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Dear Real Estate Adviser,
We’re in the middle of a condo purchase, but after signing off on contingencies, we found out about a forthcoming increase in homeowners association (HOA) dues at the complex. Can we back out of the purchase? Would we get our 3 percent deposit back? In lieu of backing out, what would be a reasonable concession to ask of the sellers?
— Connie V.

Dear Connie,
Yes, thanks to your admirable due-diligence work, you seem to be in a pretty good position here. Real estate attorneys and most state laws are in accord that if the seller of a residential unit — be it a condo, single-family home or other format — has knowledge of a forthcoming HOA increase that isn’t disclosed (or the buyer has to inform the seller), the buyer has the right to cancel and receive the deposit back. An alternative to canceling, of course, would be to ask for a lower price or seller concessions as you mentioned.

Where to start with concessions

A reasonable concession? Well, the most common is a contribution to closing costs, which can include origination fees, loan discount points, interest rate buy-downs, processing fees, appraisal fees, a portion of real estate taxes, interest charges and even X number of months of those rising condo fees, among others. The figure should be commensurate with the unexpected monthly costs you’ll be incurring prorated over a reasonable occupancy period.

You can ask your lender to determine how much your closing costs will be and how much the seller is allowed to contribute toward them. For FHA loans in 2015, caps on seller concessions/contributions are again limited to 6 percent of the appraised value or sale price, whichever is less, despite some misinformation out there that this number has changed to 3 percent.

Consider backing out

First, though, you might take this opportunity to reassess. At the risk of angering condo sellers, let me point out that you can likely get far more of a single-family home in a non-HOA neighborhood with, say, the $150 or so extra you’d be paying monthly to the condo HOA. Single-family homes also tend to appreciate faster, with notable exceptions in areas like high-demand New York City and Southern California.

Realize, too, that once you’ve bought a condo, you can be hit with special assessments from the board at any time. Condos without capital-improvement funds (not good) tend to levy such special assessments whenever a big repair or infrastructure project needs financing.

How’s the association?

Do you have a sense from past meeting minutes and other documents if special assessments have been previously imposed and if so, how often and how much is assessed? If not, you and all potential condo buyers should request copies of the condo association’s Covenants, Conditions and Restrictions, or CC&R, its bylaws (if separate), its financial report and the all-important reserve study. A reserve study is a 20-year schedule done by an outside expert to determine when HOA assets will be needed for repairs and how much they’ll cost. A poorly operated condo complex with no capital improvement funds tends to devalue units, while a well-run one has the opposite effect.

Watch for past-due bills

The fact that this apparent play-dumb seller didn’t inform you of this rate hike sort of raises another red flag. If you still want to buy, make sure the sellers are current on their own HOA dues or other fees before renegotiating, lest you get stuck with those post-purchase.

Good luck!

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