Thursday, March 13, 2014

How to Buy or Sell a Condominium -- Or Any Real Estate in a Common Interest Community

With enormous Thank Yous to our knowledgeable and accessible speakers, Kathy Stauffer of Windermere Real Estate, and Jo Flannery of the Ryan Swanson law firm, we offer a small sample of the useful details they delivered to us during our session.

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 Sellers

When 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
  • Contractors
  • CPAs
  • Attorneys
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:
  • Delinquencies
  • 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.

Thursday, January 9, 2014

Natural Disasters -- What Do You Know?

With Huge Thanks to our Forum Friends, Jeremy Stilwell, of Barker Martin, and Duncan Kirk of The Unity Group, and to Steve MacKenzie of the Red Cross Speakers Bureau, our January event sparked a lively conversation and unsettled most in attendance.

Grab a cup: there's lots of great information here, including Personal Preparedness, Association Preparedness, How to Put Together a Pro-Active Natural Disaster Plan for an Association, and Seminar Questions and Answers.

You can scroll down to find the headline you want. 

Personal Preparedness

Steve's experience as a disaster first responder and independent insurance adjuster gave him the heartbreaking stories to tell about what he'd seen in 31 years of working with people involved in natural disasters. 

He underscored the beauty of living in our geography by summarizing that we didn't live with some of the higher-than-human, food-chain predators he'd witnessed in other geographies. He meant snakes, alligators and other creatures turned loose in natural disasters that end up in unpredictable and unexpected places.

He also explained that most of his calls these days involve home fires. Steve discourages candles with live flames just for this reason.

As a Red Cross first responder, Steve asked "You've got four minutes. We're taking you to a shelter. What do you want to grab from your home."

He explained that animals are not allowed in shelters; that owners must find shelter accommodations for pets. But he did explain what is necessary in a disaster kit that you want to keep handy at home.

You can put one together based on your personal needs, and he encouraged everyone to shop at the Red Cross shop for a disaster kit. 

Steve demonstrated disaster tools that one might keep in the car. A tool to evacuate a seat belt and a hammer to break a window. "Don't keep them in the trunk," he admonished.

Take the time, on a regular basis, to review the contents of your disaster kit(s), so that any 'good-until' dates aren't past, and so that the kit contains what you need in the case of an evacuation.

He encouraged people to educate everyone in the home as to exits, escape routes, meeting places, safe-arrival reporting protocols and so forth. Develop a plan for you and yours, hold regular drills and prepare yourself for survival in a natural disaster.

Finally, based on insurance coverage that you carry, do take the time to photograph your home. You will find these photos useful when you asked to list all your possessions covered under a replacement policy.

Association Preparedness

Duncan told of his business being prepared so that after any disaster, the business would be able to recover within 24 hours. This means supplemental equipment, software, telephone systems, processes, and so forth. He conducts regular drills to verify the workability of the recovery systems.

Jeremy and Duncan also support the preparation of an association disaster kit -- it is a business after all. Disasters can affect gas lines, water lines, structures, access and egress, and most of all, people. Here are a few questions you can ask your board. In the event of a disaster, do you know:

  • How visible are our addresses and unit location IDs?
  • Where are the water shut-off valves and the tool to shut them off?
  • Where are the gas shut-off valves and the tool to shut them off?
  • Where are the unit keys or the master key?
  • Who knows how to turn off the water, gas or gain access to units as necessary?
  • Who has the authority to access units as necessary?
  • What central location is designated as an all residents meet-up point, so that the association can account for all residents?
  • Where are the building floor plans so that first responders can locate facilities and people?
  • Who holds the list of all residents?
  • How do we accommodate special needs residents, such as those with walkers, wheel chairs or no access to elevators or stairs?
  • What education has the association provided to residents about how to respond in the case of a disaster?
This is a critical task for an association, based on its responsibility to maintain, protect and preserve -- at least -- its real estate assets. 

Given that this element is probably missing from many association's business records and files, the question can be: where to start.

How to Put Together a Pro-Active Natural Disaster Plan for an Association

Based on all the variables involved in any kind of disaster plan, a board-sanctioned committee is a great way to start. Your governing documents outline how board committees are established, chartered and so forth, what authority and power they can be given and so forth. 

The goal in the committee is to open the dialog regarding a disaster plan and ultimately to advise the board. Elements to consider include:

  • Based in our CC&Rs, what action can the board take, should the board take, must the board take in the case of a disastrous event?
    • Language is probably 'significant damage' or 'damage to structure' -- disaster is not used
    • Existing language was written for the developer, not for an operational board
    • Do our CC&Rs require an amendment to give the board the power to act?
  • What repair or reconstruction process must the board follow and what are the time limitations involved in the process?
    • Don't let the time limits slip by
    • Time line is usually quick and non-standard
  • What are our CC&R insurance requirements?
    • Does our current coverage match our requirements
    • Do we carry earthquake insurance and is it useful
    • Do we carry flood insurance and is it useful
    • Have we polled our owners to verify that earthquake insurance is desired
    • Do we require that owners carry HO-6 policies. Why or why not
  • What are our insurance deductibles?
    • Who pays them
    • Is the deductible language equitable given the disaster
      • In a single unit fire, should all owners pay a share of the deductible
    • Does the budget include a deductible fund held for access when needed
    • Can our collective owners pay a deductible for earthquake repairs, if required
  • If our master policy is an 'all-in' policy -- covers real estate including furniture and fixtures of interiors: cabinets, bathroom fixtures, etc. -- what improvements are owners required to report to the association and how is this done?
    • What is the reporting provision in our CC&Rs regarding upgrades
    • Does the association require photos, invoices, what documentation
    • Is there a dollar limit over which owners must report and document upgrades
  • How have we educated owners about natural disasters?
    • Central meeting location
    • Security -- buildings and units
    • Best practices for our physical structures' exits and entries
    • Assistance requirements
    • Emergency contact details
    • Actions to take
    • Welcome packets
  • What do we need to pay attention to on our property? Consider --
    • Seismic shut-offs for gas and water lines 
    • Rescue ladders
    • Fire extinguishers
    • Educating building or floor captains (Jeremy cautioned: don't just name them)
    • Identifying resident contact tree
    • Old or diseased trees
  • What is in the association's disaster kit?
    • Shut off valve locations for water and gas
    • Floor plans
    • List of residents
    • Copies of master policy declaration page -- carrier and policy number
    • Copies of owners' HO-6 policy declaration pages -- carriers and policy numbers
  • To whom to we report a disaster?
    • Who is authorized to know
    • Who needs to know
    • Who reports
    • Form of report
Once the committee has researched the elements, the association may want to engage the services of association counsel to review the process, and may recommend crafting an amendment to the CC&Rs.

It's a good idea to announce this committee to all owners, since a majority of owners' votes are required to amend the CC&Rs.

At least, an association should perform a regular insurance check-up, to verify that what must be covered is covered, and adequately.

Seminar Questions and Answers

Q: Do I have to carry an HO-6 policy as a condominium owner?
A: Your board may require that you carry one, but the HO-6 policy covers your personal possessions, potentially in the case of a disaster, can pay your assessments, your living expenses if you cannot live in  your home and include earthquake coverage if the master policy carries it.

Q: Do I pay assessments if I can't live in my home/ unit because of a natural disaster?
A: Yes.

Q: What happens to my mortgage if my home/ unit is condemned after a natural disaster?
A: Your lender expects to be paid, regardless of the damage.

Q: What insurance covers improvements I've made to my home/ unit?
A: Depending on the CC&Rs and those reporting requirements, the master policy may cover these improvements. Best practices dictate that you send photos and invoices to the association, as evidence of your upgrades should any be required.

Q: How does the association know about improvements I've made to my home/ unit?
A: Every association has its unique requirements for owners reporting upgrades. Read your CC&Rs for the details you need.

Q: Who decides whether or not to condemn the structures?
A: This is a professional decision, that may be determined by the local municipality if the structures are not inhabitable.

Q: What is the time limit involved in deciding how to proceed with reconstruction or demolition after a natural disaster?
A: This data is available in your governing documents under 'significant damage' or 'damage to the structure', and is usually quick and tight -- documenting deadlines that are not to be missed.

Q: What are the association's legal responsibilities to owners regarding natural disasters?
A: A pro-active list of actions show the association's intent to honour its responsibilities; the lack of any action by an association in this regard may place the association at risk.

Q: What are owners' responsibilities to the association regarding natural disasters?
A: Owners are responsible for the deductibles and to pay assessments, including special assessments required to pay for repairs.