Before buying a home or condo in a planned community, looking for an HOA contingency is essential. But what is a contingency anyway? And is it mandatory in every real estate sale?
What Is an HOA Contingency?
An HOA contingency is a clause or condition that allows a buyer to break the contract within a specific time frame without suffering losses. It is a type of real estate contingency that protects a buyer from having to push through with a home sale based on the status of an HOA or condo association. In other words, if a buyer finds out that the home they want to purchase belongs to an HOA with poor reserve funding, the contingency would allow them to back out of the sale. Other real estate contingencies include home inspections, appraisals, financing, and home sale contingencies.
The Role of an HOA Contingency in the Home Sale Process
When a buyer comes across a home or condo unit they like, the usual response is to put in an offer. But, at this stage, buyers typically still need more information on the house before they place an offer.
Can the buyer back out of the home sale contract?
The home sale process begins if a buyer’s offer is accepted. In most cases, buyers will have to enter an agreement with the seller at this point. Further down the line, the seller or agent must provide the buyer with HOA disclosures. These are the pertinent documents relevant to the association, such as governing documents, financial statements, and meeting minutes.
The buyer’s agreement with the seller should have contingencies written into it, including a homeowners association contingency. With such a contingency present, the prospective buyer then has the option of pulling out of buying a house if they dislike the HOA managing the community. Of course, buyers should perform their due diligence and review the disclosures given. This way, they will know whether or not the HOA is the right fit for them.
Is an HOA Contingency Mandatory?
Given how vital HOA contingencies are, they are mandatory in all home sale transactions. But the truth is far from it. Not all home sale transactions have them, resulting in many buyers losing their earnest money deposit.
There are select states that require HOA contingencies by law. Virginia is one that immediately comes to mind. According to Section 55.1-1808, purchasers may cancel the contract within three days (up to 7 days if the ratified contract extends the period) after receiving an HOA disclosure packet. Virginia law even goes so far as to give the purchaser the ability to cancel the contract as a sole remedy if a disclosure packet is not produced.
Prospective buyers should ensure that their agreement with the seller includes an HOA contingency clause. Requesting HOA documents and financial statements can also take time. As such, sellers should do this early to give buyers enough time to review the documents and cancel the contract within the deadline. For extra precaution, prospective buyers can access the governing documents of an HOA through public records.
Why Homeowners Should Review the HOA Documents
Buying a condo or home in an HOA means automatically becoming a member of that association. Usually, membership is mandatory upon purchase, though there are rare cases of voluntary HOA membership. And while living in an HOA does have its benefits, not all associations are made equal. Some are in bad shape. And it is nearly impossible to know what condition an HOA is in before placing an offer on a home.
When you review the disclosures, though, you might find that one or more of the following are true:
1. You Dislike the Rules
Buying a home in an HOA allows an owner to abide by the community’s rules and regulations. The problem is that you might only agree with some of them. One well-known rule is that owners must pay regular dues to the association. These dues then fund the HOA’s expenses, which can include insurance costs, maintenance fees, landscaping costs, etc.
There are also other rules, of course. Many associations, for instance, prohibit owners from renting out their homes or parking certain vehicles in the driveway. It is also not unheard of for an HOA to have restrictions on pets or ban them entirely.
The most common point of contention is an HOA’s architectural rules. Homeowners associations are known for enforcing strict architectural standards in the community, and this is to help maintain consistency, curb appeal, and property values. But, if you’re the type of homeowner who likes to paint your house whatever color you want or make additions to your home exterior every once in a while, then an HOA may not be a good fit for you.
Without an HOA contingency clause, you might sign into a corner and be forced to adhere to rules you disagree with. And it’s like you can only break those rules if you wish, as violations often carry monetary penalties.
2. There Is a Lack of Financial Planning and Stability
Like any corporation, a homeowners association runs on revenue and pays for expenses. As such, a considerable amount of financial planning, accounting, and budgeting is involved. Unfortunately, not all associations are adept at this aspect of community management.
Once you get a hold of the association’s financial records, you might find its funds poorly mismanaged. Its financial statements may always be red, and delinquencies may be at an all-time high. And you want to avoid buying into a community that may soon fall apart, financially speaking.
This is also why requesting a copy of the association’s reserve studies and report is a good idea. The reserve fund is a contingency when an HOA needs significant repairs and replacements. Without a properly funded reserve account, the association will have to levy hefty special assessments against owners once its assets reach the end of their useful life.
3. Board Members Don’t Know What They’re Doing
Lastly, when you review the association’s meeting minutes, you see how the board manages the community. If you find the board painfully inept at leading the association, you should reconsider purchasing. For instance, it is a huge red flag the board is not following the HOA’s rules or procedures. Inconsistent enforcement is another thing to watch out for.
Protect Yourself With a Contingency
All in all, an HOA contingency serves as a means of protection for prospective buyers. Without it, you might find yourself locked into an agreement or lose a sizable deposit for backing out of the sale. A contingency allows you to terminate the contract without penalty if the HOA doesn’t suit your taste or meet your expectations.
Condo Manager provides automated HOA management solutions to communities and management companies. Call us today at (800) 626-1267 or contact us online for a free demo!
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