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The following article was published in our article directory on September 11, 2012.
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Title Checks and Lien Waiver Use for HOAs

Article Category: Advice

Author Name: Charles H. Maness, MSACC

The newest and greatest condominium development has just been finished and you have purchased a brand new unit. You review the engineering report that the Builder gave you. Nothing stands out to you and you feel that the building methods are sound. The lender performs a title search and finds a clean title. The attorney reviews and approves. The lender requires title insurance. Your agent says the deal is a good one. So what can go wrong, you say? You close on the loan.

Two years later, the association is turned over to the owners. A Board is elected to officiate the association's business. All of the sudden a massive roof leak happens. The builder patches the roof that lasts another year. The builder closes out the complex and closes the LLC that the building sales were incorporated in. More leaks of the roof happens and the Board now is suspicious of the construction and has an inspection done. The Board expecting the worse has a structural engineering report completed and they find that the roof has multiple failures. The recommendation is a new roof. The engineer that performs the inspections states "that the roof is not constructed correctly." There is no warranty on the roof from a third-party provider.

The Board is outraged and consults legal counsel. The Board is informed by legal counsel that the Statute of Limitations has expired as they known about the roof leaks over two years ago. The roofer that was the sub-contractor is out-of-business. The builder has moved to another state and refuses to discuss the roof issue. The Board has no legal recourse against the builder as the Statute of Limitation has expired in their state.

The Board receives multiple bids and the new roof is $150,000 or $8,000 per unit. They issue a special assessment and the owners approve. You are now on the hook for $8,000 due in 30 days. How did this happen? You did everything right or did you?

Builders/developers are not required to give a purchaser a copy of the lien waivers, paid material invoices, or other building costs. You can request such copies; however, it is unlikely that the builder or developer will release this information. The information has cost information that could hurt the competitive nature if other builders were to discover their cost basis.

So, how do you protect yourself. The answer is an Owner Title Insurance Policy. The policy is designed to cover unpaid liens and taxes on items not picked up through the title search. The insurance is not the same as Lenders Title Insurance that only covers the lender. Every owner that purchases real estate should have an Owner Title Insurance Policy.

What about subcontractors not paid by the builder or liens for materials not paid. Is the association responsible. In most cases, the answer is yes. A material-mans or mechanic liens for expenses related to building the condominium complex would be binding on the association. In fact, we have dealt with this scenario several times. The association should have a title search done when assuming control of the association from the builder/developer. The association should also ask for copies of the lien waivers from the builder for all subcontractors, suppliers and from the builder. The association should request that the builder sign under perjury that there are no outstanding liens from subcontractors are from suppliers. If they refuse, the board should do a due diligent search of all subcontractors and suppliers to make sure that the bills are paid.

Another overlooked technique is a structural engineering report. Most buyers will look at a home inspection; however, they do not consider that a new building has many unknowns that a non-engineer may not realize during the inspections. The inspections usually carry liability-waiver clauses to protect the investigator from items that are detectable or apparent. The structural engineering report is more expensive. costing two to three times that of a home inspection; however, the savings to replace defective workmanship and materials on a common element special assessment is well worth the investment.

Often, our association buyers tell us that such was not suggested or that their agent of the builder said that this was not necessary. The builder will often point to their structural engineering report. The importance that an independent report not associated with the builder cannot emphasize enough. Would you have a roof replaced with only one estimate? No, likely not; thus, why would you accept only the builder's engineering report as factual? A home is one of the most expensive purchases that you will ever make. Can you really afford not to have such an inspection done?

There are some warning signs that the purchaser need to look out for before closing. The warranties for the common elements should be made clear to who will do the warranty work. Does a third-party warranty the common elements or is it the builder or subcontractor? Builder and subcontractor warranties are only as good as the word of the builder. With the use of corporations, it is very difficult to collect on such warranties if a suit should become necessary as the assets are usually already distributed from the company.

Other areas to check and ask questions on are performance bond for completion and warranty? Was the builder require to place bonds for completion and do the performance bonds require warranting the work?. Does the building carry an FHA warranty or other secondary financing agency warranty? Are their third-party warranties for covering the HVAC systems, roofing system, etc.?

You can also add extra loss assessment insurance to your condominium policy that will protect you against a loss assessment billed from the association. We normally recommend a $10,000 policy. The costs are usually only a few dollars a year; but, if you need the protection, you will be happy that you spent the money. You can also see if the association has the option of purchasing more insurance for losses related to building defects or to purchase third-party warranties to cover repairs. If available, the protection may be worth the costs to protect both the association and owners.

The most important safe guard that a purchaser of any condominium can make to protect their investment is to ask, require, inspect, and cover the suggestions discussed in this article. You do not want to be the one with buyer's remorse when the special assessment comes your way!

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