By Arthur Czaja, Attorney-at-Law, Arthur Czaja & Associates
Condominiums and homeowner associations can make a maintenance-free living a reality for many homeowners. Imagine not having to worry about cutting the grass when the weather gets nice. Or, imagine not having to worry about paying for a new roof or new windows when it comes time to replace them.
Sound too good to be true? Well, the reality is a well-managed condominium or homeowner’s association can provide a realistic avenue for homeowners seeking true maintenance-free living. However, buying any property that is a part of an association can prove to be a nightmare for some.
Associations, just like individuals, can run into financial and ethical dilemmas. With the recent changes in the real estate market, many associations are finding themselves deeper and deeper in debt when homeowners stop paying monthly assessments. Does this mean that all buyers should shy away from buying condominiums or properties that belong to an association? Absolutely not. Don’t be afraid to ask the right questions of a prospective association before your clients buy. Asking the right questions and doing due diligence can mean the difference between your clients living a nightmare and living maintenance-free.
Below are legal and practical considerations that any prospective buyer should consider and review before buying a property that is a part of an association:
- Review the disclosure statements of the association: The most common concern among condominium buyers is the possibility of a special assessment. Most buyers want to make sure that there are no unexpected ownership costs that they haven’t accounted for, such as a large special assessment. This can be avoided by not only asking up front if there is a reserve and if the amount in that reserve can be disclosed, but also by reviewing the disclosure statements, budget and meeting minutes of the association. By doing so, you can determine if the association has funds in reserve to pay for any unexpected projects or planned improvements. Also, a review of the meeting minutes of the association in the past 12 months will give your client more insight into the practical concerns of the association. It is highly unlikely that an association would pass a special assessment if the association had not, at the very least, discussed the idea within the past year.
- REO condos and unpaid assessments: With the rise in foreclosures, the Illinois legislature stepped in to help associations with the passage of Section 9(g) of the Illinois Condominium Property Act. This law states that buyers of bank-owned properties may be responsible for paying up to six months of unpaid assessments of the prior owner that lost the property in foreclosure. With the number of REO properties on the market, savvy agents should bring this issue to the attention of their buyers when shopping for bank-owned properties. Associations are required to disclose the exact amount that they are seeking to collect from buyers in the Section 22.1 Disclosure Statement and in the paid assessment letter issued by the association at the time of the closing. I represented a client in the purchase of a bank-owned property where the association, after the closing, claimed that fees were due from my client pursuant to this new law. My client could not use the swimming pool, tennis courts and fitness center as the association claimed he was delinquent in the payment of his assessments. The association never disclosed these fees to my client. With a strong paper trail in hand, we were able to sue the association and management company and recover over $7,500 in damages, plus all of our court costs and attorney fees.
- Parking space and ownership issues: I represent many clients and associations dealing with parking space and boundary line issues. Most disputes stem from either sloppy closings or complacency on the part of the unit owners. These issues can become even more complicated after a foreclosure. The Declaration and Bylaws of the Association contain the most accurate description of the property that your clients are purchasing. Relying on the representations of the bank or unit owner is not a good practice. A prudent buyer would insist on reviewing a complete declaration of condominium ownership, including the condo survey, to determine exactly what is going to be owned by the buyer and what is a common area that falls under the jurisdiction of the association.
- FHA approval of condominium projects: Recently, there has been a tremendous increase in the number of loans given to buyers that are insured by the Federal Housing Administration (FHA). Therefore, it is extremely important for associations to be FHA-approved. A simple question before deciding on whether to buy a condominium is, “Is the association FHA-approved?” Owning a property that is part of an association that is not FHA-approved can significantly reduce the number of potential buyers when it comes time to resell the property. Are you part of an association that is not FHA-approved and a little worried? The good news is that the barriers to FHA approval are not impossible or even difficult to overcome. In fact, those associations that are not FHA-approved generally have difficulties simply because the association has a right of first refusal. The right of first refusal gives the association the first right to purchase any property offered for sale. This would require a seller who negotiates a contract for sale of the property to present the contract to the association who would have the first right to purchase this property on the same terms and conditions. The association would then exercise this right by purchasing the property or waive their right of first refusal. This archaic mechanism had been used by associations over the years as a method of discrimination. The process of amending the declaration is not outrageously difficult or expensive and can be done relatively quickly if the unit owners are cooperative.