Caution: Restrictive Covenants Can Be Costly

When buying a home, it’s important to be aware of restrictive covenants, the legally-binding deed requirements that “run with the land” and dictate what you are allowed to do—or are restricted from doing—on your potential property.

Understanding Covenants

Covenants are common in many parts of the country, particularly in planned community developments managed by a homeowners association (HOA).

Unlike zoning ordinances, which are government-imposed requirements on private individuals, covenants are rules or responsibilities imposed by developers or private sellers on present and future owners.

Covenants can be extremely important to the property value, as well as crucial to your enjoyment of your home.

Most large, planned subdivisions impose covenants, conditions and restrictions (CCRs) that empower an HOA to prescribe detailed rules regarding architecture and esthetics designed to maintain the attractiveness of the community.

These rules can include the following:

• Permissible colors of exterior house paint for your house
• Minimum property and landscaping standards
• Types of fencing allowed
• Types of window treatments allowed
• Limitations on the type of security lights you can attach to the house
• Whether you are allowed to install sporting equipment like a basketball hoop in the driveway
• Restrictions that limit vehicle storage or recreational vehicle parking
• Restrictions on property uses that generate noise or smells, such as raising livestock
• Restrictions on commercial or business uses of land reserved for residences

Sadly, older covenants sometimes prohibited sales of properties to specified ethnic or religious groups. Yet, even in places where these covenants are still recorded in home deeds, they have been nonenforceable since 1948, when the U.S. Supreme Court nullified their use.

Covenant Fees

Some large subdivisions use another type of covenant: a transfer fee to support HOA capital needs.

Each time a house or lot is resold, the seller must remit a fee—typically a small percentage of the selling price—to the HOA. The association uses this money to support community improvement projects, such as enhancements to common areas or facilities and repairs to pools, tennis courts or other important features.

Usually these covenants are disclosed and generate minimal controversy.

A widely-used but controversial form of covenant used by some large developers requires each seller of a house or lot to send 1% of the selling price of the property to a trustee. The trustee distributes the money from the closing proceeds to an investment group, which may include the original developer.

If the home seller refuses to disburse the 1% fee to the trustee, the closing cannot proceed because the title contains the covenant language.

Buyers of houses in some subdivisions may be surprised to find such fees buried in the deed—and may only hear about the fee requirement during the title search. Critics say these mandated fees can make resales more difficult and can even cause transaction cancellations once potential buyers learn about them.

Talk to your real estate agent about a contingency clause to protect yourself and allow you to back out of a contract without penalties if you don’t approve with covenant or deed restrictions.

The bottom line is covenants can be good for you if they maintain attractiveness or the amenities in your community—but they can cost you money.

Always ask the real estate agent, community developer or the seller for full disclosure of all covenants attached to the property before you make an offer.

Source : realtor.com