The HOA contingency is a critical clause in many real estate transactions. Buyers and sellers must understand what this clause means and how it works. It can make or break a deal, mainly when buyers review important HOA documents.
What is an HOA Contingency?
HOA contingencies refer to clauses in a purchase agreement that give buyers the right to cancel the contract after reviewing the HOA documents. These documents may include rules, financial reports, meeting minutes, and other relevant materials. The clause typically provides a specific time frame (usually 3 to 10 days) for the buyer to assess the HOA’s overall condition and management.
The goal of HOA contingencies is to protect buyers. They allow buyers to ensure that the community’s financials are sound and that the rules won’t interfere with their intended use of the property. For example, buyers who want to rent their unit short-term may decide to walk away if the HOA bans rentals.
HOA contingencies also reduce the risk of future disputes. Buyers can evaluate past conflicts, pending litigation, or upcoming assessments. If the buyer finds red flags, they can cancel the contract without penalty within the contingency period.
What is the HOA Contingency in Texas?
In Texas, the HOA contingency is outlined in the Texas Real Estate Commission (TREC) resale contract forms. The most common forms include a section that addresses subdivisions with mandatory homeowners associations. Under Texas Property Code Section 207, sellers must provide a resale certificate and related HOA documents.
The resale certificate contains key information, such as:
- Outstanding dues owed by the current owner
- Pending or recent special assessments
- Litigation involving the HOA
- Restrictions on property use
- Insurance coverage details
- Contact information for the management company
Once the buyer receives this package, the clock starts ticking. In Texas, buyers generally have 3 calendar days to terminate the contract after receiving the HOA documents, unless the contract specifies otherwise. If the buyer doesn’t cancel within the timeframe, the sale continues, and the buyer accepts the HOA’s conditions.
Is an HOA Contingency Required?
An HOA contingency is not legally required in every state or transaction. That said, it is a standard and recommended part of real estate contracts when buying property in an HOA. Most lenders and real estate professionals recommend that buyers include this clause to avoid surprises after closing.
Some sellers may resist including the contingency, especially in competitive markets. In such cases, the buyer should consider the risks of moving forward without full knowledge of the HOA’s finances and rules. In states like Texas and California, resale certificate laws support the buyer’s right to disclosure, which strengthens the need for a contingency.
If the contingency is waived, buyers still have the right to see certain documents. But, they lose the contractual ability to back out easily if they find issues. This can lead to legal battles or forced acceptance of burdensome HOA policies.
Can a Buyer Back Out of a Home Sale?
Yes, a buyer can back out of a home sale during the HOA contingency period. The real estate contract outlines the terms and conditions under which this can occur. If the buyer terminates the contract within the specified timeframe, they can do so without forfeiting their earnest money.
Common reasons buyers cancel under the HOA contingency include:
- The HOA has a large amount of debt
- Reserve funds are too low
- The community is facing a lawsuit
- The rules restrict personal preferences (e.g., pets, rentals, exterior modifications)
- Monthly dues are higher than expected
Once the contingency period passes, canceling becomes more difficult. Buyers who back out late may lose their earnest money deposit or face legal consequences. This is why the contingency period is vital for due diligence.
The Importance of Reviewing HOA Documents
Buyers should never skip a careful review of HOA documents. These materials provide a snapshot of how the community operates. Poorly managed HOAs can lead to financial stress, conflict, and falling property values. Here’s what to focus on.
1. Find Out the HOA Rules
The governing documents, particularly the CC&Rs, determine what homeowners can and cannot do. These rules may limit:
- Short-term rentals
- Exterior home improvements
- Paint colors and decorations
- Number and type of pets
- Parking arrangements
Buyers should make sure they can live with these restrictions before proceeding. If any rules interfere with their lifestyle or plans, they may use the HOA contingency to cancel the contract.
2. Review HOA Finances
Healthy finances indicate that the HOA can maintain the community without sudden increases in dues. Buyers should review annual budgets, reserve fund levels, current dues, and delinquency rates.
If the reserve fund is low or the HOA is spending beyond its means, the buyer should be cautious. A poorly funded HOA may levy special assessments in the future to cover repairs or upgrades.
3. Gauge HOA Leadership
Buyers should also look at how the HOA is governed. Review meeting minutes and newsletters to spot signs of dysfunction. Frequent disputes, poor communication, or high board turnover can be red flags. Strong leadership improves neighborhood stability and property value.
HOA Contingency vs HOA Contingency Fund
Some people confuse the HOA contingency clause with an HOA contingency fund. They are two different things. An HOA contingency clause protects a homebuyer. It allows buyers to review and cancel a home purchase if HOA issues arise.
An HOA contingency fund, on the other hand, refers to money set aside by the HOA itself. This reserve is used for emergency expenses or unexpected costs. The contingency fund helps the HOA avoid sudden special assessments. It also shows financial responsibility and good planning.
Both terms involve the idea of preparing for the unexpected. That said, one applies to real estate transactions, and the other applies to HOA budgeting.
The Bottom Line
The HOA contingency gives buyers a powerful tool to protect their investment. It allows them to walk away if the HOA’s rules or finances don’t meet their needs. For this reason, reviewing HOA documents during this period is crucial.
Graham Management provides exceptional and reliable HOA management services to Houston communities. Call us today at (713) 334-8000, request a proposal, or contact us online to learn more!
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