A common interest community (CIC) can be a marina, a mobile home park, a high rise residential building, or a mixed use complex, and buying into one or selling part of one requires extra effort in terms of buyer due diligence and seller full disclosure.
For Buyers and SellersWhen you buy in, you become an automatic partner in the association. Buyers: look around at the amenities and determine what you pay for vs. what will you use. When you sell, be aware of curb appeal and general look and feel of the property.
In that high stack of papers that a buyer signs at closing is a (condominium) Resale Certificate -- purchase from a private seller, or a Public Offering Statement -- purchase from a developer. These are particular to common interest communities, and you are well advised to read and review the contents of these documents. Sellers: You are responsible for a (all CICs) Form 17 that the buyer will review.
Whether you're buying or selling, you can look at the 'big picture' for the community:
- What is its financial health?
- What are your percentage of voting rights -- allocated interest compared to all other allocated interests -- are they fair?
- What are indicators of the association being well managed?
During the period when you conduct your (buyer) due diligence or (seller) disclosure, study and review materials, so that a buyer can -- if necessary -- knowledgeable and legally cancel an offer or make one that reflects the status of the association. Sellers may want to pay special attention to outstanding indicators that could discourage buyers.
Get copies of the Resale Certificate/ Public Offering Statement before making an offer. Work with an association-savvy realtor to shape and value the unit. Not all real estate brokers are professionals with expertise required for transacting business with common interest communities.
Ways to read the 'big picture':
- How much are assessments and what do they cover -- can you find the details in the budget?
- Are delinquencies less than 10% of all assessments owed to the association?
- Is the subject unit current in assessment payments? If not, why not?
- What is your potential allocated interest -- you can find a chart in the back of the CC&Rs. Are you voting by percentage of ownership, or simple one vote to one unit? What is fair for the ownership?
- What is the date of the Public Offering Statement -- if it is more than 120 days old, you can request an updated version.
- In Reserves, are at least 10% of the total amount of annual assessments being held in Reserves?
- Request a copy of the Reserve Study, and compare it to the Reserve account balance. (Search blog to find Reserve Study Forum session notes for how to read a study. ed.)
- Given the age of the community, are Reserves high? High enough?
- Find a way to understand the board's philosophy, which is key to understanding the contents of the Reserve Study.
- For a new community with a Public Offering Statement, be aware that there may be pressure to keep assessments low. You can expect a 15% to 30% increase over the first several years, since unrealistically low assessments for new communities serve one purpose: to sell units.
- What is the master insurance policy deductible? (Take a copy to your broker and purchase personal property coverage not covered by the master policy -- this is highly recommended.)
- What is the percentage of rentals?
- What is the status of any rental cap: lenders and insurers question a high percentage of rentals?
- In new construction, be aware that warranties given in the Public Offering Statement may not reflect state law.
- If the building is a conversion, consider conducting extra due diligence: What was done?
- What is the status of any lawsuits? Suits for collections of assessments? Association suing owner(s) for other reasons? Owner(s) suing the board? (last = Major Red Flag.)
- Review meeting minutes. Last two annual meeting minutes, or two to three years' worth of board meeting minutes.
- Review several years worth of financials and look for over-budget expenditures. Get explanations for why.
Finally, can you find someone who knows someone in the community? Are there any postings on social media about the association?
Real Estate Agents
Real estate agents are educators for buyers and coaches/ cheer leaders for sellers. Real estate agents are not:
- Immigration specialists
The benefits of working with a knowledgeable common interest community realtor are enormous. Why? Because these realtors understand and can help buyers and sellers involved in CICs to act knowledgeably and can help maximize a CIC investment.
Review details to verify that the Resale Certificate you rely on is no more than 30 days old. Sellers are obligated to sign Resale Certificates and legally required to produce a Form 17. In many cases, lenders use Freddie Mac and Fannie Mae qualifying criteria for loans, so you can verify that your situation conforms to these lenders' requirements.
Work with your realtor to complete the optional clauses in the neighborhood review.
Sellers are well advised to check on:
- Curb appeal
- Pending maintenance projects/ expenses
Think like a single-family owner/ seller and work with your board to make the property look its best.
Is your association FHA certified? This can be a competitive edge. The association qualifies and keeps it up.
Are there special situations in your community, and how does that affect the price. Disclose these and give details as to the position. The key is disclose, disclose, disclose.
Ideally, there are 'good sellers' and 'good buyers' -- so that everybody can 'get along'. This is crucial and problematic in common interest communities.
As to remodels: Best practices dictate that you establish your plans with a qualified architect, and review the plans with the board and with the neighbors. Note that windows and doors may be under the control of the association. Before you 'do anything', verify your authority to remodel before you begin.