A large number of American homeowners now live in a community association. But do you know that there are several different kinds of community organizations, and each has a different set of laws, and different legal structures.
Oversimplified, the three main types of community associations are condominiums, cooperatives and homeowner associations. Although all three types may appear to be the same, in reality they are quite different. Before you buy into any association, you must read the operational documents carefully and ask your financial and legal advisors for guidance if you do not completely understand what you are buying.
Condominiums: most states have specific condominium legislation which spells out basic concepts. However, these laws generally do not get into the operations of the association — the nitty-gritty of daily life. In a condominium, there are three operational documents which are probably as important — if not more so — than the state law. These are the Declaration, the Bylaws and the Rules and Regulations which are adopted by the Board of Directors of the Association. This Board is elected by the members, and has fairly broad authority to run and manage the day-to-day activities of the association. The Board also sets the budget of the Association, and has the authority to bring legal action against unit owners who do not pay their condominium fees.
In a condominium, there are three basic elements: (1) the unit, which is owned by the individual owner; (2) common elements — which are the parts of the building not owned by individuals. Common elements include such areas as the elevators, the roof, the lobby and any laundry room or swimming pool in the complex; (3) limited common elements — these are common elements which are accessible to less than the entire membership, such as patios or parking spaces — and in some projects even mailboxes.
Cooperative Housing: Coops are a different breed of legal entity. The entire complex is owned by the Cooperative Housing Corporation; individual cooperative owners in reality do not own anything. Rather, they have a written documents — called a “proprietary lease” or an “occupancy agreement” giving them the right to live in and use a particular apartment within the building. Real estate taxes are paid by the entire cooperative, and in most cases, each coop owner has the right to deduct his or her proportionate share of these taxes on their own individual tax return. Generally speaking, the Board of Directors in a cooperative have more authority — and more flexibility — than the Board of a Condominium.
However, cooperatives have legal documents, including Articles of Incorporation and Bylaws, and if enough members get together, these documents can be amended.
Homeowner Associations: the main difference between a condo and a homeowner association (HOA) is that the HOA owner owns his/her house — including the front and back lawn — but there are covenants (rules recorded in the land records) which must be followed by each owner. Generally, condominiums are found in high-rise buildings, while HOAs are single family units or townhouses.
The covenants include such matters as architectural controls. This has been a hotly debated — and often litigated — topic. Some Boards of Directors insist on strict compliance with these covenants, and will take legal action to enforce the covenants, even when there are minor variations from the covenants. For example, some communities have stringent controls on the size of fences, the color of the windows, or the number of trees which can be planted in the front yard.
Books have been written about community associations, and it is not possible to give a full explanation in this short column. However, if you are interested in purchasing in a community association, there are two things you must do:
1. before you buy, read all of the legal documents. Make sure you fully understand the nature of community living, especially within the particular association you may want to live in. Talk to current residents and the managing agent before you sign a legal purchase contract.
2. if you become an owner in a community association, you must get involved. Ideally, you may want to consider running for a position on the Board of Directors. Short of this, however, you should attend as many Board meeting as possible, especially the annual meeting. Get on a committee and be active. Read your legal documents periodically, and review the written minutes for each Board meeting.
After all, this is your investment and you should be monitoring all of your investments carefully.