Steer clear of dysfunctional complexes: Here’s how

Question: I’m a real estate agent, and my wife and I entered into escrow on a town house in an 18-unit complex. Knowing what items I’m supposed to receive from the homeowners association before we complete the deal, I asked the president for the necessary information. She told me there is no board, no minutes, no meetings, no reserves, no CC&Rs; and nobody cares. I was taken aback to hear, according to the management company, that most of the owners don’t pay dues, the association is around $18,000 in arrears and there are four units in bank-related foreclosures. We canceled the purchase and got our deposit back but want to avoid this pitfall in the future. How do we find out who’s in charge of this complex? How do buyers find out about situations like these before they buy? Is there some entity that finds out about this total lack of adherence to the rules and then does something about it?

Answer: Most homeowners associations are incorporated as nonprofit mutual benefit corporations and are required by law to file a statement listing the association’s officers and directors. The information contained in those reports can be obtained by accessing the California secretary of State website at sos.ca.gov and clicking on the “Business Entities” link and going to “California Business Search.” Unfortunately, many associations fail to keep this information current.

The association, made up of all titleholders, is in charge. The original concept of self-governance for associations meant owners could make decisions and manage their own property without management companies and advisors. Because the association is self-managed, the owners elect a board of directors, which is presumed to be responsible for acting in the best interests of the owners and the project. As elected officials, board members are ultimately responsible for day-to-day operations. It is the board’s duty to abide by the law, including conducting board meetings and adhering to the Davis-Stirling Common Interest Development Open Meeting Act.

All titleholders are supposed to receive notice of every such meeting unless the date, time and place are contained in the association’s bylaws. Titleholders also must receive an agenda at least four days in advance of any meeting. The board is obligated to publish minutes of those meetings and make them available to homeowners who request them.

Because residential deed-restricted property sales are typically considered to be private property purchases, there is no entity per se that monitors homeowners association compliance with the law or enforces such adherence.

Buyers are responsible for performing their own due diligence before entering into the purchase of deed-restricted property in a common interest development. The Davis-Stirling Act requires that the seller provide potential buyers with certain documents. The seller requests those documents from the board of directors, and the association must provide them within 10 days of the request. The required documents are listed in California Civil Code Section 1368 and include the declaration of covenants, conditions and restrictions (CC&Rs;), operating rules, articles of incorporation (or a statement from an authorized representative that the association is not incorporated), the pro forma operating budget, a summary of the association’s reserves (if they exist) and other documents referenced therein.

Any person or entity that willfully violates Civil Code Section 1368(d) is liable to the purchaser for damages and civil penalties. In an action to enforce this liability, the prevailing party shall be awarded reasonable attorney’s fees. This process is meant to ensure that potential buyers receive the documents -- it does not ensure the documents are accurate or that they have been or will be enforced. The buyer must decide whether to take the risk of buying the unit.

Uncovering a dysfunctional association may be difficult, but it’s not impossible. Buyers should check the index in the local county courthouse to see if the association is suing any of its members or whether the association itself has been sued. Also be certain to check the local county recorder files for potential foreclosures in the common interest development where you wish to purchase.

Although they may appear helpful, statements made by management company employees about the association to potential buyers may be a breach of loyalty to their employer, the association. Such statements also may subject the association to liability. Keep in mind that any titleholder can sue to force the association to collect unpaid dues and to enforce the CC&Rs.;

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Send questions to P.O. Box 11843, Marina del Rey, CA 90295 or e-mail noexit@mindspring.com.