Condominium Unit Buyer's Chec List & Due Diligence

During my tenure in the community association industry, I have touched in one way or another probably over 6,000 director and officer (“D&O”) Liability claims. I have sat back and thought at length what, if any, commonality there is between and amongst these claims. I have come to these conclusions and I presume that there are other community association professionals that would come up with more:

Proposed Unit Buyer’s do not do their due diligence/homework before moving into a community association. This due diligence is critical for a Unit Buyer to understand what it means to buy into a community association, and the cost benefit analysis of what they are giving up versus what they are gaining. Once you buy in, your home is still your castle, but subject to the covenants, conditions and restriction you agreed to by signing your deed, and the rules and regulations of the association. “Ignorance of what you have agreed to is not a defense!” I cease to be surprised that many Unit Buyers do not have time to do their due diligence, but they have time to fight and litigate matters for years causing the association and its insurers to incur significant amounts.
The second commonality is that many volunteer board members are very often the same Unit Buyers who did not do their due diligence. As a result, often their motivation for joining the board was to fight what they after the fact believe is not fair, or to try and change things that are in their self-interest as opposed to the best interest of the community association that is a foundation to the board member’s fiduciary obligation.
Finally, the volunteer board members often do not understand their role as a board member. This item will be an article in and of itself. At a minimum, there should be a requirement that a prospective board member should declare that they have read the governing documents and have asked any questions they may have to clarify their duties and obligations. Additionally, boards should have a mandatory annual board training. Many managements do this, but just as many, if not more do not. This can be done by their management company, local attorneys or one of the many CAI offerings you can get on line or a attend a course that CAI may make available.

A number of years ago, when my daughter and son-in-law thought about buying a condo. They presumed I would not recommend that they buy a condo. I surprised them by indicating that I had no problem with a condo. However, they must do their due diligence first! Their presumption was based on the many stories I shared with them over the years regarding association and unit owner problems, disputes and challenges, stories I could not make up. I believe, however, that 95% or more community associations in fact operate fine with minimal issues. I attribute this to my participation in CAI all around the country which exposes me to the good and not just the bad and ugly.

My daughter and son-in-law, the teaching coach and the engineer, asked me what due diligence I would recommend. The Condominium Unit Buyer’s Check List was the product of that question. The check list is equally applicable, but not limited to Cooperative Housing Corporations, Single Family HOAs, Commercial Condominiums, Townhomes and Timeshares. As a result of my daughter and son-in-law conducting their due diligence, they did not buy the condo. Specifically, the realtor and the unit owner at the 11th hour submitted a supplemental disclosure statement indicating that the tile flooring in the kitchen and the hardwood floors were installed on the second floor unit without board approval. The board would not grandfather this in, nor would the unit owner pay to have it remediated. I am curious whether the supplemental disclosure statement would have been submitted had they not pursued their due diligence.

It is my humble opinion that if 75% of Unit Buyers were to do a substantial amount of this due diligence, the potential problems and challenges would be significantly reduced. I further believe that if association boards and managers were to be asked these questions on a regular basis, this would have a very positive impact on the associations risk management. Accordingly, the Condominium Unit Buyer’s Check List is just as valuable to the association and its board. On the one hand, the check list will weed out prospective Unit Buyers who do not fit in a common interest development and on the other hand it can act as an audit check list for the association.

Condominium Unit Buyer’s Checklist

Joel Meskin

Joel W. Meskin, Esq., has been Vice President – Community Association Insurance and Risk Management, McGowan & Company, Inc., since January, 2005. McGowan & Company, Inc.,...