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Additional Considerations When Buying Certain Kinds of Homes or When Using “Creative” Types of Financing

photo_coverBig Mistake #20: Failing to Obtain Adequate Advice when Buying Special Types of Properties or when Becoming Involved in Unusual or Uncommon Financing or Purchase Plans

There are many special issues to consider when you contemplate buying a condominium, a co-op or any type of home subject to a homeowners’ association or property owners’ association.

Buying A Condominium Home. Each state separately regulates the sale of condominiums in that state. Although there are many similarities in the applicable laws and regulations of the various jurisdictions, there are also many significant differences. It is important to know the applicable law and regulations that govern your transaction.

It is also important to distinguish between the situation in which you buy a condominium from the developer versus the situation in which you buy a previously owned condominium unit from someone other than the developer because your legal rights as a purchaser are significantly different in these two types of transactions.

When you buy a condominium unit from a developer who has newly constructed or converted a condominium project, the law requires the developer to give you a comprehensive disclosure document called a “Public Offering Statement” which is supposed to disclose to you all of the material facts which a purchaser might want to know in deciding whether or not to buy a condominium unit in that project. Also, when you buy from a developer, the law allows you several days to review the Public Offering Statement and decide whether or not you want to cancel the contract.

When you buy a condominium unit from a previous owner other than the developer, you also get a disclosure package from the seller but it is not nearly as comprehensive and informative as the Public Offering Statement given with the original sale from the developer. (If you can get a copy of the POS given with the original sale, do so. They usually contain a lot of valuable information about the project.) Also, unless the contract or the law of the local jurisdiction provides for it, you do not automatically get any “cooling off period” or right of rescission after you sign a resale contract and receive the resale disclosure documents.

The large number of differences between the laws and regulations applicable to new and resale condominium units, the variations among the laws and regulations of each state and the fact that all of these laws and regulations are constantly subject to changes, make it impractical to attempt to discuss all the variations in this Guide. Consequently, whenever you consider buying a condominium home, if you are not already familiar with the applicable laws and regulations of the jurisdiction in which that condominium is located, you should retain a knowledgeable real estate attorney who is.

Anyone buying a condominium unit also needs to understand that he is buying into a little governmental system that is going to have a considerable impact on the use and enjoyment of his condominium unit. When you buy a condominium, you automatically become a member of the unit owners’ association that governs that condominium. This association has broad responsibilities and powers with respect to the management and operation of the condominium project, as a whole, as well as the way in which you are allowed to use and enjoy your own individual unit. Just as you need to evaluate the neighborhood and the sticks and bricks in any home you buy, condominium or otherwise, you must take special pains to evaluate the quality of the association management for any condominium you are thinking of buying.

As a practical matter, a prospective condominium purchaser cannot afford to hire all of the expertise required to evaluate fully every single aspect of the condominium documents and the management of the condominium that he is considering buying into. There are, however, some basic things that you can do to protect yourself from making a “Big Mistake.”

First of all, an experienced condominium attorney can take a fairly quick look at the Public Offering Statement (or the resale disclosure documents if you are buying from a previous owner) and flag any obvious problems. In addition, a knowledgeable attorney can identify for you certain areas which you can (and should) inquire into further yourself. If the attorney has a regular practice in condominium law, she may even have some prior knowledge of the particular condominium you are considering.

If you don’t do anything else when you consider buying a condominium unit, you should at least read some of the minutes of the meetings of the association (assuming, of course, that the condominium has been in existence long enough to have had meetings). For example, look at the minutes of the last two annual meetings. Also, read the minutes of the board of the association for the last year. Typically, the board will meet once a month. It is required to keep minutes of its meetings. If there are any significant problems at the condominium, they will usually show up in the minutes of the meetings of the board and/or the annual meeting of all the unit owners. Here again, however, remember to distinguish between associations which are still under the developer’s control versus associations which have been turned over to the individual unit owners. It is not likely that you will find minutes of association or board meetings that reveal significant problems as long as the association is under the control of the developer.

Incidentally, if you do buy a condominium unit, don’t forget to get your own separate hazard insurance policy in addition to the comprehensive master policy that the condominium has on the building, itself. Your insurance agent can explain to you the differences in coverage between the master policy and an individual condominium unit owners’ policy. They are significantly different and separate coverage for you as a unit owner is important.

Buying a Co-op. In some ways, co-ops are similar to condominiums in that they typically involve multi-unit buildings owned by many different individuals. Legally, however, co-ops are vastly different from condominiums in the way they are created, owned and operated.

In a condominium, a unit owner owns her individual unit and is a tenant in common with all the other individual unit owners with respect to their joint ownership of the common elements of the condominium (see the discussion of condominiums above). Thus, in a condominium, the unit owner is a direct owner of the real estate. In a co-op, each owner owns stock in a corporation (which owns the real estate) and leases his unit from the corporate owner.

Because the legal framework of co-ops is very complex and because there are so few of them in most areas, it is often difficult to find an attorney with the experience and expertise necessary to properly evaluate whether or not to buy into a co-op. Nevertheless, a purchaser would be well advised to make the effort to find someone with adequate experience and expertise whenever the purchase of an interest in a co-op is contemplated. Naturally, the need for this expertise is very important at the contract stage and even more important at the time of settlement due to the complex nature of co-ops and the ease with which mistakes can be made in properly conveying good title.

Property Owners’ Associations. In its broadest sense, this term would include the governing associations for subdivisions, planned unit developments and the like as well as condominium unit owners’ associations (by whatever name they are called, such as “council of co-owners,” “condominium association,” “homeowners’ association,” etc.), co-op associations (by whatever name they are called) and all other similar types of associations which provide a governing body for a group of people who have ownership interests in common property which is subject to the rules of that association.

In any situation in which a property owners’ association is involved, it is important for a purchaser to understand that she will become subject to the rules and regulations that may be adopted by that organization from time to time as well as the more permanent covenants and regulations that may be made part of the master deed or declaration that is recorded in the land records.

Purchasers are often surprised, sometimes unpleasantly, when they realize the extent to which these associations can regulate the use of their individually owned property. Consequently, it is important for a purchaser to be alert to the possibility that the home she is contemplating purchasing may be covered not only by covenants and regulations reflected in the land records but also by rules and regulations of any property owners’ association that has any authority to regulate the use of that home or any other uses of other property in the neighborhood.

In many ways, the existence of a property owners’ association may enhance the value of a home. Typically, property owners’ associations exist in situations where there are common area amenities like tennis courts, swimming pools, open areas for recreation, bike paths, picnics, etc. The governing associations usually have responsibility for maintaining these common areas. Thus, the homeowner can enjoy the economies of scale that they provide and have the use of facilities that each homeowner, individually, probably could not afford. On the other hand, anyone buying a property subject to regulation by a property owners’ association should understand that a certain measure of independence will have to be sacrificed to the decisions (and, sometimes, the personal whims) of a majority of her neighbors.

The recent spate of litigation seeking to obtain judicial recognition (or expansion) of the rights of minority voices in property owners’ associations has demonstrated that community living is not for everyone. If your tastes or preferences tend to be somewhat out of the mainstream and you expect that those tastes or preferences might be reflected in the ways in which you might want to use your property (for example, by the unusual color or texture of the exterior of your home or by erecting a large satellite reception dish in your yard), you would be well advised to get and review carefully those recorded covenants and the rules and regulations of the property owners’ association before you commit yourself to buying a home that may be subject to unacceptable limitations on its use.

“Creative Financing” Plans. There are many “creative financing” plans that are sometimes used to finance the purchase of a home. Contracts for deeds (land contracts), Section 1031 exchanges, leases with options to buy, equity sharing arrangements, wrap-around financing and purchases “subject to” existing financing are all useful techniques under certain circumstances. However, it requires a sophisticated analysis of the risks and rewards of each method in light of your particular circumstances to determine whether or not such a plan would be right for you in any given instance. Such unusual techniques almost invariably involve increased risks to buyer or seller or both and it is usually the party who is better represented who is successful in shifting most of the risks to the other party or parties.

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