in downtown San Jose that was suing the builder over alleged construction defects. Despite uncertainty about the outcome of the litigation, he said, he liked the fact that he knew exactly what was wrong with the condo buildings, because they had been carefully examined by experts. The suit was settled in 2005, and Hansen said the settlement amount should be adequate to cover repairs.

Check the financials

Knowing about pending litigation, dues and rules is a good start.

But checking out the financial strength of an association is just as important, said Jacquie Berry, president of Community Association Data Source in San Jose. That can be hard for an average buyer to do, though reviewing meeting minutes and budgets can help. As of July 2005, all homeowners associations are required by law to project how well their reserve funds will cover maintenance needs for the next 30 years.

For $325, Berry's company will review the disclosure documents provided to a buyer, make sure disclosures comply with the law, and also evaluate the financial fitness of the homeowners association. Her customers are mostly buyers and their agents, but sellers hire her, too.

She says almost none of the disclosure packets she reviews are initially in compliance with the law on association disclosures, which is known as the Davis-Stirling Act.

But ``the financial health of the association is most critical to these people,'' she said. ``To get hit with a large special assessment is devastating.''

Berry said she recently reviewed a case in which homeowners were each assessed more than $30,000 to pay for repairs that the association's reserve funds couldn't cover.

Homeowners who don't or can't pay the special assessments may be fined for non-payment, and can even face foreclosure. So it's important that buyers know what kind of financial shape an association is in before they buy, she said.

Berry said associations whose reserves include at least 70 percent of what's needed to fund anticipated maintenance and repairs are unlikely to have to raise dues steeply in the near future. For associations whose reserves are leaner, homeowners are likely to face increases, she said.

``The value of the property is directly related to the value of the reserve and how well they're funding it,'' she said.
Contact Sue McAllister at smcallister@mercurynews.com or (408) 920-5833.

 

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