Condominiums remain a popular housing option in the Bay Area - especially because many condos and townhouses cost less than detached houses.But buying a condo - or buying a house in some master-planned communities - comes with issues that many home buyers don’t face.

Condo buyers don’t simply become homeowners once all the papers are signed. They also become part of a homeowners association. Because a homeowners association is essentially a corporation, it’s important to check out its rules and financial health before becoming one of its owners, experts say.

“You’re buying into a part of a business, so you need to look at not only the packet they give you, but talk to people in the development. What do they understand are the problems of the development?” said Sam Chuck, a real estate attorney with Rossi, Hamerslough, Reischl and Chuck in San Jose.

The association’s business is to pay for maintenance and repair of all the mutually owned parts of the community - things such as roadways, sidewalks, pools and roofs - and enforce rules. Owners pay monthly fees to fund those activities.

The “packet” Chuck referred to is typically a stack of documents that should disclose to a potential buyer all the pertinent facts about the operation and financial health of the homeowners association, plus the do’s and don’ts of homeowner behavior. The packet is usually provided to buyers once they are in escrow.

Buyers with short “contingency periods” in their purchase agreements should be warned: It can take anywhere from a day or two to a few weeks for an association’s property management company to produce the documents.

Among other things, the packet should include copies of the association’s articles of incorporation and bylaws, its rules and its “conditions, covenants and restrictions,” commonly known as “CC&Rs.” It also should include minutes from a year’s worth of association meetings, a copy of the association’s budget and a financial statement. Often, association newsletters are included as well.

Former San Jose resident Suzanne Trocha didn’t know much about homeowner associations when she bought a downtown San Jose condo in 1995. She eventually spent three years as president of her association’s board and went into property management professionally. Prospective condo buyers must read the CC&Rs, she said, because they explain who is responsible for maintaining different parts of the property.

“Usually the association maintains common areas,” that residents share, she wrote in an e-mail. “Common areas may include the siding on the buildings and the roofs, but not the windows or the chimneys,” so buyers will want to know those details before they buy.

Chuck says few people bother to read more than a page or two of their CC&Rs, but they should read sections that seem pertinent to their lives. The documents can specify things like what color door a home can have, what color paint and trim, what kind of fencing can be used, how many pets are allowed, even how big a party an owner can throw.

“I’ve seen CC&Rs that limit what children are allowed to do,” Chuck said. Skateboarding might not be allowed, for example.

Real estate agent Jeff Hansen of Keller Williams Realty agreed that buyers should ask about any rules that affect their daily lives. Hansen, who specializes in selling downtown San Jose condos and townhouses, said “the things that people are bothered by over time tend to be practical,” like parking.

Some associations strictly limit guest parking or forbid street parking, for example.

Buyers also should find out exactly what their association dues cover. Some cover water and garbage service, for example. And they need to know whether dues have gone up over the years. If not, that could be a sign of future trouble because an aging community will certainly need maintenance, and the association might not have raised enough funds to cover it. New buyers could be hit with steep increases in dues. “You can’t say, `Hey, I just got here and nobody told me,’” Chuck said.

Buyers should also check out what kind of insurance the association has - does it have an earthquake policy, for example? And what are the deductibles?

Any pending or ongoing litigation also should be disclosed.

Hansen said buyers often shy away from condos that are part of construction-defect lawsuits because the legal action adds a layer of complexity to an already daunting financial transaction.

But a few years ago he bought into a homeowners association in downtown San Jose that was suing the builder over alleged construction defects. Despite uncertainty about the outcome of the litigation, he said, he liked that he knew exactly what was wrong with the condo buildings because they had been carefully examined by experts. The suit was settled in 2005, and Hansen said the settlement amount was adequate to cover repairs.

Knowing about pending litigation, dues and rules is a good start.

But checking out the financial strength of an association is just as important, said Jacquie Berry, president of Community Association Data Source in San Jose. That can be hard for an average buyer to do, but reviewing meeting minutes and budgets can help. State legislation approved in 2005 regarding how homeowners associations report their reserves has made it easier to gauge the financial health of associations, Berry said.

For $375, Berry’s company will review the disclosure documents provided to a buyer, make sure disclosures comply with the law and evaluate the financial fitness of the homeowners association.

She says almost none of the disclosure packets she reviews is initially in compliance with the law on association disclosures, which is known as the Davis-Stirling Act.

But “the financial health of the association is most critical to these people,” she said. “To get hit with a large special assessment is devastating.”

Berry said she’s reviewed cases in which homeowners were each assessed tens of thousands of dollars to pay for repairs that the association’s reserve funds couldn’t cover.

“The value of the property is directly related to the value of the reserve and how well they’re funding it,” she said.

Source:

http://www.mercurynews.com/search/ci_5387935