Purchasers

Alabama is a dangerous place to purchase real estate. Is your REALTOR® well trained.

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Purchasers

Be Sure Your Agent Is Well Trained On HOA's

Purchasing real estate governed by a Homeowners Association in Alabama has been jokingly compared to purchasing in the Wild, Wild West. Why? Below are just a few of the problems you can run into...most often AFTER you purchase because "you didn't know what you didn't know", and neither did your Agent.

Some of the issues which may arise as a result of Declarant-controlled HOA Boards are:

HOA funds may be comingled with the Declarant's accounts.
Decisions requiring expenditures may often be made without the benefit of a Board decision and recorded meeting minutes.
Descriptive receipts for expenditures may not be maintained; this can open the door to using HOA funds for maintenance of property still in development, and even include sales related expenses for things such as cell phones, gasoline, tools, travel, professional association dues, sales meetings, or other such expenses that may not normally be associated with the proper management of an HOA.
As mentioned earlier, HOA dues waivers may be granted to builders as purchase incentives with owners underwriting lost HOA income for the benefit of the Declarant and Builder. Individuals who purchase building lots may not generally be afforded the same incentive. They are generally required to pay HOA dues from the date of closing on their lot. Authority may be based on CCRs, or as approved by the Declarant or its appointed Board, but clearly outside of fiduciary responsibilities.
Property designated or represented as “Common Property” may not be transferred to the HOA for years, if at all. CCRs often make transfer to the HOA an “option”; however, few homeowners realize this. In one instance, the Declarant of a large local community has not transferred property represented as “Common Property” after more than 10 years, though the HOA pays to maintain it and the Declarant status has generally expired. The definition of "Common Property" can be elusive from property owned by the association to property designated for use of owners, with no real guarantees of eventual ownership. It could be mortgaged or even lost in a foreclosure of legal settlement.
Without full disclosure, HOA accounts can be used as a “Cash Cow” and possibly misappropriated with little or no accountability, a particular concern before the transition of the association from the Declarant to the homeowners.
Homeowners, prospective purchasers and Agents who ask pointed questions trying to do their due diligence are often met with resistance, threats or simply dismissed. One REALTOR® reported when performing due diligence for a client at a large local community that the Declarant threatened her saying, “If you keep this up, I’ll see you never work again in this town”.
Liability and Directors and Officers insurance may be difficult to obtain, not reasonably available, or much more costly for communities where the Declarant maintains control or a position on the HOA Board and/or where Common Property remains in Declarant’s name.
As previously mentioned, funds and/or facilities that remain in the name of the for-profit Declarant can be lost due to insolvency or litigation. Funds and facilities should be transferred to the HOA at its inception. This should not be a concern to the Declarant since they continue to maintain control of funds and property until transition has been completed. After all, this is Alabama where conflict of interest is ignored. Homeowners should not have to face the threat of having to re-purchase property if it is lost in foreclosure or litigation which was represented as part of an amenities package built into the initial cost of their home.
Economic conditions leading to changes of ownership can result in the transfer of Declarant powers, or the “Passage of the Crown”. One consequence of the transfer of rights can be the debasement of the CCRs which are established in part to insure the continuity of a common architectural theme so there is not a “patchwork” of home styles and home values in the community. Another consequence can be the degradation of restrictions in the community regarding aesthetics, landscaping and maintenance. Depending on how radical the change, existing property values can be reduced. CCR variances, amendments and lack of enforcement can occur without HOA homeowner member vote or recorded explanation when a Declarant is in control.
This lack of protective legislation, coupled with poor economic conditions and feelings of skepticism, mistrust and betrayal toward Declarants, has created a “perfect storm” for change which needs to be readdressed given the weak content of the current HOA Act. To ensure all purchasers make informed decisions, and Realtors® can present honest and complete information to their clients about properties, change must occur. But, past history has shown the ability of special interest groups to thwart effective change.

This is certainly not to imply that all Declarants engage in questionable or nefarious practices. There are many who do an excellent job from the outset all the way through transition. Although some demonstrate through their actions that they clearly have the best interests of the community at heart, and readily participate in fair practices, exhibit cooperation and transparency and gain the trust of purchasers and homeowners, there are no standards or consistency requiring the same from others in the industry. Alabama lawmakers have been complicit in allowing a weak nonprofit code to stand and the Real Estate Commission, Local Boards and Multiple Listing Services (MLS) have failed to require and provide appropriate member training.

To be fair, purchasers and homeowners are partially at fault. Most are far too trusting, do not read their CCRs; they do not ask questions or investigate “the state of the HOA” prior to making a purchase. Purchasers are more often focused on "The Pretty Package": curb appeal, location, schools, and nearby amenities. They are also often uneducated and gullible with regard to Alabama laws. In real estate, any oral agreements are generally unenforceable and should not be part of the decision-making process. One new homeowner in a large HOA community noted: "I thought Alabama consumer protection laws protected me when I bought this house". I have purchased homes in other states and the buying and selling process is strictly controlled".

They rely on their licensed, professional Agent.

The ultimate risk to homeowners is when a community becomes disrupted as a result of rumors of mismanagement or abusive practices. The outcome is often anger, damaged reputations, impeded sales and even litigation. A community can sometimes become stigmatized or toxic, further reducing property values.

Unhappy homeowners may begin to associate risk not only with the Declarant, or inept and untrained homeowner Board, but also with their REALTOR® with whom they had a fiduciary relationship through a Buyer Agency agreement. Remember, "The mission and vision of the Alabama Real Estate Commission is to serve the public through the licensing and regulating of real estate licensees and insure public confidence in real estate transactions".

Also very troubling is that the Alabama Commission has no jurisdiction over HOAs or their management. HOA Managers are popping up all over and there is no regulation or oversight over their activities as well. Since there are no substantial, mandated HOA disclosure laws in Alabama, the challenge for the Agent is in obtaining and presenting information that has the potential to adversely affect a purchaser’s decision to buy. There is often a complete lack of cooperation on the part of Declarant, builders and even homeowner-managed HOAs. Homeowner controlled Boards share the same level of responsibility for disclosure and accountability as those that have not transitioned. Agents sometimes must simply fend for themselves. But this does not mitigate their responsibility or lessen personal and professional exposure and accountability.

As previously stated, fueling these problems in Alabama is the lack of consumer protection and community management oversight. Until Alabama enacts comprehensive real estate-specific consumer protection laws (with particular focus on Community Association disclosure, management and accountability of funds) similar to those afforded by other states, Purchasers and Realtors are left to fend for themselves.

Use a Safety Net

You can make your offer contingent upon receiving and approving material information before you are committed to purchase (DRAFT Purchase Addendum under Links).

If the agent or seller says "NO", Just say, "NEXT".