Publications

Phillip C. Querin, Partner
Partner - Portland, Oregon Office

philquerin@dwt.com
(503) 241-2300

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Considerations in Purchasing a Condominium
[August 2005]

(Second in a two-part series on condominiums)

Condominium construction in the Portland area has exploded due to the high cost of single family lots, a shift in buyer purchasing preferences, and the cache’ of living in some of the newer developments currently being built. However, the newness of this type of living has resulted in many buyers failing to ask the right questions when caught up with the excitement of the purchase itself. This is where a good Realtor® brings value to the transaction – especially in making sure that their buyer-clients fully understand what condo living is all about and how the homeowner association (HOA) is being run.

The Property Disclosure Form. All sellers of existing residential condominiums must provide seller property disclosure to their buyer.¹ The property disclosure form asks several pertinent questions that buyers should read closely. The following topics are covered:

• Is there a homeowners’ association or other governing entity?
  
  
• What is the name of the association or other governing entity? Who is the contact person and what is their address and phone number?
  
  
• Are there regular periodic assessments? If so, how much are they?
  
  
• Are there any pending or proposed special assessments?
  
  
• Are there any shared common areas or joint maintenance agreements for facilities like walls, fences, pools, tennis courts, walkways or other areas co-owned in undivided interest with others?

• Is the homeowners’ association or other governing entity a party to pending litigation or subject to an unsatisfied judgment?

• Is the property in violation of recorded covenants, conditions and restrictions or in violation of other bylaws or governing rules, whether recorded or not?

But the buyer’s inquiry should not end there. There are other significant issues that a good Realtor® can assist their buyer in researching:

Assessments. One of the most significant financial issues for new condominium purchasers to investigate is the amount of the association dues:

• When are they assessed?
  
  
• How long have they been at their current level?
  
  
• How do they compare to those at other comparable condominium projects?
  
  
• What do the assessments cover?
  
  
• How have the assessments increased over the years and are there any increases or special assessments planned for the immediate future?
  
  
• Do the assessments include a reserve for capital improvements and major repairs?
  
  
• How long have contributions been made for the reserve fund?
  
  
• Will the reserves be sufficient to replace major capital items such as the roof, parking area or heating and cooling systems, or will there be a large special assessment?
  
  
• How do the reserves compare to other similar condominium projects?
  
  
• Is there a legitimate arms-length bidding process for hiring contractors to perform work at the condominium?
  
  
• Prospective unit owners should be wary of large contracts being let to vendors or contractors who are directly or indirectly related or have a business connection with a director or officer of the association. Buyers should obtain a copy of all recent budgets and other current financial information regarding the unit owner's association.
  
  
• If there are special assessments planned, this information should show up in the documents.
  
  
• Buyers should try to get copies of the HOA’s minutes for the last 12 months or more, as needed.
  
  
• Speaking with the treasurer of the association may be helpful. This may be especially useful if the HOA directors hold frequent “executive sessions” where no minutes are taken.
  
  
• Is there is any litigation existing or planned by the HOA for claims against the developer for construction defects or other reasons? If so, the buyer should consult with an attorney for further direction in finding out more.

Declaration and Bylaws. The declaration and bylaws are the documents that govern the operation and business affairs of the association as well as any limitations on use of the condominiums by the owners. Not all condominium documents are the same. They should be closely reviewed prior to purchase.

• Are the declaration and bylaws clear and understandable?
  
  
• Are there any restrictions that seem overly burdensome?
  
  
• Does the purchaser's intended use of the residence conflict with the terms of the declaration? For example, most declarations prohibit conducting commercial businesses from the unit. Having a private consulting or counseling business that could increase traffic and pedestrian flow might constitute a violation.
  
  
• Are there restrictions on renting the unit? While some unit owners may prefer this option, others may strongly oppose it.
  
  
• Are there any pet restrictions that the unit owner might find unacceptable?

Administration of the Association. How does the association deal with and enforce violations of the declaration?

• Have they had to resort to lawsuits to do so?
  
  
• Do the officers of the association get along with the rest of the unit owners or is it an adversarial relationship? Some associations can be run by a small group of unit owners who are overly zealous in how they approach their responsibilities.
  
  
• Is there professional management? If so, what is the cost and are they doing a good job?
  
  
• Other existing unit owners should be asked whether they are happy with management, and if not, why not.

The Physical Structure. The quality of construction of condominiums can vary greatly. Conversions from pre-existing apartments or other structures may pose a greater risk that some of the mechanical systems are not as modern or effective as those used in new projects. This is especially true of electrical, plumbing and HVAC systems.

• Soundproofing is especially important. However, new condominiums should be closely evaluated for noise as well. Asking other unit owners is essential.
  
  
• Is there any obvious deferred maintenance, such as the roof or parking area?
  
  
• Is the siding a manmade product, and if so, how is it holding up? Will any of the siding have to be replaced? Is there a substantial reserve in place for this?
  
  
• A professional home inspector should be used to evaluate not only the unit, but the limited and general common elements, as well.
  
  
• Have there been any repair problems with the common elements, especially involving water leakage in and around the decks, patios, windows or siding. Read the Declaration closely on this issue – who is responsible for repairing or replacing the windows and sliding doors? This is frequently the unit owner’s responsibility.

Insurance. The nature and amount of insurance coverage is frequently overlooked by buyers - until it is too late.

• How much liability insurance does the association maintain?
  
  
• Is it comparable to other similar developments? If an injury occurred on the common areas, inadequate insurance coverage could affect each of the unit owners personally.
  
  
• Similarly, is the hazard insurance coverage adequate? If one of the structures burned to the ground, would there be enough coverage to replace it today?
  
  
• Prospective purchasers should be sure to carry their own personal liability umbrella coverage as well as personal property coverage.
  
  
• Do those running the HOA have directors and officers (D&O) insurance? This is important for those prospective buyers who may wish to serve in a leadership capacity.

Developer Control. If the condominium development is new, the developer may still control the association. If so, prospective buyers should find out how the HOA is being run.

• Remember, the developer's interest may not be the same as the unit owners.
  
  
• Additionally, if there is no prohibition against renting the units, the developer may rent unsold units to defray any loan costs that are being carried.
  
  
• Is the developer paying for the assessments for all of the unsold units that are still being marketed for sale?
  
  
• If the developer has turned the association over to the unit owners within the last 1 - 2 years, a prospective buyer may wish to review the financial information that was delivered at the turnover meeting. Did the developer turn over what was required by law to be delivered?

Conclusion. Listing agents must prepare their sellers to be asked about the HOA, its assessments, operation and whether it is doing a good job. Buyer agents also have a significant responsibility to assist their clients in performing the same – and perhaps more – due diligence than with the purchase of a single family home. Not only must the condominium and limited and general common elements be inspected, but the books and records of the unit owner’s association must be closely reviewed as well. This is the type of knowledge and information that a good Realtor® brings to the table.

FOOTNOTES

1 The sale of new condominiums are exempted from this property disclosure requirement, since Oregon law imposes substantial disclosure obligations on developers when they first sell units to the initial buyer. Upon resale, seller property disclosure is required.

© Copyright 2005. Phillip C. Querin, Davis Wright Tremaine. No part may be reproduced without the author’s express written consent.