The Real Estate Law Podcast

Episode 3 - Condo Associations and The Law

March 03, 2019 Jason Muth / Rory Gill Season 1 Episode 3
The Real Estate Law Podcast
Episode 3 - Condo Associations and The Law
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The Real Estate Law Podcast
Episode 3 - Condo Associations and The Law
Mar 03, 2019 Season 1 Episode 3
Jason Muth / Rory Gill

In this episode, we're talking all about condo associations - everything from the benefits of living with neighbors in a harmonious condo association, to the horror stories when condo associations become dysfunctional.  Before you buy into a condo association, you need to listen to this episode!  Join Jason Muth and Attorney / Broker Rory Gill of NextHome Titletown and UrbanVillage Legal in Boston, Massachusetts for another episode of The Real Estate Law Podcast!  

Support the show (https://www.urbanvillagelegal.com)

Show Notes Transcript

In this episode, we're talking all about condo associations - everything from the benefits of living with neighbors in a harmonious condo association, to the horror stories when condo associations become dysfunctional.  Before you buy into a condo association, you need to listen to this episode!  Join Jason Muth and Attorney / Broker Rory Gill of NextHome Titletown and UrbanVillage Legal in Boston, Massachusetts for another episode of The Real Estate Law Podcast!  

Support the show (https://www.urbanvillagelegal.com)

Announcer:

You found the real estate law podcast because real estate is more than just pretty pictures and law goes well beyond the paperwork and courtroom arguments. If you're a real estate professional or looking to build real estate expertise, then welcome to the conversation and discover more at real estate law, podcast.com and it's time for the real estate law podcast, episode number three. Welcome. Welcome. So we reached

Jason + Rory:

Our third episode. Who'd ever thought we'd be here? Oh, it's been awhile. My name is Jason Muth and I'm here with, I'm Rory Gill. This is attorney and broker Rory Gill from UrbanVillage Legal and NextHome Titletown here in Boston. And it's certainly good that you named your brokerage title town after what's been happening here lately. We had quite a celebration, recently here in Boston for the New England Patriots. I feel like we deserve all the credit for that. That's awfully modest of you, isn't it? I think that we deserve all the credit for cheering heartily for one of our favorite teams. But they went out there and they won it in a year that they didn't think that people didn't think that they could. So, we're really proud to represent Boston and Eastern Massachusetts and the whole region here in New England and we do think that title town is Boston right now, and Boston is Title Town. So, NextHome Titletown makes all the sense in the world. Rory, today we're not going to talk about sports. Not at all. No, not at all. I'm sure the rest of the country is thrilled to hear about Boston sports because we're everyone's favorite. We're going to talk about an area that you have a ton of expertise in being that you're both a real estate attorney and you're practicing broker here in Massachusetts and New Hampshire. And that is buying into a condo association. My experience with that is simply having purchased into a condo association on three separate occasions. But, most of what I do is I kind of glanced at all the information and then I literally say, Rory, can you take care of this? Well, we're fortunate to live in some pretty good condo associations, but I've experienced the horrors of the bad ones. Yeah, I mean, I got to say, we've had three fantastic associations. Everyone gets along, everyone contributes to the building. So far, knock on wood, there's rarely been a situation that was, controversial or antagonistic. I do remember one loud party at one of our associations that we had to remind them that was well after two in the morning and suddenly things got taken care of. I think they thought that we were actually the landlords in the building. In the grand scheme of things, a party once in a while is not is not the end of the world. Right? No, not at all. I mean, like, some of the horror stories you're talking about, they actually spill right into the courtrooms. because you actually have represented associations in courtrooms that correct several times and it's after we knew, take it to court, you've failed to get this resolved in every other way possible beforehand, right? Nope. Those are the worst. The worst end up in court. No kind of friendly neighborly negotiations. Mediation didn't work. And next thing, like you're in front of a judge. It's almost worse than divorces sometimes. Okay, well we'll get to that a little bit, The Real Estate Law Podcast, we like to cover a number of items related to the same topic during each one of our episodes. So why don't we really just start with the basics about condo associations like, here in the city, we live in Boston and that's where we're recording this. Condo associations are everywhere. And sometimes when we read real estate blogs or forums elsewhere around what's happening around the country, there's a lot of folks that just say, warning, warning, be careful of the HOA. Be careful of your condo association. You might not want to buy into that. But , here in the city, that's essentially what we do, right? It's almost inevitable and it's pretty amazing if you could find a single family in this neighborhood that's available, that's, it's a rare catch, right? So it's almost inevitable, but it's not always bad either. You're splitting costs and you're sharing responsibilities with other neighbors. Like the roof and painting and siding and shoveling and, all that stuff that, instead of paying 100% for, you're paying 15% or whatever percentage you have. When, when you're looking for property, you're excited to do an open house tour. You're on house hunting. You're pretending like you're on HGTV and you're out there with your agent and you're checking all these hot properties in the city. Most of them are probably going to be units within a larger building and it's probably safe to say that that larger building usually has a condo association, right? Almost always. Almost always. So, why should a buyer evaluate that association when she's actually looking to put an offer down on a property? Well, when a buyer and starts looking at properties, they'll do a home inspection to make sure that the physical condition of the place is great, but then they'll skate past the condo association and taking a hard look at that. I almost think it's more important than the condo association then the home inspection because you are entering into a business relationship with everybody in the building, and they're going to be your neighbors for your entire time there so they can make or break your investment. They can make or break your enjoyment of your time there. The association is absolutely critical. So are these documents that are readily available when you show up at the open house. If you're working with a great real estate agent, there'll be absolutely readily available either at the open house or with an easy inquiry afterward. Okay. Some of the basic information. What is the basic information of a Condo Association? Like what should a buyer - what are the first three things they should probably look at. So they're the publicly available documents that you want to take a look at that outline the rules and the regulations of the association. So if you have pets and the building doesn't allow pets, you want to know that upfront, but you also want to make sure that the rules are pretty standard and there's nothing completely unusual, or just incompatible with what your expectations are. That should be readily available in public records, so if how to do a correct online search, you should be able to discover that before you even take a look at the place. So, simple rules like, can I rent my unit out? Yes, that would be something that might be in the association's documents. Right? And you want to take a look at that too and think ahead. So you might want to live there for few years, but your plan might be to live there for a couple of years and then upgrade to a larger house elsewhere. And if you wanted to keep it and rent it out, that whole possibility may be foreclosed if the rules prohibit it. Right. We spoke about, short term rentals and Airbnb in a previous episode of the Real Estate Law Podcast. And one thing that you mentioned Rory is that the associations these days, all the new ones that are going up here in the city, short term rentals are pretty much excluded entirely from all condo documents as something that owners would be allowed to do, meaning they can't do it. It's getting written into these documents. Right, right. And you want to act, in some cases, you might want that restriction there for your quality of life or for your ability to sell the property. But if that's something you want, you might want to look for a place that has a different set of rules than what's standard, right? So, okay, so let's say that I look at it, a lot of properties, I found a couple of look fantastic. Maybe they don't have the, the association information right there at the open house. I can't get it online on MLS. It might be publicly available, right? You're saying that there's a record of this, but you might not get the full set of information from what's not publicly available and if you see that and you like the property, don't worry about it. You can still make an offer on it and the fast paced market, you might not have time to do other research that you can. So I recommend putting in an offer, but putting in a standard contingency on there for review of Condo docs. Now a standard contingency is only going to give you a few days to review the information so that you don't keep it off the market forever. But four or five days should be enough time to take a look at the documents and look for the red flags. Have you been in a situation, in either of your capacities as an attorney or as a broker working with a buyer where the condo association documents were not provided or where it was difficult to obtain them? That happens in about a third of the time. It happens a good amount where you're, you're working with somebody and you don't get the documents and to me that's actually the first red flag. Aside from what the documents contain, if it's very difficult to get the condominium documents from the seller, it could mean the seller is just not on top of things, but it might mean that the condo association is difficult to work with. Could it mean the association just doesn't have their stuff together? It does exactly what that could mean. Now you don't know that for sure. That's why I'm calling it a red flag. Not necessarily a reason to run, but it's a red flag that begs some further inquiry. If they, if it's very difficult to get basic information of the association, imagine when you're an owner and you need to to make a request. Maybe a yellow flag, red flag, I don't know. Yellow flag is a warning sign, right? A red flag. It's like I'm going to go running, we'll call it an orange, like an orange flag. Okay. so we've got orange flag where it might be really difficult to obtain the condo association documents saying you might want to back off from the unit. What are some other, just some basics that a buyer should do when they're evaluating those documents. Let's say that they were obtained easily. Okay. So, yes, here potential buyer. Here are the association's the Condo association documents. Please let us know if you have any questions, what might those questions be? So you first want to take a look at some obvious things that are, that might be difficult for you. If you are a smoker and you expect to smoke in your unit, and the condo documents banned smoking, that's a problem. Additionally, you might, this is a good time to retain a lawyer to take a look at the documents because I'm often going to say you want to take a look to see the documents have anything that's not standard, but unless you look at these frequently, you might not know what's unusual. And as an attorney who specializes in real estate, that's the UrbanVillage Legal side of your business, you look at these things all the time. Yes, right. Have you ever, or do you write them also? Is that something that is typical of a real estate attorney? I do and I've done it in two different capacities. One for new condo associations where the building's being converted into condos and we can create the documents as part of the condo conversion. Or, I have worked with, associations that wanted to revamp old condo docs from the 70's or 80's that takes a universal agreement and that's difficult to get. But sometimes you, you can have that if people just want to update the rules and regulations. And that might be more difficult to get also with some absentee landlords. Right? So people that maybe don't live in the state anymore, or it's been passed on to, or they're elderly folks, they're just collecting rent checks or what have you, it might be hard to kind of tackle them down. Not always. You can never predict who's going to be easy to work with and who will be difficult to work with. I seem to remember we purchased a new construction in a few years ago and , the building didn't exist prior to our buying it. So somebody wrote those condo documents like, so who would have written what, what I have on file? An attorney working for the seller or technically the declarant is the word for the person who creates a condo association. The declarant, yes. Okay. That they're not the seller. Usually they are the seller as well, but right. I have to be precise. Because you're attorney exactly. So they were like, the part of me says, just figure it out, fix it. I don't know what a declarant is. I'd actually never heard of that term before. So that's my blissful ignorance in all of this. Right. But when you're, if you're working in that situation of new construction, the condo documents might not be finalized yet. In that case, you often take a copy of the draft documents, call it Exhibit A, in the purchase and sale agreement and say these have to be the condo docs. If there are any big changes, then we have the right to back out. Okay. All right, let's move on and talk about the money side of it. the finances, because , if it's a new association, obviously this, this probably very little in the reserve, if anything, and the reserve is the account that, is how much money is in there in case something catastrophic happens or it's basically the checking account. That money you can get paid out of for paying the common bills, right? So for a new association, the finances almost don't matter because there have no bills have ever been accrued. No condo fees have ever really been set. I would almost ignore it. The only thing I would look at there is the cost of the insurance. If the insurance is extremely expensive. There's an orange flag, if you will, that the insurance underwriter doesn't believe that the building's in good condition. Otherwise for an existing association, the first thing you want to take a look at is the condo fee. That's pretty straightforward, but you want to make sure that the fee is not too high because that will become a burden on your finances while you're there, but you also want to make sure that the fee is not too low. If the fee is under what you'd expect for the area and the type of building that's an orange flag and that the building isn't saving up enough money over time, that they're cutting corners and they're trying to be cheap now. And while that's great for your monthly budget, it can explode later on if the building needs a new roof or need some project done and there's no money saved. So, I don't know how many listings I'll look at where a listing looks fantastic, the price is like, oh, that's an interesting price for that property. Then you take a look of the HOA and you're like, Whoa, they need 600 bucks a month for that property. Like, I get why there's a concierge and an elevator and a workout room and I don't know, a yoga studio upstairs and a pool outside. But that stuff requires maintenance. So, the question I guess I would ask as as a potential buyer would be, do I even need those amenities in the first place? But you obviously won't be able to take them away. So you might enjoy the amenities, I understand where places do it, but if you don't appreciate the amenities, you're going to be forced to buy effectively a gym membership to that. A gym that's part of the condo association right now. We purchased into an association with one of our vacation rental properties that was an established association that had a pretty solid reserve, but upon closing, and I might have this completely wrong and then just correct me, but was there an assessment declared before the closing that carried over into us? Or was that before the closing? What happened there? So there was an assessment for basically, repair of the septic tank that was assessed before the closing, but we were informed of it in advance and we negotiated with the seller where we would split that assessment. Okay. So we actually ended up paying for some of that during at the closing, at the closing when we paid the seller back for half of the assessment. I feel so blissfully ignorant sometimes when I just don't exactly know exactly what happened, but that's why I just say, hey Rory, can you figure this out? But that raises a good point too. You want to make sure that any additional fees are addressed in a contract. Right, exactly. Okay. So, in in the notes for what we want to talk about today you wrote down adequacy of reserves. So let's talk a little bit about what that means. First of all, let's define what the reserve is. So there are, there's very little law in the way the condo associations have to conduct themselves or operate their business. They're free to do things in a lot of different ways and a lot of small associations are going to be very informal. However, the best practice for a Condo Association is going to have separate accounts for the operating expenses and the reserve account. And the reserve account should have about 10 to 15% of the money that comes in should go into the reserve account, be held there for large projects down the line? A byproduct of having too informal of a system or too low a condo fee is that the reserves might be woefully inadequate to pay for repair. So when you're evaluating a condo association, you want to know how much money has been set aside for those projects, the reserves, in whichever way the association did it. And if that number is high, then great. If that number is low, you want to just figure out why. Maybe they just did a big project and that's why the funds are low. That's might not be a problem at all if they just redid the roof, you know a new roof doesn't have to be done for a while. So it just begs further inquiry if the reserves are too low because you, you want to avoid having a special assessment down the line. Right. Or, a situation where the reserve is low, then you close the next thing you need a new roof. And that wasn't disclosed in advance. Correct. Right. Because once you've closed, it's now your problem regardless of what the seller knew or what they said. Right. So if a new roof is needed, I mean that's probably of the due diligence in buying into the property, right? Like you might want to look at the, the age of the roof and if you were to ask a question of, have there been any roof issues lately? Like what, what, who has to say what? So often what will happen is you'll have a home inspection in that front. And then if there's a question, it'll be asked to the condo association, especially if you're working with a lender, the lender might actually be sending a questionnaire over to the condominium trustee asking for information about a recent repairs in the association or other, other factors that they consider important. But as part of your followup to the inspection, all your questions might not be directed just at the seller. Some of your questions might be directed at the Condo Association. So we're on The Real Estate Law Podcast, episode number three. We're talking about buying into a condo association. And what are some of the things that we usually think about, Let's talk about litigation and the law. So, how do you know if there is any pending litigation? How do if there has been any, is this something that needs to be disclosed by the seller or the attorney or what, like what is that situation where the law is involved? So you have a few questions rolled into there at one, a all in one, but let's unpack all those. So where should we start? I'll start with the fact that Massachusetts is a nondisclosure state. So the seller doesn't have to provide you any of this information. There's no mandatory property condition disclosure that needs to be sent to you. The seller doesn't necessarily even need to answer your questions, but they just can't cover up problems or lie to you. But I would start by, if you're concerned about litigation or any legal trouble that the condo association has been in, the first thing I would do is ask. If don't get an answer or if you get an answer, you're not happy with from the cellar, ask the Condo Association and regardless of the answers you get, you want to verify it because litigation is a, that's more than an orange flag. That's a red flag that there are, that there is trouble going. And if the you find litigation, you want to know what it's about, what's going on and whether or not you want to be party to this. And that's where UrbanVillage Legal could actually stand to make some money on the side because that's when you get hired that well, unfortunately, yes. If there's, if there's, if there's a problem with the association, you are basically buying a position in an exist in existing lawsuit. So, sometimes these things are explained away. There was a famous, luxury condominium complex in Charlestown that had a longstanding lawsuit against them arena next door. That might not have been a reason to run from the Condo Association there, but you just want to know what's going on and what you're getting yourself into. So is this a larger association in Charlestown? That particular one is, yes. So would people, people would kind of still and go and buy and sell properties knowing that this, this litigation was pending and they were just bought basically the understand that going into it? Yes. Yeah. Was this like a multiyear thing? Yes. Okay. What are some examples of some reasons that maybe you've been to court with an association or on behalf of an association? Like obviously, don't, don't say exactly what the situation was like with names and everything, but , like, just give a general overview as to what might've landed one of your clients in court or while you were brought in. Far and away the most common condominium litigation, is for unpaid condo fees. So if a unit owner is not paying, and they don't pay for a while and they ignore the notices and they can't reach some kind of friendly solution, it will go to court. And that's the vast majority of conduct cases are likely that. Again, that's actually a problem. If too many unit owners are not paying their fees, then that there's financial trouble for the Condo Association. so, that's a con even though that's a common type of case, it's still one to be concerned about. We've been involved in litigation going against unit owners that have had troublesome pets in the building that have caused problems for people. We've had, separate cases against, owners who are hoarders, they were causing mold and safety issues in the building. We've gone against tenants of owners who were causing real physical damage to buildings and getting into fights, and bringing police into the building and all of these things are issues that need to get resolved in the existing condo association has to pursue these. But as a buyer and you're from that perspective, you have to ask yourself whether you want to get involved with this, or if you should just continue your home search on to the next place. I mean, because it just doesn't have to be your problem. I mean, like if you fall in love with a property to the point that you're willing to deal with this, then that's one thing. But, there's always going to be another unit available that might just be easier than having this headache. Right? Yup. And, but as long as you understand what you're getting yourself into. It's almost like, those are all collectively, they're probably not rare individually. Those are probably relatively rare circumstances because in most condominiums, at least here in Boston, the majority of them operate fine, right? Yes. And you have to, you have to be on the lookout for the terrible situations, because they can ruin your enjoyment of your whole home or your investment. But the vast majority of condo associations work well. And if you can cooperate with your neighbors, you're saving money, you're splitting expenses with them. And it's been a rewarding experience wherever we've lived. So we've been fortunate. Yeah, I mean like, we can speak about just, individual and personal experience and it's just a matter of, writing checks every month and making sure they're on time and, getting together what is the rule, usually once a year at the association has to get together. So there are some soft rules in just about all kinds of documents that say they have to get together on, for example, the third Tuesday of February. Those are almost universally ignored. But yes, condo association should get together at least once a year. And if there's anything ongoing more frequently than that, I mean, I don't think that we've had an association meeting in any of our buildings that didn't involve a number of bottles of wine along with the meeting. And it wasn't to drown our sorrows. It was really just to be a kind of a collegial, neighborly thing to get together and chat about stuff. Absolutely. So, even though I see the worst of it, I'm not cautioning people against a condo associations altogether. Right, right. So a couple of final things that we should probably chat about. And by the way, a number of those cases that you mentioned, those are going to be future episodes of the real estate law podcast because you're really have to dig into some of that stuff. I mean, you just mentioned hoarders and pets and there's so many pets out there and there's so many things we'd love to keep in mind when they have pets and they're living in kind of a cohabiting situation with multiple neighbors in the same building. But hoarders I- got to hear about that. I haven't, I don't think I've heard. I don't know. I don't know how much I want to hear about it, but we'll document that in a future episode. That was a glamorous visit, I promise you. All right, so just a couple of final things. Multiple changes in property management is something that you mentioned is an item that you should be on the look out for. So what does that mean? Sure. If a condo association uses a property manager, typically larger associations will do that. It's fine if they change every once in a while and it's just a matter of business. But if they're frequent changes in the property management company that needs further inquiry, whether or not there's just an indecisiveness there, or if there are problems, I've seen property management companies multiple times fire, they're a condo association, just pull out their business because the personalities are too difficult to deal with. So I mentioned that if you see multiple changes in property management, ask why. Okay. And finally one last note that you mentioned on my show notes, here are the owner occupancy rate. So, what, what does that mean? How many units are owned, and not rent it out to other people or just are still, not on the market. So owner occupancy rate is the percentage of units that are occupied by the owners themselves. And I actually put this last because I think this is an important thing to know, but it's not the most important. I pushed back from the idea that tenants are bad occupants and bad neighbors because that's not always true, but it is still something to know about a building in a condo association because if the owner-occupancy rate is too low, it might limit your ability to sell or refinance in the future because not all loan programs allow for low owner occupancy rates of building. So if you're going to sell, it would preclude you from being able to sell to most FHA buyers, for example. So if you want to keep, if you want the place to be in good position for resale, a low owner-occupancy rate could be a problem. Yeah, I know that when we purchased our unit where we live here in Boston, it was a new construction condo and nobody had closed yet. Right. And that's a bit of a fallacy because everybody ended up closing in pretty much the same week. Right. But because we were one of the first ones to actually close, it eliminated some loan programs. Yeah. We had to do a adjustable rate loan instead of a fixed loan at the very beginning. So in that case that wasn't that big of a deal. But lots of the low down payment programs are going to exclude these types of condos. Right, right. Well, a lot to think about when you're buying into a condo association, being that you're an attorney and a broker, that's probably a big benefit to any of your clients or people that you've worked with because you probably see it from both sides. Right. As I like to say, I like to look past the pretty pictures and see what's actually going on with the real estate. Exactly. Okay. Well, Rory, really appreciate, once again, your being being a part of The Real Estate Law Podcast and this is attorney / broker Rory Gill here in Boston. And you could find him at UrbanVillageLegal.com and NextHomeTitletown.com. That's the new brokerage. Don't forget. Title Town, NextHomeTitletown.com. Excellent. Okay. Well once again, we really appreciate your listening to The Real Estate Law Podcast. You could download all episodes right now where you choose to get all your podcasts, whether it's on iTunes or Google Play or any of the podcast platforms. We really appreciate your listening. We'd love it for some feedback. So feel free to reach out directly to Rory on either of his websites, or you can check the show notes and find out a way to get a hold of both of us. And we love it if you were to give us some glowing five star reviews because then maybe we'll get some better standing on all of these podcasts platforms. So once again, this is Jason Muth and you're listening to The Real Estate Law Podcast. Goodbye, Rory. Goodbye. Thank you. Thank you.

Announcer:

This has been The Real Estate Law Podcast, because real estate is more than just pretty pictures and law goes well beyond the paperwork and courtroom arguments. We're powered by NextHome Titletown, Greater Boston's progressive real estate brokerage more at NextHomeTitletown.com. And UrbanVillage Legal, Massachusetts Real Estate Council serving savvy property owners, lenders and investors more at UrbanVillageLegal.com. Today's conversation was not legal advice, but we hope you found it entertaining and informative. Discover more at RealEstateLawPodcast.com. Thank you for listening.