Generally. Condominiums and townhomes are similar types of housing – almost. The condo owner (technically called the “unit owner”) does not own the entirety of the structure and land upon which it sits. Rather, ownership is indirect; that is, by virtue of the unit owner’s membership in the unit owners’ association, each is assigned a proportionate interest in the property. This is usually based upon the square footage that the unit bears to the total square footage of all units.
Technically, the unit owner owns nothing more than the airspace inside the unit, together with the windows, doors and fixtures within its interior physical boundaries. In condo developments, unit owners have shared rights to the common areas (e.g. the pool facilities, hallways, grounds, etc.) and exclusive rights to the limited common areas, such as the unit itself, the balcony, reserved parking, etc.)
Townhomes are much the same, except that the land under the structure and the land in front and behind it, comprise a separate parcel titled in the name of the owner. If there are several townhomes connected to one another side-by-side, each owner will share a common wall that is placed exactly on the common boundary line of the adjacent owners on either side.
The main similarity between condos and townhomes is that they both have general and limited common areas that are maintained by a homeowners’ (or unit owners’) association (“HOA” or “UOA”) that operates with the power of assessment.[1] It is this governing association that I want to focus on below. This is not to minimize the importance of the physical structure of the unit and its operating systems – they are an important aspect of making any purchasing decision.[2]
Conditions, Covenants and Restrictions (“CC&Rs”) – Including Actual and Proposed Revisions. This document, sometimes called the “Declaration,” contains the “rules” by which the owners are bound. It is recorded in the county where the property is located, and applies uniformly to every owner of record. The Declaration should always be closely reviewed before purchase. Doing so after purchase could be too late. For example:
- What does it say about ownership of pets? [e.g. size, breed, and number];
- May units be rented out? [There frequently are limitations or “caps” on the percentage of units that may be non-owner occupied.];
- What about parking restrictions?
- How about limitations on working out of one’s home?
Current Articles of Incorporation and Bylaws – Including Actual and Proposed Revisions. The owners’ association will have been incorporated in Oregon. The corporate bylaws address the business side of operations, e.g. the number of directors; the officers’ powers; term of office; how votes will be conducted; quorum requirements; assessments; and many other important functions. Note that there can be some topical overlap between the bylaws and the CC&Rs. For example, some provisions that might typically be found in the CC&Rs might be found in the Bylaws instead. It is important to review both. And always ask if there are any amendments to the bylaws, actual or pending.
Documents Verifying Current Casualty and Liability Insurance Coverage for the Association and Board of Directors. The existence and amount of insurance is important. Since the association usually secures the fire and casualty insurance, care must be exercised in making sure it will be enough if there was a fire or other casualty that destroyed one or more units.
- What is the owners’ deductible? Is there enough insurance to cover a catastrophic loss?
- What about liability insurance for say, a slip and fall claim against the association?
- Are there surety bonds in place for all Association personnel that handle funds? Embezzlement can and does occur.
- Do the officers and directors have liability insurance, and if so, how much is the coverage? The CC&Rs or bylaws generally insulate directors and officers from liability for almost all activities and decisions arising from the exercise of their business judgment, but there can be liability for misconduct that is reckless or intentional.
Verification of Current Association Assessments – Including Notices Relating to Potential Increases or Special Assessments. Association assessments are usually payable monthly. They are based upon a budget for the cost of operation, including maintenance and repair of common and limited common elements. Look at the current budget and prior budgets.
- Try to determine not only the current assessments, but the frequency and size of prior assessments. Are they once a year?
- What have the historic increases been over the past few years?
- Special assessments are those that are levied in addition to the regular monthly assessments. They usually become necessary when there are large unanticipated expenditures occurring outside of the normal budgeting process. While they can be the result of having to pay a portion of a large loss not covered by insurance, they can also arise due to necessary repairs or renovations for which there are inadequate reserves.
Reserve Studies. Annual reserve studies are required to be secured by Oregon associations to evaluate the amount of the current reserves versus the remaining life of the major systems, such as the roof, the heating and air conditioning, elevators, etc. It is essential for buyers to review these studies in order to evaluate whether there will be sufficient funds with which to replace major operating systems. For more on this important subject, go to ORS 100.175, here.
Reports, Bids or Proposals for any Material Structural Repairs or Improvements Relating to Safety of the Property. It is not unusual for sellers to decide to leave amidst an upcoming construction project, usually because they will not be able to afford the resulting special assessment, or they simply decline to pay for it. However, when this occurs, most savvy buyers require that a portion of the seller’s net sale proceeds be retained toward payment of the special assessment.
Any Notices Relating to Potential Construction Defect Claims. For the past several years, many condominium and townhome developments have brought construction defect claims against developers, builders, contractors and their subcontractors. While settlement of the claims almost always occurs, they are rarely settled for 100 cents on the dollar. This means that of the total bill, there will usually be a 15% – 20%+ shortfall in necessary funds, thus forcing the association to secure a loan for the remainder. Owner repayment of the loan may either be in a lump-sum, or amortized over a period of time – in addition to the normal monthly assessments. Buyers should thoroughly vet this issue, not only with the seller, but with one or more officers and/or directors of the association. Under Oregon law, before construction defect claims may be filed, a legal notice must first be given to the contractors who are the intended defendants. See, ORS 701.565, here. It is important to determine if the association has retained counsel and sent out such a notice of claim. If so, get a copy of the letter and review it with a professional if you have any questions regarding the scope of the project and litigation. These claims can temporarily stigmatize a development and make resales – especially for those buyers seeking institutional financing[1] (as opposed to cash buyers) – almost impossible for quite a while.
All Association and Board of Director Minutes for the Prior 12 Months. If the development is professionally managed, that company would likely be the first source of information. They may even have a standard packet of such documents for buyers.
If the development is small, it may not be professionally managed. The secretary should have the minutes. Remember, however, that certain discussions may not be reflected in the minutes if the board went into “executive session.” This means that no minutes are taken – they are “off the record.” If the minutes reflect that the board conducted several executive sessions, this could point to a desire to avoid disclosure of a potential claim, impending litigation, or other business that they do not want disclosed to the unit owners at the present time. While it may be difficult to secure information on such topics, as for myself, I would not make a purchasing decision on a condo where I knew there might be relevant information that was not being shared. Tip: If any of the officers or directors are trying to sell their own units, ask why?
Directory of Contact Persons at Management Company and Association. This information is important to have not only before purchase, but after closing as well. Before purchase, in order to secure or confirm important information prior to closing; and after purchase, to learn more about the institutional history of the association.
Conclusion. All the above tips and traps are drawn from the OREF statewide Condominium Sale Agreement, which is available to Realtors® throughout Oregon. It is for this reason, among others, that Realtors® bring added value to a successful real estate closing. A qualified Realtor® familiar with the sale and purchase of townhomes and condominiums is essential in avoiding the many land mines that may lie buried just below the surface.
[1] Condos and townhomes are governed by ORS Chapter 100 (http://www.oregonlaws.org/ors/100.100), and planned communities are governed by ORS 94.550 et. seq. (http://www.oregonlaws.org/ors/94.550).
[2] Some people forgo professional inspections of condos and townhomes, believing that since almost everything is maintained by the association, the interior of the unit is the only thing to worry about, and “what you see is what you get.” This is a mistake. A purchaser of a condo or townhome should hire a good professional inspector, just the same as if the property was a detached single family home.
[3] Most lenders will not finance the purchase of a condo embroiled in construction defect litigation.
