“Documenting the Deal: Buying, Selling, and Refinancing in a Community Association” – KSN attorney Omar Malik discusses the different types of documents associated in buying, selling, or refinancing a home or unit in a condominium, homeowner, or townhome community association.
Omar reviews closing requirements, disclosures, paid assessment letters, lender questionnaires, and more. (20 mins.)
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Nikki: You’re listening to the KSN podcast and today we’re talking about buying and selling within a community association. Welcome to the KSN podcast where you’ll hear from KSN attorneys as they share their experience and insight on legal issues surrounding community associations, collections, property tax appeals, and landlord tenant law. I’m Nikki and today we’re joined by KSN attorney Omar Malik. Omar practices condominium, townhome, and homeowner association law, and has a background as a litigator. Hi Omar. Welcome back to the podcast.
Omar: Hi, Nikki. Great to be here
Nikki: Today, we are going to discuss a few different topics pertaining to buying and selling within association; lender questionnaires, paid assessment letters, and 22.1 disclosures
Omar: Buying and selling in an association is different from state to state. So, we get a lot of questions about this particular aspect, because whether you live in a condo association or homeowners association, you’re inevitably going to deal with owners who are buying and selling within that association. So many states have distinct disclosure laws that mandated sellers inform prospective purchasers about the home or the unit they’re buying within an association. These disclosures can include a variety of information and paperwork that outline the Association’s leasing restrictions, rules, regulations, and other items. To give you an example of a couple of different states and how they differ in Illinois under section 22.1A of the Illinois condominium property act, it describes the information that the unit owner must obtain from the board for inspection by a prospective purchaser upon demand in the event of a resale of a condominium unit by unit owner, other than the developer.
Omar: In contrast, for example in Wisconsin, under Wisconsin statute, section 703.33, the association is required to provide an executive summary, quote, setting forth in clear plain language, unquote, information addressing several community issues, including parking, special amenities and the rental of units. Along with these state mandated disclosures, lender questionnaires and paid assessment letters can also be a part of a real estate sale or refinance within a community association.
Nikki: So, Omar starting with lender questionnaires today, what exactly is a lender questionnaire?
Omar: Good question. So, in order to meet borrowing eligibility requirements, some lenders will require potential buyers to obtain a lender questionnaire covering information beyond the state mandated disclosures we just talked about. Some of these questions can be included in a lender specific questionnaire. These questionnaires are often very lengthy documents. Traditionally, I see them being 70 plus questions, and unfortunately there’s not a standard form that’s used by all lenders. So you may get a similar, but not exactly identical list of 70 plus questions depending on who the lender involved is. So these can become time consuming, tedious and difficult to respond to and keep in mind when you’re responding to these lender questionnaires, it’s often relatively time sensitive because there’s either refinance of the unit going on or the resale of a unit.
Omar: Anyway, going back to the types of questions that you may see, some of the more simple questions may be whether or not the association is professionally managed what is the name of the management company what happens if a lender acquires a unit due to a foreclosure or deed and move foreclosure, and how many months would the mortgagee be responsible for paying delinquent common expense assessments? There may be some technical questions such as what is the total square footage of the commercial space in the building that is separate from the residential HOA. Oftentimes they ask how many owners are delinquent in the payment of assessments and the total dollar figure associated with those delinquent assessments. So, that’s just a sampling of the questions. Again, it’s a very lengthy document and it differs slightly from lender to lender, but it’s a time consuming task and it’s probably the most comprehensive document that the association must provide responses to when there’s a purchase or sale in the association.
Nikki: Well, Omar, those are some really great questions, but why might a lender want to ask these questions?
Omar: So lenders are really seeking answers to these questions because they’re doing their due diligence to try to identify any potential red flags or risks that could impact their loan underwriting procedures. For example, the lender may not approve financing for a home or unit sale or refinance if the association doesn’t have enough in reserve, if it’s in the middle of a lawsuit or there’s other pending litigation. If there’s a certain percentage of owners that are delinquent in the payment of their assessments, that may be a red flag indicating that the association is in a precarious financial position.
Nikki: Those are some really great points there, Omar. I mean, you obviously don’t want to, if you’re going to lend some money to somebody to buy into an association, you don’t want them to go purchase a home or a condo somewhere where the association is quote unquote failing. So, I mean, the lender now has received the questionnaire back after the association had filled everything out. So how does this go hand in hand with a paid assessment letter? What exactly is a paid assessment letter?
Omar: Good question. A paid assessment letter, which is frequently called the PAL, or sometimes referred to as an estoppel letter or certificate of assessments will indicate– it’ll have some preliminary information on the individual unit that is being sold, including its current account balance. It has the property address, the buyer’s name and contact information, the seller’s name and contact information, the closing date, the amount of the regular monthly assessment, and the frequency of the assessment. So I just mentioned monthly assessment. It could also include information if it is an annual assessment, it will indicate the owner’s balance on their account through a given date. It’ll also indicate if there’s any unpaid fees or fines on the owner’s account, when the last assessment payment was made, when the next assessment payment is made, if there’s any unpaid special assessments, or if there are any outstanding liens for the unit. So this is really just a one or two page document, and it contains– largely the title company wants to see this document for financial purposes. So they can say how much this owner who’s selling their unit owes on their account and how large of a check needs to be cut by the title company at closing to ensure that the owner zeros out their account, all liens are addressed and they have a clean slate for that new incoming buyer.
Nikki: And so Omar, why are these documents so important when buying and selling in an association?
Omar: So, these documents are important because they protect the buyer, the seller and the association. Accordingly, they should be completed by a qualified representative of the association. Board members should work with their property manager, their financial consultants and attorney to confirm the distinct information request. So when I’m involved in these requests, I’m oftentimes interacting with the board, the property manager, sometimes the Association’s accountant or CPA firm, because we all have various pieces of information that need to be compiled and this information needs to be accurate when it’s provided to these third parties.
Nikki: Omar and I are going to take a quick break, but when we get back, we will continue discussing 22.1 disclosures in community associations.
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Nikki: And we’re back. I’m here with attorney Omar Malik, and we’re talking about 22.1 disclosures. So Omar, we’ve talked about the importance of lender questionnaires and paid assessment letters and the selling and purchasing process in an association. So what is a 22.1 disclosure and how does it tie into those two documents?
Omar: So in Illinois, the reason we call it a 22.1 disclosure is because this particular topic is governed by section 22.1 of the Illinois condominium property act and that section describes the information that an owner must obtain from the board for inspection by a prospective purchaser upon demand in the event of any resale of a condominium unit by unit owner, other than the developer. In reference to the specific section, again, this is contained specifically within section 22.1 of the Illinois condominium property act. There’s similar language in section 1-35D of the common interest community association act that is applicable to homeowner and townhome associations in Illinois that are subject to that act, the common interest community association act, and it’s common for such disclosure to be made in these homeowners associations as well.
Nikki: So, Omar, what is included in a 22.1 disclosure then?
Omar: The 22.1 disclosure must include– there’s a list of nine topics that must be included. I’ll cover a selection of those but again, these are all specifically outlined in section 22.1 of the Illinois condominium property act. So for example the disclosure must include a copy of the Association’s declaration, bylaws, or other condominium instruments, including its rules and regulations. It also includes a statement of the liens, including a statement of the account of the unit setting forth the amount of unpaid assessments and other charges due in owing. It also mandates that the association provide a statement of the status and amount of any reserve for replacement fund and any portion of such fund earmarked for any specified project by the board a copy of the statement of the financial condition of the unit owner’s association for last fiscal year, for which such statements are available.
Omar: So for example, a copy of the budget, a statement of the status of any pending suits or judgements in which the unit owner’s association is a party. So this is one of the most common questions that we get, and the reasons that the 22.1 disclosure is updated over time and I’ll talk a little bit more about this later on, but essentially this is a way for any prospective purchaser to get a snapshot or some details about any pending litigation within the association. Couple of the other items I’ll go through quickly are a copy of the Association’s certificate of insurance so the owner can see the insurance coverage whether or not the alterations made to a unit are believed to be in compliance with the association condominium instrument and the identity and mailing address of the principal office of the association or of the officer or agent. This is usually contained within this document as well so that the prospective purchaser has a copy or has some contact information for someone within the association.
Nikki: So Omar, we’ve talked about lender questionnaires, we discussed the paid assessment letters, kind of information going back between the association, the lender, the buyer, the seller. Now, we’re into 22.1, Is there a timeframe for which these disclosures must be obtained from the selling party?
Omar: Yes. So, the timeframe is actually set forth in section 22.1B of the Illinois condominium property act and it states that the disclosure and information must be provided within 30 days of the request. The reason this timing is important is because you have a purchase and sale of a unit going on. So there are significant potential consequences of providing an incomplete or untimely disclosure. So for example, a purchaser might be able to– In terms of an incomplete or inaccurate disclosure, you may have a purchaser who is able to avoid a special assessment because the timely disclosure was not made and they were not made aware of that special assessment. So that can create problems for an incoming buyer who comes in and says, well, Hey, I didn’t know about this special assessment because the disclosure you provided to me didn’t indicate the same, or it was incomplete, it didn’t make reference to the special assessment whatsoever. So I have dealt with that situation in the past where the 22.1 disclosure, it is a document from the association that can be relied upon by the potential purchasers, so if there is inaccurate information in it it can lead to problems later on.
Nikki: Yeah. I mean, I totally see how all of this information is really time sensitive. When you’re trying to buy and sell and market, you want to make sure that whichever direction you’re going, things are taken care of in a timely manner. So Omar today, like I said, we’ve discussed the paid assessment letters, the lender questionnaires, and now we just finished talking about 22.1 disclosures. As an attorney who deals with these documents on a daily basis, how can you help our listeners today with the collection and distribution of these documents and information?
Omar: So that’s a really good question and actually I deal with this very frequently. In fact, yesterday I was working with a small self-managed association that was struggling to respond to a lender questionnaire. I think they were perhaps overwhelmed by how many questions were asked. Some of them are more technical in nature. I covered a couple of those technical ones earlier. Some of them are more legal in nature that require an answer from an attorney or to review the Association’s governing documents. And some associations or board members are really not comfortable answering these questions on their own. So that’s why I frequently work with boards, property managers, accountants, whoever it may be on the association front to help assist answering these questions and some of our smaller associations– KSN actually has a program out there called our closing and refinance system CARS, we call it. It’s for self-managed clients where we actually will assist these small self-managed associations to respond to 22.1 disclosures.
Omar: So it takes some of that burden off of the small self-managed associations. We have volunteer board members who may have day jobs and are unable to respond to these lender questionnaires that are very lengthy in a timely fashion. So we can assist small associations with that. We also consult with large associations to make sure that the information that is being provided is accurate. What are the most common documents? So when I work with an association on 22.1 disclosure, it’s usually not just a one-time interaction. One of the items I highlighted in the 22.1 disclosure was the status of pending litigation. And so, if you have an association with pending litigation, that 22.1 disclosure should be updated over time to reflect whatever the most recent status of that case is. So it’s not just that you generate a 22.1 disclosure and that’s it. If there’s a hearing, a substantive hearing on a matter that’s subject to that pending litigation, that 22.1 disclosure should be updated on a rolling basis.
Omar: So for example, I’m attending a board meeting tomorrow night and they have monthly board meetings and since I go to these meetings very frequently, I’m aware that they will update and they will actually reach out to me prior to the meeting to make sure that 22.1 disclosure is accurate. The reason that’s important is because again, if you have pending litigation, that may be a red flag to an incoming buyer, and they want to be able to assess and evaluate that case to determine whether or not there’s implications for that incoming buyer to come in. The lender may be concerned possibly depending on the subject matter of that litigation. So it’s important that that information that is being conveyed is accurate.
Omar: So again, that’s why there’s kind of this ongoing relationship where I work with boards over time to ensure that the information is indeed accurate. From a liability perspective, the association wants that information to be accurate because we don’t want the association to be in the position of providing either inaccurate or untimely information that affects whether or not someone is able to sell their unit or whether or not someone is able to come in and buy that particular unit. So again, I can’t stress enough how important it is to ensure that the 22.1 contains accurate information that is also updated over time.
Nikki: That was KSN attorney Omar Malik. He practices condominium, townhome and homeowner association law in the city of Chicago and surrounding areas. KSN is an experienced legal resource, ready to provide you with quality advice and exceptional service. We look forward to demonstrating how we have earned the trust of thousands of clients over the past 35 years. If you’d like to reach Omar or anyone of KSN’s experienced attorneys, please call 855-537-0500. You can also visit ksnlaw.com and complete the contact form to send us a message. Thanks for listening.
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