BUYING A CONDO

BUYING A CONDO

A friend called and said his daughter was buying a condo. He asked what she should look for when buying one. Following are my recommendations.

1. Maintenance. Don't assume the association takes care of everything, it doesn't. Find out what your maintenance responsibilities are so you can budget for them. Inspect the common areas. If the paint is peeling on buildings, trees are overgrown, lawns are shabby, sidewalks are tilting--roofs and plumbing are probably in a similar condition. Poor maintenance means you can expect stagnant property values and special assessments as water starts infiltrating common areas through roofs, windows, water lines and drain lines--leading to mold and litigation.

2. Reserves. This is an extension of the maintenance issue. Does the association have healthy reserves so it can repair large ticket items? If not, special assessments are inevitable. Reserves in the 70% to 100% funding range are excellent. Reserves below 50% mean probable future special assessments. The lower the reserves, the more imminent the special assessment. If reserves are below 30%, look elsewhere for a condo.

3. Insurance. How much insurance does the association have? If it's at bare minimum levels, you face a higher risk of a special assessment in the event a claim is filed against the association. Is the development in an area deemed high-risk for an earthquake? If so, does the association carry earthquake insurance? If not, are you prepared to lose your investment in the event of significant damage?

4. Litigation. Ask the seller about litigation over the past ten years. Also ask for the past two years of minutes. A slip and fall lawsuit is not a problem. If the association has had ongoing litigation with members over the past ten years, run for the exit. The association is dysfunctional. There will be no peace until the litigants all move or die.

5. Rentals. Inquire about the percentage of rentals in the development. A high rental population creates problems for rules enforcement, maintenance and oversight of the property. If the rentals are nearing or exceed 15%, you should be cautious. If they exceed 30%, it does not matter how beautiful the condo is, you're stepping into quicksand. At 50%, the development is in a death spiral.

6. Pets. If they don't have pet restrictions, is the property a dog patch? If so, barking dogs at all hours of the day and night plus dog doo-doo in the common areas will be a challenge. If they have restrictions, do you have pets that violate those restrictions? If so, are you willing to give up your loved ones for the condo? If your Realtor tells you the rules don't matter because the association will never discover the violation, get a new Realtor.

7. Parking. Is there sufficient parking in the development? If not, it will create problems for you and your guests. Visit the property on a weekend when everyone is home and see what parking is like.

8. Noise. Ask the seller about plumbing noise, crying babies, TV and stereo sounds, etc. from surrounding units. If there is a unit above yours, ask about noise from hardwood floors. If all the above can be heard through walls and floors, it indicates cheap construction--a harbinger of future maintenance problems. It also means you won't get any sleep at night.

9. Finances. Ask for a copy of the budget and annual financial statement - and read them. Ask about delinquencies. A delinquency rate above 15% means that higher dues to make up the deficiency are probable. Also ask about past dues increases. If they proudly tell you that dues have not increased for ten years, it means they kept their dues down by deferring maintenance for ten years. It also means large increases and special assessments are looming.
10. Sales Activity. If you see a lot of "For Sale" signs in the association, you better find out why. Like rats fleeing a sinking ship, they might know something your Realtor isn't telling you.

RECOMMENDATION: It does you no good to sink your last penny into a condo and then lose it the next year when you get hit with a dues increase and large special assessment to cover delinquencies, litigation, artificially low dues and underfunded reserves. Any Realtor can read the MLS and drive you around to look at condominiums. What you need is a Realtor who is knowledgeable of how associations work and respects them. A good Realtor with condo experience will provide invaluable guidance.

SHARING HOA RECORDS & HOA FINES

SHARING HOA RECORDS

QUESTION: An owner requested over 4,000 documents which we provided. Does she have the right to share those records with others??

ANSWER: It depends on who the "others" are and for what purpose. Since all members have the right to inspect records, there is nothing improper about members sharing records with other members.

Improper Purpose. Where your homeowner can get herself into trouble is if she uses those records for an improper purpose such as (i) using them for personal gain, (ii) altering the records to defame others, (iii) selling them, or (iv) using them for any other purpose not reasonably related to her interest as a member.

Damages. If an owner uses records for an improper purpose, the association can take legal action against him and is entitled to reasonable attorneys' fees and costs if it prevails. (Civ. Code §1365.2(e)(3))

FINES & COLLECTION AGENCIES

QUESTION: Can an association turn a fine over to a collection agency if an owner refuses to pay? 

ANSWER: Only if the fine is first converted into a judgment. Since collection agencies cannot practice law, they cannot go into court to make an association's monetary penalties collectible. The association needs to first sue the owner in small claims court (up to $5,000) or superior court (over $5,000). If the court determines the fines are reasonable, the association will receive a money judgment that can then be turned over to a collection agency. Most collection agencies work on a contingency fee basis and charge between 25% and 40% on any sums recovered.

EV CHARGING STATION

QUESTION: I am a townhome owner and would like to install an EV charging station in my private garage. Do I still need HOA approval?
ANSWER: All of the owner requirements in the Davis-Stirling Act apply to installation of charging stations in common areas or exclusive use common areas. If your garage is solely owned by you as your separate property then the association arguably has no interest in the installation of a charging station in your garage.

Licensed and Insured. However, the association has an interest since your townhouse is connected to other townhouses and an improper installation could result in a fire. So as to protect your neighbors, the association has a legitimate interest in ensuring that you hire a licensed and insured contractor who installs the charging station pursuant to building codes.

MINIMUM INSURANCE LIMITS PER STATUTE

MINIMUM INSURANCE LIMITS PER STATUTE

QUESTION: To save money, can we purchase liability coverage of $1 million per occurrence with an aggregate limit of $1 million plus an umbrella policy of $1 million? An insurance agent who wants our business said this would satisfy the Davis-Stirling Act and protect owners from litigation. Our board is not convinced and would like your guidance.

ANSWER: First, a little background. Minimum insurance requirements were added to the Davis-Stirling Act after the Ruoff v. Harbor Creek decision in 1992. Ms. Ruoff, a guest of a member, suffered catastrophic injuries falling down defective common area stairs. Her husband sued the association and every owner in the association, each of whom, he argued, had common liability because they jointly owned the stairs.

The court of appeals agreed and held that every owner in the complex was jointly and severally liable for her injuries, the cost of which greatly exceeded the $1 million limit in the association's insurance policy. The case sent a chill through the industry and the Legislature responded by adding Civil Code §1365.9. The statute protects owners from individual liability, provided the association maintains at least minimum levels of insurance as follows:

• $2 million for HOAs with 100 or fewer units, and
• $3 million for HOAs with more than 100 units.

Umbrella. To answer your question, assuming your association has fewer than 100 units and assuming the $1 million umbrella is written to act as excess to the underlying $1 million general liability per occurrence, the combination of the two policies would provide the required $2 million for a single tort action brought against the association.

RECOMMENDATION: Meeting minimum levels of insurance may, however, not be enough. Even though owners are not directly liable for a loss exceeding insurance limits, they are indirectly. Assuming a $4 million judgment against an association, owners would be hit with a special assessment to make up the difference between the $2 million policy and the $4 million judgment.

Accordingly, boards need to talk to their insurance brokers to determine appropriate levels of insurance for their associations. A $5, $10 or $15 million umbrella policy is relatively inexpensive and not uncommon for associations to purchase. In addition, homeowners should individually purchase loss assessment coverage in the event a loss exceeds the association's policy limits.