We often get calls from clients considering a purchase of a “broken” project, who are in the due diligence period on a project. In this situation, it is worth the effort to investigate the project from the Department of Real Estate (DRE) perspective. Was it filed with DRE previously? Are there any red flags in the public report? What would an amendment filing at DRE look like for this project? What will the timing be? Was it phased? If so, would you be able to, or want to, phase it similarly?
Some projects include previously completed common area improvements. While it’s great that the improvements were constructed, in this situation, you might be disappointed to learn that the dues are much higher in 2018 than they were in the 2007 Public Report — the dues won’t reflect “as new” condition unless you re-construct the improvements. This is because the improvements have been aging without any maintenance or funds set aside for future replacement. The DRE will also require a reserve study, even though there may not be an HOA.
Another thing to consider is whether the common area was conveyed to the Homeowners Association. If there were any sales under a previously issued Public Report, there may have been common area conveyed to the HOA. It is definitely worth checking what should have been conveyed against what WAS conveyed. If the common area was deeded to the HOA and there are existing homeowners in the development, there is simply no way to reduce dues associated with the conveyed property… except through a Subsidy Agreement, which you may need to consider.
If your plan includes a quick turnover of a property you just acquired, it definitely merits investigating what the DRE requirements are before completing the purchase. Conditions for creation of special districts to provide basic services (water/sewer/drainage) take time, and these districts need to be formed and assured before DRE will issue a public report.
As it happens, there are still projects out there that were created before the Great Recession that are viable. We’ve seen projects where the HOA is maintaining common areas they don’t yet own… those are easy to get right-sided, and the existing owners are delighted to see a new builder enter the scene. There are also plenty of great properties just waiting to be annexed and developed.
Whatever the opportunity, we welcome you to call us to assist during your due-diligence period. We can investigate any prior (or current!) DRE filing, and we can advise you with regard to a new filing that needs to be created.
