“Gotcha!” at Closing: Beware the HOA Inspection Report when Buying a Home

As more and more subdivisions adopt common deed restrictions and covenants, the chances that you will buy a home in one of those neighborhoods increases. While covenants and restrictions are nothing new, there is a trend that can catch the unwary by surprise and add thousands of dollars of unexpected costs above the purchase price. Some due diligence can save you a lot of grief.

Contract terms that apply to the land before the first purchaser buy a lot, are recorded in the public land records and referenced in each subsequent conveyance are said to “run with the land.” Those documents are public records and available for anyone to review before agreeing to purchase property in the subdivision.

However, the covenants typically vest a number of powers in a body of representatives of the entire group of owners. Those powers include the ability to

adopt and enforce rules consistent with the spirit of the original covenants. Unlike the deed restrictions, these rules are generally not public record and can only be obtained from a member or officer of the home owners’ association (“HOA”).

HOAs have the unpleasant task of enforcing rules drafted to help keep all property values up by ensuring consistent levels of exterior maintenance, upkeep and accessibility. It is a thankless job but one that benefits all owners in the subdivision. On the flip side, if the HOA turned a blind eye to violations, the entire set of covenants could be declared nullified by failure to enforce them over a period of time.

HOAs have a new trick they use to meet these obligations: the so-called “resale inspection rule.” Here is one example from Maryland. Here is another example from Arizona. These rules can apply to condominiums as well as traditional lots.

Although the rule varies from HOA to HOA, it typically includes a requirement that anyone selling their property obtain an inspection by the HOA architectural representative. If the property passes, everything is great. If the property does not pass HOA inspection completely, then that can become the “gotcha!”

Here is how a good plan can cause trouble even for people who had no intention of violating the HOA rules:
1. HOA inspection is mandatory, but not requested before closing
2. HOA inspection occurs, but report not received prior to closing
3. HOA inspection occurs and report is received prior to closing, but after the purchase contract becomes binding
4. HOA inspection occurs and Seller fails to disclose the non-compliance issues pointed out in the HOA report
In most states, the first and last scenarios likely can lead to legal action by the buyer to either reform or avoid the contract because the Seller has done something intentional and deceptive or negligent. It is the other two that are more likely to occur, and because there is no intentional deception, the remedies available to the buyer can be limited.

For example, let’s say Owner wants to sell House. Owner spruces up the place, gets a Realtor, lists the house for sale and starts preparing for tours. Because Owner knows the rules, she contacts HOA to inform them of the new listing and request the mandatory HOA inspection. HOA takes its normal, customary 8-10 business days to get around to the inspection. HOA finds a few “minor” items of non-compliance, and within a couple of days, mails its report to Seller.

The only problem here is that the market is pretty hot and Buyer makes an offer on the third day the property is on the market and has a closing date scheduled in less than three weeks. Why is that a problem? Seller may honestly have no actual knowledge of any non-compliance items to list on the disclosure statement. Buyer relies on the Seller’s disclosure statement and the train is rolling towards closing. Depending on how quickly the HOA completes and delivers the report, that document may not even show up until after closing. If the cost to remediate is substantial, the sale may be off.

Protect yourself by doing some research before you make an offer. Read the seller’s disclosure statement very carefully (in states where they are required), then ask questions in writing and get the answers in writing. Here are some questions to put in your list when there is a mandatory HOA and there are active covenants and deed restrictions in place:
a. Does the HOA have any requirement for an HOA inspection prior to, after or in connection with the sale of property covered by the deed restrictions?
b. If so, have you complied in all respects with that requirement?
c. Are you as home owner in compliance in all respects with all HOA rules?
d. Is the property in compliance in all respects with the HOA rules and covenants?
e. Has there been an HOA inspection or report related to your property in the past 24 months?
f. Do you expect to receive any report from the HOA prior to, after or in connection with closing?
g. Please provide the names and contact numbers for all current HOA officers.

Most HOA officers see themselves as ambassadors for their neighborhood. They want to paint the environment in the best light and will be helpful. Ask if they have any violation history on the property you want to buy. Ask them what the requirements are on an owner when she wants to sell as well as on a buyer when he completes the purchase. They will typically provide copies of rules, meeting minutes and even HOA financials if you ask, though they may ask you to cover the costs.Buying is stressful enough. Do not let the unexpected get in the way of your new home. Ask questions. Probe. Be prepared. Hopefully, there will be no “gotchas!”

Author:
Lewis Kinard has general corporate counsel experience in corporate and government contracts for software and professional services, state, federal & international compliance, hosted solutions for insurance companies, real estate transactions, HR & employment law and management of outside counsel is strengthened by actual C-level executive experience with full profit and loss responsibility and international business process consulting experience.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.