7 Tips on Navigating HOA State Legislation for Escrow

Managing HOA state legislation can sometimes feel like navigating a labyrinth, especially when it involves acquiring essential HOA documents and ensuring compliance with ever-changing state laws. 

In this article, we’ve tailored our insights to help you master the art of handling HOA state legislation while working diligently to safeguard your clients’ interests. We’ll give you seven helpful tips to make acquiring and verifying HOA documents easier so your Escrow transactions follow state laws. 

What Are HOAs?

Homeowner Associations (HOAs) are private organizations subject to federal and state laws that dictate their formation, operation, and HOA members’ rights. HOAs enforce the rules, maintain common areas, and manage the day-to-day operations, including the HOA budget.

The property owners usually elect volunteers to lead the HOAs, who then form the HOA board of directors. HOA community can also be managed by a property management company. In addition to federal and state laws, HOAs have their own rules. While the HOA bylaws can maintain community cohesion, they must comply with local laws.

Number of HOAs (per State)

Did you know that California has the highest number of HOAs nationwide? An astounding number that places significant importance on ensuring that HOA bylaws, rules, and regulations are followed closely during the property closing process. So, here are the numbers for all states to keep handy as an Escrow Officer.

How Federal Laws Affect HOAs

Federal laws have a significant impact on HOAs in addition to state laws that govern their operations. Some notable federal laws affecting HOAs include: 

The Americans with Disabilities Act (ADA) 

This Act prohibits discrimination against disabled persons in public accommodations, such as HOAs, etc. 

The Fair Housing Act (FHA)

The Act prohibits discrimination in housing based on protected classes; 

The Fair Debt Collection Practices Act (FDCPA)

This regulates debt collectors attempting to collect debts from consumers; 

The Freedom to Display the American Flag Act

This prohibits HOAs from restricting the display of the U.S. flag on residential properties. 

How State Laws Affect HOAs

State laws significantly affect HOAs by establishing the legal framework within which they operate and defining their rights, responsibilities, and limitations.

The state laws regulating HOAs are typically found in the state’s statutes, and they can differ from state to state. Some states may have comprehensive laws that extensively regulate HOAs, while others may have more limited or general provisions.

It’s important to understand the following key state differences when handling real estate transactions:

Formation and Governing Laws

State legislation dictates the formation and governance of HOAs, outlining the requirements and procedures for creating and registering these associations. 

Disclosure Requirements

States may have specific laws related to the disclosure of HOA information during the real estate transaction. This may include providing potential buyers with important documents like CC&Rs (Covenants Conditions and Restrictions), bylaws, financial statements, and reserve fund information.

HOA Fees and Assessments

State laws often govern HOA special assessments and fees, specifying the types of charges that can be imposed on homeowners and setting limits on the amounts that can be collected. Some states impose limits on the transfer fees that HOAs can charge for processing ownership transfers or issuing required HOA documents during a sale.

Different Naming of HOA Documents

Some HOA documents have different names depending on each state. For example, some of the different names for HOA Estoppel include Estoppel Certificate, HOA Payoff Statement, Resale Certificate, Resale Demand, and others.

HOA Documents Turnaround Time

Each state has specific timeframes for an HOA to provide HOA documents. Be cautious of these and arrange documents accordingly, to have enough time for review and compliance during closing. If you are too close to the deadline, you can pay the rush fee to the HOA for faster document processing. The cost of rush fees also differs from state to state.

Fines and Penalties

States may have different rules and limits regarding the fines and penalties that HOAs can impose on homeowners for violating CC&Rs or bylaws. Considering the potential implications of unresolved fines or penalties on the property being transferred, it’s always a good idea to check that there are no outstanding balances.

HOA Liens and Foreclosures

State laws can vary regarding HOA lien priority, the process for placing liens on properties for unpaid assessments, and the requirements for foreclosing on properties due to unpaid HOA fees. 

Insurance Requirements

State laws may dictate specific insurance coverage requirements for HOAs, affecting the property’s overall insurance costs and obligations. Always verify compliance with these laws during the transaction.

Some other factors that state laws may dictate for HOAs include Reserve Fund requirements, elections, voting procedures for selecting board members, the use of Alternative Dispute Resolution (ADR) methods, and more. 

To effectively navigate these variations, research state-specific legislation around HOAs and work closely with experienced real estate attorneys or professionals familiar with the specific state’s HOA laws. Staying informed and up-to-date on any legislative changes in the relevant states is also crucial for ensuring smooth real estate transactions involving HOAs.

Can HOA Rules Override State Laws?

No, local laws supersede HOA laws. HOAs rules cannot override state or federal laws, nor can they contradict city or county ordinances. If there is a conflict, local laws take precedence over HOA rules, ensuring that homeowners’ rights are protected, and community governance aligns with broader legal requirements.

7 Tips on HOA State Legislation for Escrow

1. Understand state-specific laws in the states where you handle transactions.

There are several resources such as state government websites and regulatory agencies that publish updates and guidelines for real estate transactions. Keep an eye out for the ones relevant to your state. 

2. Keep yourself updated on the latest state laws and regulations related to HOAs.

You can learn about the latest state regulations by being engaged in title associations, attending industry conferences, seminars, and workshops, and collaborating with experienced professionals in the field. For example, ALTA has a great newsletter and often hosts webinars on hot topics in the industry.

3. Obtain HOA documents early.

This will give you time to check if the HOA documents follow state requirements. Many Escrow professionals rely on the Seller to provide HOA documents. Experience has shown that Sellers are often slow to respond and not aware of the details of their HOAs. Relying on the Seller sometimes presents additional challenges. To avoid these complications, use a reliable HOA docs acquisition service that can take care of the whole process while you focus on more important work. 

4. Review the HOA’s governing documents to understand the rules that may affect the property.

Examine these documents carefully, focusing on sections around state-required compliance, such as regulations regarding property use, maintenance, architectural guidelines, fees, assessments, and any restrictions. Pay close attention to how the HOA’s rules align with state statutes and legislation. Ensure that the HOA’s rules do not contradict or violate any state laws.

5. Verify compliance with the state requirements.

Many state government websites have sections dedicated to real estate regulations, including sample forms and guidelines. Visit these websites to access the latest information about required closing documents and compliance standards.

6. Consult legal experts.

A personal connection or a local bar association is a great way to find a qualified real estate attorney.  Bar associations often have directories of lawyers and can provide referrals. Some legal directories include the American Bar Association’s directory, Avvo, Martindale-Hubbell, etc. When selecting a legal expert consider factors such as the lawyer’s experience in real estate law, reputation, fees, and ability to communicate and collaborate effectively throughout the transaction

7. Ensure that all HOA-related information is disclosed to both Buyer and Seller.

Transparency is key to avoiding future disputes. There are 4 main key touchpoints of client communication during closing: introduction, updates, signing appointment, and gratitude. Cover those, and you get a lot less stress during closings. 

By following these tips, you can minimize the risk of running into HOA-related complications during real estate transactions and facilitate smooth closings for your clients.