Checklist for Buying a Condominium

Following is an important checklist of things to do before purchasing a condominium in California. Please keep in mind this is a partial list only. There is no substitute for obtaining the advice of a qualified attorney concerning legal matters. In addition, you should never purchase a condominium unless you are represented by a qualified, licensed real estate agent who is knowledgeable about condominium associations.

 
Checklist for Buying a Condominium

Read the CC&Rs (Covenants, Conditions, and Restrictions) and Operating Rules before you make a written offer to purchase a condominium. These governing documents set forth what you may do and what you may not do with your condominium. Restrictions will likely apply to your ability to modify or improve your unit, your right to rent your unit, pets, parking, visitors, use of the common areas, your right to operate a business from your unit, and more. You should be aware that CC&Rs are designed to reflect the law that applies to condominiums. If the CC&Rs were written before the current calendar year, you should read the Davis-Stirling Act in order to acquaint yourself with the current law that will apply to your ownership of a condominium. Keep in mind that if the CC&Rs are more than a year old, they cannot possibly reflect the current law, because the law is amended annually.
   
Review the homeowner association (HOA) budget for the current fiscal year as well as the prior year’s budget in order to determine how the association’s funds are being spent, and most importantly, the percentage of members who are delinquent in paying their HOA assessments. Determine whether the association’s actual revenue and expenses vary from the budget projections. If the revenue and / or expense variances are material, you should determine the reason. Pay careful attention to the payment of attorneys fees and the reasons for such expenditures. Determine whether the association is actually collecting and setting aside reserves as budgeted and whether the amount budgeted is the amount recommended in a current Reserve Study. Determine whether the HOA is collecting special assessments and the reason for any special assessments. Special assessments are the result of poor planning, a lack of fiscal discipline, or unforeseeable circumstances. Thus, the reason for special assessments is important.
   
Review the association’s most recent Reserve Study. California law requires associations to obtain a reserve study every three years and to make the report available to all members of the association. A reserve study is a report that informs the board of directors of an HOA, and its members, as to the amount of funds that must be set aside in a reserve account each month so that adequate funds are available for future maintenance and replacements such as roofs, exterior painting, repaving, and more. If the amounts being set aside are inadequate, the building will deteriorate or special assessments will be required. If the HOA does not have a reserve study conducted within the last three years, it is not in compliance with California law. This would be a poor reflection on the board and the association.
   
Determine the percentage of renters living within the HOA. Mortgage lenders are usually very concerned when the percentage of renters reaches 20% and many will not consider making loans on condominiums within an association if the percentage reaches 30%. Likewise, many buyers who have experience with condominiums will steer away from communities when the percentage is near 20% or will reduce their offering price to compensate. Associations that have CC&R provisions that discourage rentals are generally considered the most desirable HOAs by mortgage lenders and potential buyers. Those lenders that make loans within condominium associations with high percentages of renters nearly always charge higher interest rates and fees.
   
Determine whether the association has ever been involved in a construction defect lawsuit against the developer. These types of lawsuits are not uncommon and should not automatically discourage you from purchasing a condominium in a community that has made a claim against its developer. What is important is to determine whether the actual defects have been repaired. If the answer is yes, you can proceed. If the answer is no, you should investigate to determine how any remaining defects will affect you if you purchase. A price adjustment may be justified.
   
Determine whether the HOA is involved in any current litigation and how it may affect you financially, your ability to obtain a low rate mortgage loan, or otherwise.
   
Attend at least one board meeting. While a board can legally exclude non-members of the association from attending board meetings, it is not a good sign if you are excluded. Most boards permit prospective buyers and renters to attend board meetings. Board meetings present an opportunity to evaluate the individual board members as well as the management company representative. Ask yourself these questions: