Colorado HOA Due Diligence
Silver Fern Homes real estate investment group meets to discuss all manner of issues regarding buying and owning investment property. As an agent, property manager and now meeting planner, I am forced to think outside the box, find the answers to the questions we have, come face to face with yet more questions… And dig deeper for my clients.
This month I have spent considerable time researching Home Owners Associations for the good of the group. Luckily for me I have a collection of Colorado HOA docs left over from real estate deals!
Most people beginning their foray into the investment property world are looking for a good deal on a low maintenance property, that will present well to prospective tenants. (Just about everyone I know in the dating world is looking for something similar… “Presents well, financially stable, low maintenance and not expensive to be in a relationship with”)
With the purchase of a condos or townhouse, comes the inevitable agreement to essentially go into business with the Homeowners Association too. The entity which will enforce covenants, maintain the exterior of your property and take money from you monthly, is not to be trifled with. So it makes sense to check them out (date them) BEFORE marrying them at closing!
Step One: Find a property that works for you and get it under contract. Easier said than done, but that is another post! Now what?
The Colorado contract to buy has several contingencies that benefit the buyer. One of which is the buyers subjective approval of the Colorado HOA documentation. The buyer will receive HOA documents, sometimes referred to as the Common Interest Community (CIC) docs, by a deadline specified in the contract. They will then have 3-7 days typically to review the documents before the HOA Document Objection Deadline is upon them. This is the date by which the buyer has to either terminate the Contract to Buy based on dissatisfaction of the HOA docs or forever hold their peace. Well… Not forever, but at least until after closing let’s just say. 🙂
Step Two: Reviewing the Colorado HOA docs- this is your dating period. What should we have in hand? What questions should we be seeking answers for, in the quest for satisfaction and peace of mind going forward?
You should receive:
- Financials
- Meeting minutes
- Bylaws
- Rules and Regulations
Review the financials. If you don’t understand what you are looking at, seek advice from someone who does. There is bound to be someone in your life who is familiar with HOA financials and budgets etc. If not… Call me. I will do my best to help you. You might also take your accountant, financial planner, friend in finance to lunch. Pick up the tab! This is cheap advice!
You are looking for a reserve study. When was the last time one was done? (Hint: 1982 is not a good answer!)
A reserve study is a budget planning tool which identifies the current status of the reserve fund and a stable and equitable funding plan to offset ongoing deterioration, resulting in sufficient funds when those anticipated major common area expenditures actually occur.
Without adequate reserves and the planning for large expenditures, you (as the new owner) are likely to be faced with either a dues increase and/or a special assessment. Not the end of the world if your calculations factor this in and you can afford it. But could be very stressful down the line if the HOA demands money you simply don’t have. In light of the flooding in September 2013, look for such things as loans taken out to repair damage. Is the HOA collecting enough dues to cover the budget this year- and then some? If not, why not?
Feel free to contact board members or the management company with any questions or concerns.
Review the Meeting Minutes. Have they talked about special assessments? Litigation issues? Difficulty collecting dues or having to penalize people for non-payment or rule breaking? Are they planning improvements and can they pay for them? Make sure you investigate further anything that raises a red flag for you.
Review the Bylaws. Understand when meetings are held and if possible, see if you can join one before the purchase. It will give you a chance to peek into the inner workings of the complex and meet some new neighbors. If there is one old woman that won’t stop complaining about this and that … Best you make sure she is not your immediate neighbor OR be proactive and set about creating an alliance with her ASAP.
NOTE: I think one of the smartest moves an owner can make is to get involved in the HOA board.
Review the Rules and Regulations.
- If you have a boat, RV, trailer or work vehicle that you are planning to park on the premises, best you find out if that is ok per the HOA rules.
- Check into pet restrictions… You may and may not have a dog now, but what happens when you start dating a guy with one and he brings his dog for sleepovers? Say you want to rent out the unit… Don’t you need to know if your ad should say “no pets”?
- There is likely to be a process for architectural control. If your purchasing plans also include putting in a bigger window to capture more light and a stunning Flatiron view, it’s not a bad idea to run it by a committee member just to get a feel for feasibility.
- Some complexes have rules regarding gas grills on patios… Some have strict regulations about the furniture and accessories that can be set outside on balconies and whether or not smoking is permitted. The fines can be steep and you should expect almost zero tolerance on fire safety and insurance issues.
- Are you planning to list your condo on Airbnb or similar? It’s important to find out now whether or not the HOA has rules about short term rentals. Also their restrictions on the number of persons (related and unrelated) who may occupy a residence.
- The pool looks amazing and you know your college aged daughter would just die to hang out there with her friends all weekend during the summer. So… How many friends is she allow to bring to the pool and how often? What is the fine you will be paying when she violates that loudly, at 11pm, repeatedly?
Once you have thoroughly checked out the HOA and have satisfied yourself that you can live with the rules, afford the dues and feel good about the upkeep of the property, you can let the HOA Doc Objection Deadline just pass on by. Nothing more to be done in this regard.
However, if you do find a deal breaker – talks of dues increasing 100% in the next year, restrictions on how many of your dogs you can let move in with you or a dilemma about where you will park your work truck over the weekend, don’t delay in letting your Realtor know. Terminating and finding another property that is a better fit, is always better than living with regrets after closing or trying to sneak that 3rd dog in!
Terminating a Contract to Buy is quick and easy, if done properly and in accordance with the Contract.
And… You will find something else, don’t worry!
