New Washington Laws Affect Private Transfer Fees, Resale Certificate Charges, and Reserve Study Obligations

Effective April 13, 2011, a new section restricting private transfer fee obligations (“PTFOs”) was added to Title 64 of the Revised Code of Washington. A PTFO is a provision in a declaration or covenant that requires money to be paid to the association when a unit or lot is sold. The new law states that PTFOs recorded on or after April 13, 2011 are not binding or enforceable. It goes on to state that PTFOs recorded before April 13, 2011 are not presumed to be valid and that they will become unenforceable on December 31, 2011 unless the associations that benefit from them record documents containing certain notices before that date. Fortunately, transfer-related assessments payable to community associations in accordance with the state laws that govern them (such as resale certificate preparation fees and priority liens for delinquent assessments) are exempt from this new law and can still be collected in connection with transfers of ownership.

Effective July 22, 2011, the Washington Condominium Act will allow condominium associations to charge up to $275 to prepare resale certificates. The previous limit for this service was $150. To learn more about the obligation to provide resale certificates, please review my previous post on that subject.

Effective January 1, 2012, the Washington Condominium Act and Washington Homeowners’ Associations Act will contain a number of new provisions relating to reserve studies and accounts. Two of the changes affecting condominium associations deserve special mention. First, those associations are now only required to prepare and update reserve studies if this does not pose an unreasonable hardship and if the current total cost of major maintenance, repair, and replacement of reserve components is fifty percent or more of the gross budget of the association, excluding reserve account funds. Second, condominium associations are now required to make certain disclosures about reserve studies and accounts as part of the budget summaries they provide to owners.

This third law also imposes new requirements on Washington homeowners associations to prepare and update reserve studies and to make certain disclosures about reserve studies and accounts as part of the budget summaries they provide to owners. However, such associations are exempt from those requirements if: 1) the cost of the reserve study exceeds five percent of the association’s annual budget, 2) the current replacement value of the major reserve components is less than seventy-five percent of the gross budget of the association, excluding reserve account funds, or 3) there are ten or fewer homes in the association. To learn more about reserve-related obligations, please review my previous post on that subject.

Community association boards should keep in mind that the laws governing them will change from time to time. Establishing a relationship with a lawyer who focuses on representing Washington condominium and homeowners associations can help to ensure that your association fulfills its legal duties.

Evaluating Condominiums from the Buyer’s Perspective

The March edition of the King County Bar Bulletin includes an article written by yours truly. The article focuses on helping prospective condominium buyers make more informed decisions. Board members may find the overview of resale certificates and reserve studies to be useful, and the article may also cause them to view their associations from a different angle. Without further ado, the text of the article appears below.

The origins of the condominium concept stretch back two thousand years to the Roman empire. Condominiums involve individual ownership of units (living spaces) and joint ownership of common areas (such as siding, roofs, and recreational areas). This form of ownership is currently popular with individuals on either end of the adult age spectrum because condominiums are generally less expensive than single-family homes, allow people to live in more desirable areas, and greatly reduce owners’ direct role in maintenance and repair work.

Persons interested in buying a condominium unit should conduct a thorough inquiry to make sure that they understand what kind of community they are joining and what their obligations will be once they are a member of that community. Condominium owners are responsible for common expenses and must comply with the restrictions contained in the association’s governing documents. It is therefore important for potential purchasers to evaluate a condominium association’s financial health and the types of rules that it expects owners to follow.

People considering condominiums should know how to spot warning signs that this is not the place to call home. Paying close attention to four key R’s - resale certificates, reserves, records, and residents - can help buyers make the best choices and savor condominium life.

Resale Certificates

A resale certificate must be given to a prospective purchaser of a condominium unit. The owner of the unit is legally obligated to provide such a document before the sale. An officer or agent of the condominium association is legally required to sign that document based upon actual knowledge.

Resale certificates contain a plethora of useful information. If delinquent assessments are owed by the current owner, this must be disclosed. If repair work is anticipated that will cost more than 5% of the annual budget, this must be disclosed. If any alteration or improvement of the unit or limited common area violates the declaration, this must be disclosed. A statement of the association’s reserves must be disclosed, along with financial statements, balance sheets, and operating budgets. It is important to review historical financial data as well as current reports. A reserve study must be provided or a mandatory disclosure about the lack of a reserve study must be given. Most importantly, a copy of the declaration, bylaws, and rules must be provided. These governing documents contain the rules by which a condominium buyer must live.

One broad entitlement to information in resale certificates that should not be overlooked is “any other information reasonably requested by mortgagees of prospective purchasers of units.” The Act states that information typically requested by entities like the federal national mortgage association and the department of housing and urban development is reasonable (and therefore discoverable in a resale certificate) if it is reasonably available to the association. Fannie Mae and HUD have recently begun requesting much more information about condominium associations, including owner occupancy rates and delinquency rates. Obtaining this type of information can help prospective purchasers make informed decisions.

Reserve Studies

Reserve studies have been legally required for most Washington condominium associations since June 12, 2008. If funded, reserve studies ensure that major common expenses will be collected in small increments over time. The alternative is paying for major repairs with loans and/or special assessments, and that approach tends to result in foreclosures and strife. Associations that have not obtained reserve studies pose an increased risk of financial disruption that should be taken into account when condominium shopping. Any potential buyer of a condominium unit should find out if the association in question has its financial life in order.

A closely related issue is the amount of money that is in an association’s reserve account. Washington law does not require condominium associations to place any money in reserve accounts. As a result, some associations have a reserve study but have not set aside enough funds to fully or even mostly fund the expenses described in that study. This raises the risk of a future special assessment on the owners to make up the difference.

Records

Association records reflect important events in the life of a condominium. Minutes of the meetings of the board and the owners provide a particularly revealing window into the affairs of an association. It is prudent to obtain and review (at some length) the association’s governing documents and meeting minutes before pulling the trigger on a transaction. This can help identify sources of future conflict.

The governing documents of a condominium are usually long and difficult to understand, but taking the time to evaluate their contents can prevent major headaches down the road. A few associations ban smoking in units and/or the common areas. Some associations ban pets or place severe restrictions on their behavior. Some associations restrict the ability of owners to lease their units or run businesses out of them. Most associations limit what can be placed on windows, doors, and porches to preserve a uniform exterior appearance. Almost all associations have the general authority to punish behavior that an owner’s neighbors reasonably find annoying, and this can lead to heated disputes over noise and odors. The severity of fines for violations of the governing documents varies greatly. If people want to live in a condominium, they must be willing to subject themselves to the restrictions contained in the governing documents and the board’s reasonable elaborations on those restrictions.

Residents

Perhaps the most overlooked method to learn about a condominium is to speak with residents. Conversations with several board members and several other owners can provide a glimpse of the challenges facing the association and the general philosophy of those in power. This is often a valuable way to discover what life is like in that community.

Assessing condominiums’ strengths and weaknesses is difficult and time-consuming work, and many people seek out professionals that can guide them through this process. In light of the misery that can ensue if the wrong choice is made, this is time and money well spent.

Resale Certificates - Provide a Proper Preview

According to the Washington Condominium Act, a prospective purchaser of a condominium unit must receive a resale certificate from the owner of that unit before the sale closes. The condominium association is required to provide the owner with a signed resale certificate within 10 days of each request, and it is allowed to charge a fee of up to $150 for this service. An officer or agent of the association must sign that document based upon actual knowledge.

Resale certificates provide a prospective buyer with a snapshot of the association in general and the unit in particular. If delinquent assessments are owed by the current owner, this must be disclosed. If significant repair work that will cost more than 5% of the annual budget is anticipated, this must be disclosed. If any alteration or improvement of the unit or limited common area violates the declaration, this must be disclosed. A statement of the association’s reserves must be disclosed, along with financial statements, balance sheets, and operating budgets. A reserve study must be provided or a mandatory disclosure about the lack of a reserve study must be given. A copy of the declaration, bylaws, and rules must be provided as well.

One broad entitlement to information in resale certificates is “any other information reasonably requested by mortgagees of prospective purchasers of units.” The Act states that information typically requested by entities like the federal national mortgage association and the department of housing and urban development is discoverable in a resale certificate if it is reasonably available to the association. Fannie Mae and HUD have recently begun requesting more information about condominiums, including owner occupancy rates and delinquency rates, so this information may need to be provided.

Associations should take their legal obligations to prospective purchasers seriously and err on the side of disclosure when completing resale certificates. A useful rule of thumb is: "If I was considering buying this unit, would I want to know about this?" Boards do not want to get involved in lawsuits seeking damages caused by inadequate resale certificates.