When an Executor or Administrator of an estate sells a probate property that has a Homeowner’s Association (“HOA”), they have a legal obligation to disclose in accordance with California HOA Disclosure Obligations. This duty is outlined in Civil Code §4525 – Disclosure to Prospective Purchaser, under the Davis-Sterling Act.
For the most part, when we think of HOAs, we think of a condominium community. However, there are many communities that have HOA that are not condominiums.
Sellers of a probate property are not exempt and have a legal obligation to disclose when selling any property with an HOA.
Risk of Selling a Probate Property with an Association
Selling a home with an HOA is not Risk-Free when it comes to California HOA Disclosure Obligations.
When selling a property in a Common Interest Development, we are selling the living space which is driven by the Purchase Agreement between the parties in the transaction. The parties in the transaction are:
There are two vastly different disclosure obligations, both of which are part of the sale.
The Quasi-Government entity, the Homeowner’s Association maintains all or portions of the structures, common areas, and recreation facilities and is not a party to the sales transaction.
Double Disclosures are required therefore we have Double Jeopardy. There are different Disclosures required for each.
- Disclosures for the Real Estate – the probate property
- Disclosures for the Business side of the Association – the Corporation
California HOA Disclosure Obligations
Who is responsible to prepare the required Business Operations disclosures in accordance with the Davis-Stirling Act?
The Association’s Board of Directors. If not compliant with the Davis Stirling Act the Board is at RISK of not fulfilling their Fiduciary Duties and meeting the HOA disclosure requirements to its members.
If Boards were smart, they would require the management company to include a disclaimer with the documents, disclaiming that the documents provided at the request of the seller, may not be complete.
Homeowner’s Associations are established as non-profit corporations. The duties of the Corporation are to Maintain, Preserve, and Enhance the property value.
Seller Duty to Disclose
The Association is not a party to the sales transaction between Buyers and Sellers and has no duty to make disclosures directly to the Buyer. That duty belongs to the Sellers.
Sellers and their real estate agents cannot mislead buyers about the association. They must fully disclose to Buyers that they are buying into a deed-restricted community with rules and regulations. The financial health of the business side of the Association, and operations, must also be disclosed.
Probate Property | Davis Sterling Act – Civil Code Section 4530
In accordance with §4530 of the Civil Code, the seller must provide to the prospective purchaser, at no cost, current copies of any documents specified by §4525 that are in the possession of the seller. This presents a high risk for non-disclosure because the documents in the sellers’ possession may not be complete or current.
Our Best Practice is for the Seller to purchase the required disclosure documents from the Association through their designated source which is typically the Management Company or third-party delivery service. It could also be a Board member.
Generally, there is little if any Quality Control of these disclosure documents by the Association’s Board of Directors, Management Company, or document delivery service.
Judging a book by its cover may lead to unintended consequences!
Sellers cannot rely solely on the documents from the Association to be fully compliant with the Davis Stirling Act. Simply delivering the documents purchased from the Association may not, and often does not, fulfill the Sellers’ duty and the requirement to disclose.
Components of the Business Operations Disclosures
The Administrative component is the day-to-day operations such as:
- collecting assessments
- preparing monthly financial reports
- contracting for services
- bill paying for common utilities, landscaping, lighting, security, recreational facilities, and upkeep.
- Establishing and enforcement of the governing documents.
The Board has the right to delegate any or all these services but cannot relieve themselves of the ultimate responsibilities or liability.
Effective January 1, 2019, the Board of Directors are required to review 6 financial documents on a monthly basis, ratify them at the next Board meeting, indicate they have read and understood them, and are knowledgeable of the financial health of the Association.
The Financial component is comprised of the Budget and the Reserves.
The Budget is comprised of income and expenses which are reported on an accrual basis. A budget must be created in order to manage the administrative duties of the association.
The Reserves are for future maintenance of the buildings, common areas, and recreational facilities. Reserve studies include a physical inspection every 3 years. The Reserves are updated annually to reflect any changes in the life expectancy of each component or costs associated with repairs or replacement. The financial accounting is required to be reported on the Accrual Basis, Not Cash Flow.
Risks of Seller’s Non-Disclosure
Sellers are at risk of non-disclosure if the disclosure package provided is not compliant with the Davis-Stirling Act. A Seller needs to complete their due diligence and review the disclosure documents. Most sellers would not know if the disclosures are complete or in compliance with the Davis-Sterling Act unless they are well-versed in the 2020 condominium blue book.
Our Best practice is for the seller to hire a qualified professional to conduct a 4525 Real Estate Transaction Sellers Disclosure – Davis-Stirling Common Development Act Title 6 Review in compliance with David-Stirling rules.
This review verifies that disclosures have fulfilled the Seller’s disclosure obligations. It includes a review of the business operations, notes regarding what is not in compliance, and why it is not in compliance.
REQUIRED DOCUMENTS UNDER CIVIL CODE 4525
List for the Year 2020
GOVERNING DOCUMENTS INCLUDE
- HOA Articles of Incorporation – Verified Status with the Secretary of State – Active, SUSPENDED
- Bylaws amendments
- CC&R’s, CC&R amendments
- Operating Rules & Regulations
FINANCIAL DOCUMENTS INCLUDE
- Budget Package in accordance with Civil Code 5300
- Assessments – Monthly, Quarterly, Yearly
- Assessment Reserve Funding Disclosure
- Reserve Study with Physical Inspection Done within the past 3 years
- Annual Policy Statement Civil code 5310
- Budget Package in accordance with Civil Code 5300
- CPA Year-End Review ($75,000 of income)
- Annual Report (HOA with $10,000 to $75,000)
- Current Balance Sheet (Not Required)
- Operating Rules
- Age restrictions
- Rental restrictions
- Litigation statement
- Minutes for the past 12 months (upon request)
- Governing Document, violations, fines, or penalties Clearance (Estoppel Notice)
- Maintenance work of the exterior that needs to be done prior to closing
Probate Property Value with an HOA
A probate property sale may be the most valuable asset in an estate. Executors and Administrators have a fiduciary duty to act prudently with a high standard of care.
Sellers must understand they are selling a probate property with a Multi-Million Dollar Corporation.
There are two separate values to be considered when selling a property.
- Association’s Business Value is based on the costs of operations and the value of the Reserves for future maintenance.
- Market Value is based on recent sales in the community and/or other similar properties.
Sellers are required to disclose the financial health of the Business Operations of their Homeowners Association expressed in Dollars as well as the corresponding percentages.
As an example, reporting might look like this: $4,622,222.00 equates to 57.49% funded.
Calculated as follows: The amount required to be fully funded, less what is currently in the reserves, divided by the number of units, equals the percentage funded.
- 00 – 30% expect frequent and significant special assessments
- 31 – 69% expect significant increases in monthly assessments and special assessments
- 70 – 100% considered financially strong and special assessments should be rare
The major concern for both the Sellers and Buyers is the Financial Health of the Association. Deficits may affect the value of the property and may become negotiable between the Sellers and the Buyers.
From the Business Operations perspective, the Value of the Property is related to the value of the Reserves on hand.
The concept is that the Owners pay their fair share of the usage during the time they own the property. Any deficit in the reserve funding will pass to the Buyers unless it is negotiated when the property is sold.
California HOA Disclosure Obligations Process
The executor or administrator is well advised to hire an experienced, trained, and certified probate real estate agent specializing in probate property sales and the HOA compliance process! The real estate agent should understand the probate process and know:
- Is the real estate seller required to disclose HOA Bylaws? Based on the required governing documents, the answer is Yes.
- What happens if the seller didn’t disclose the HOA violation?
- When to order HOA resale documents.
- How to complete the request for the HOA disclosure form.
Once the documents are received order a Compliance Review.
This review verifies the probate property disclosures fulfilled the Seller’s disclosure obligations under the Davis-Sterling Act. It includes a complete review of California HOA disclosure obligations indicating what is not in compliance, and why it is not in compliance.