Buying a Condo or Townhome – Due Diligence and Traps for the Unwary

Posted on by Phil Querin

Introduction. For some reason, buyers – and occasionally their agents – seem to regard condo transactions as demanding less due diligence. Perhaps it is because they are seemingly just a container of air, surrounded by general and limited common elements. Townhomes, although subject to slightly different laws, are viewed much the same as condominiums.

To a degree this conception is mirrored by the Seller Property Disclosure Statement which focuses on separate free-standing structures built on a lot or parcel with the typical issues involving sewer systems, water systems, boundary and title issues, construction defects, standing water, roof leaks, etc.

The upshot, too often, is that buyers and their brokers can be lulled into a misconception that the due diligence tasks are simple, straightforward, and quick. In fact, the truth is quite the opposite – not only do buyers have significant due diligence duties, but they are quite different from purchasing a detached single family dwelling.

Below is a summary of the basic distinctions between these types of ownership.

Generally. Avoiding the technical legal distinctions for the moment, the basic differences between condos and townhomes can be summarized as follows:

  • Ownership of a townhome includes the ground upon which the structure sits. The ground in the front and back of the building’s footprint is usually owned by the townhome owner. Whether the owner, or the homeowner association, is responsible for maintenance of that ground is dictated by the terms of the Conditions, Covenants and Restrictions (“CC&Rs”) or “Declaration.” Townhomes are sometimes referred to as “row houses,” where each home shares a common wall with their neighbor. The Declaration and/or the CC&Rs provides the maintenance responsibilities of the owners.
  • Ownership of a condo includes just the interior of the structure. In short, metaphorically speaking, it consists of a “box of air.” Everything else is owned in common with the other owners. The use of certain common elements is reserved exclusively to the unit owner, such as the decks, while other portions of the structure and grounds are available for the use of all owners, such as recreational facilities, grounds, streets, etc. Townhome ownership is slightly different in that it includes the land under the structure.
  • Since both townhomes and condos include commonly owned property (e.g., the roof of the townhome structure, and elevators in the condo building) there is a homeowner association that is set up for levying periodic assessments. The assessments are collected and accumulated for the purpose of creating a reserve fund to replace the capital improvements when their useful life expires.
  • How do you to determine if property is a townhome or condo? Interestingly, there can be confusion by homeowners themselves when selling their own condo or townhome. What is the easiest way to determine one from the other? Check the tax assessment. If the property is a townhome, where the ground is also owned, the assessment will include land separate from the structure. If it is a condo, there is no separate assessment to the homeowner for the land.

Governance Documents. Typically, the HOAs for a townhome community or condo development[1] are non-profit corporations, run by officers and directors. The bylaws determine how the organization will operate, the frequency of meeting, voting rights, and other such regulations for the operation of the entity. Both are required under Oregon law to have annual reserve studies, which determine the depreciable life of the common areas, the cost to fully replace them, and the amount of the assessments to do so. See, ORS 94.595 and ORS 100.175.) Insofar as the governance documents go, there is no major distinction between condominium developments and townhome communities.

Planned Communities. Is it possible to have a free-standing home that is not a condo or townhome, which is in a community that requires a homeowner’s association? Yes. This is because the community is a “planned community” that maintains certain common areas, such as parks or recreational areas. These common areas are jointly owned by all of the community owners (or they may be owned by the HOA itself).  Again, the HOA is going to be a nonprofit corporation, governed by bylaws, and the CC&Rs and/or a separate Declaration exists to deal with managing the common areas. 

Tips and Traps. What (a) townhomes, (b) planned communities, and (c) condominium developments all have in common is the following documents and issues that need to be vetted by buyers as a part of their due diligence.

  • Conditions, covenants, and Restrictions (“CC&Rs” or “Declarations”);
  • The HOA articles of incorporation and bylaws, including any revisions or amendments;
  • HOA Rules and regulations, including any revisions or amendments;
  • Policies, agreements, notices relating to: age restrictions, pets, parking, any restrictions on rental of homes;
  • Minutes of meetings for the HOA and the board of directors;
  • Documents verifying coverage for casualty insurance for the structures;
  • Documents verifying coverage for liability insurance for the HOA directors and officers (“D&O insurance”);
  • Documents verifying the current HOA assessments and budget, together with any HOA notices relating to potential increases in the assessments or any potential special assessments;
  • Documents prepared for the HOA such as inspection reports, studies, bids, or proposals for repair or replacement of any actual or suspected material defects in the structural integrity or safety of the Property, and its limited or common areas;
  • Documents relating to any claims made by or against the HOA regarding actual or suspected material defects the structures and their limited or common elements;
  • Documents showing the latest reserve study conducted by or for the HOA together with current reserve fund figures;
  • The total number of homes/units with assessments over 30 days past due, expressed as a percentage of total number of homes/units in the community;
  • The total number of homes/units that are non-owner occupied, expressed as a percentage of total number of homes/units in the community;

Buyer and their brokers need to pay special attention to the seller’s HOA documents. Why? Because some associations are run better than others.

  • Are the reserves fully funded?
  • Are the HOA dues current?
  • Is there any deferred maintenance of the common areas for which a large assessment will become due?
  • How many units are being rented?
  • Has the HOA ignored a construction defect issue that needs to be addressed?

Lastly, as a part of any due diligence, all buyers should not only insist upon obtaining copies of all relevant documents, but also, make personal contact with other homeowners to find out how things are being run. Are they satisfied? If not, why not? Oftentimes, more can be gleaned from a conversation with a neighbor than reviewing sanitized meeting minutes.  ~Phil

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[1] Technically, the association for a condominium development is a “unit owners’ association” since each structure is referred to as a “unit.”

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