According to the Foundation for Community Association Research, more than 74 million Americans currently reside in communities organized under homeowners’ and condominium associations, cooperatives or other planned residential developments. The popularity of these types of communities is expected to grow due to the myriad of benefits they offer residents, including affordability, a safe environment and guaranteed maintenance of common areas – just to name a few.
In its simplest form, a community association is a collection of homes, condominiums or other properties that are legally bound together by a collection of documents that govern the community as a whole. An association’s governing documents typically contain the rules, regulations and all other contractual terms that bind the association’s members. If a property is part of an association, membership is automatic when a buyer purchases the home.
The most common types of community associations are homeowners’ associations (HOAs) and condominium associations (CAs). When a real estate transaction involves property that is part of a larger association like an HOA or a CA, title agents must take exception in their title insurance commitments and policies for all the association governing documents. It is also critical for the title agent to review the association documents to understand how the association works, and to understand how its existence impacts the title to the property.
Here are some important things for a title agent to keep on their radar when reviewing the governing documents of a community association:
Sometimes, a community association may have the option to purchase a property if the current owner wants to sell or otherwise convey it. A right of first refusal will often guaranty to the association the right to buy the property under the same terms and conditions as set forth in a contract with a purchaser, provided that the right is exercised within a certain time specified in the association’s documents.
If an association’s governing documents include language that establishes a right of first refusal, then the commitment will include a requirement that the agent contact the association to notify them of the upcoming sale and obtain a signed waiver of the association’s right of first refusal. This waiver should be recorded at closing so that the record title will clearly show that the community association chose not to exercise their right to purchase the property. Failing to record a waiver of the right of first refusal may lead to title claims down the road.
A community association will collect assessments – sometimes referred to as “fees” or “dues” – from property owners within the association. These assessments are usually the primary source of funding for the association. Assessments collected from owners are used to pay for things like maintenance and repair of common areas, general operating costs and overhead of the association, and any professional management fees that the association incurs. The right to charge and collect these assessments comes from the governing documents of the association, and collection is also guided by applicable state law.
As a title agent closing these types of transactions, it is important to familiarize yourself with the community association or condominium statute(s) in your state. When reviewing a community association’s documents, an agent should make sure to note how and when the recurring assessments are collected. Sometimes, state law will require the seller to disclose this information to a prospective purchaser. At closing, many state laws and customary practices require that a title agent obtain and record a statement from the association reflecting that there are no regular or special assessments currently outstanding. This statement, which is called different things depending on the state, serves to protect the buyer and the lender from any surprises regarding delinquent fees that accrued prior to them having an interest in the property.
If an owner falls behind on their share of the association dues, the association will typically send a warning to that owner and to any mortgagees that have an interest in the property. This warning will consist of a notice stating when the assessment became delinquent and the total amount of money that is owed. The notice will give the owner a period of time, which will vary depending on state statute, to pay the outstanding dues before the association can place a lien on the property.
When reviewing the title for a property that is subject to a community association, a title agent must carefully note if there are recorded HOA or condominium association liens and promptly deal with them. In some states, there are statutes that give higher priority to HOA or condominium liens, putting them ahead of all other liens. These so-called “super-priority liens” will give at least a portion of an HOA or condominium lien a higher priority than even a first mortgage lien. If an HOA forecloses on a super priority lien, it can extinguish the property rights of even the first position lender. When dealing with a recorded HOA or condominium lien, the agent should immediately contact the association and resolve the lien before any foreclosure action is initiated.
In states where statutes allow the lien to take priority over mortgages or deeds of trust, agents should take care when asked to issue endorsements to a loan policy that insure mortgage priority over HOA or condominium assessments. Specifically, Doma agents should contact Doma underwriting counsel before issuing the ALTA 4, ALTA 5, or ALTA 9 endorsements in states where HOA or CA liens are afforded super priority. Agents should also make sure not to add any language to Schedule B that offers affirmative coverage over liens created in covenants, conditions and restrictions.
Community association properties can be tricky, but if proper care is taken, there is no cause for alarm! As always, your Doma underwriting counsel are available to answer your questions and to assist you in working through any issues that arise along the way, thus insuring a smooth and frictionless closing for your customer.
“The most important part of this rapid response plan is the word rapid,” Schreiber said. “You have a limited window to recover the funds. Fraudsters are not going to leave the funds in the bank where you wired them to, which makes recovery all the more difficult. In most instances, the money is unrecoverable within a matter of hours, or at most, two or three days.”
Lony-Ann Sheehan is Vice President, New England Regional Underwriting Counsel for Doma Title Insurance, Inc.