A homeowners association (HOA) is a subdivision organization that creates and enforces rules relating to properties within its control. Generally, when a property is purchased within an HOA, the property owner and the property automatically become a member of the HOA and are required to regularly pay fees.
While HOAs are often incorporated and are subject to those related laws, HOAs are not regulated under Wis. Stat. Chap. 703 as condominiums and, therefore, HOAs are not impacted by the obligations of that Wisconsin statute. However, a common misconception is that HOA documents are required to meet the same deadlines and statutory requirement of condominiums.
HOAs can have a great legal impact on the property and the property owner’s rights and, therefore, a buyer must take great care to understand any obligations, limitations, fees or the like when considering purchasing a property in an HOA. The rules and regulations of HOAs are often included in a document referred to as a covenant, conditions and restrictions, sometimes referred to as CC&Rs, or subdivision covenants or deed restrictions.
For illustration, a buyer wishes to place a wooden fence on the property after closing. Upon reading the covenants, the buyer may learn the covenants allow a fence but only a specific black metal fence, which may be cost-prohibitive for the buyer or visually displeasing. If the buyer included such a provision into his or her offer to purchase, the buyer may be able to walk away from the transaction.
When confronted with the knowledge of an HOA, in addition to reading the subdivision covenants, conditions and restrictions prior to writing the offer, the buyer may also consider including a contingency that allows the buyer to obtain permission from the necessary HOA authorities as a condition of the offer, and if the buyer cannot, then he or she is not obligated to purchase the property.
Further, the offer could also be drafted with the sample language below to include a contingency similar to the condominium disclosure documents — see lines 204-246 of the WB-14 Residential Condominium Offer to Purchase — allowing the buyer to review the subdivision covenants, conditions and restrictions within a certain amount of time and then have a right to rescind within a certain number of business days as well.
Seller agrees to provide Buyer with any homeowners’ association restrictions, covenants, rules or other documents that limit or restrict ownership or use of the Property. Seller is required to provide Buyer with these materials within 10 days of acceptance of this Offer. Buyer may within 5 business days of receipt of the documents rescind this Offer by written notice delivered to Seller. If Buyer timely rescinds this Offer under this provision, Buyer is entitled to the return of any earnest money. 5 business days begin upon the earlier or (1) Buyer’s Actual Receipt of the documents or (2) upon the deadline for Seller’s delivery of the document.
No matter the buyer’s objective as to what he or she would like to do with the property, the REALTOR® should encourage the buyer to look over the covenants to ensure the buyer is aware of all the rules and restrictions and potentially to direct the REALTOR® on how to draft the contingency.
Cori Lamont is Director of Corporate and Regulatory Affairs for the WRA.
Resources
For more details about HOAs, see the following resources available from the National Association of REALTORS®: