How Should Association Assess Buyers’ Financial Health?
Your clients may be worried that the COVID-19 crisis threatens their financial stability, but you need to help them avoid going too far in their efforts to protect their bottom lines. One path to steer them away from, for example, is becoming overly invasive in their financial screening of prospective buyers.
An association in Florida recently learned the risks of such screenings. The court characterized the requirement that buyers provide two years of tax returns as extreme, invasive, shocking, and draconian. Its ruling makes clear that associations must balance their justifiable concerns with prospective buyers’ privacy rights.
The governing documents in the case provided that the association may require “such other information concerning the intended purchaser as the Association may reasonably require.” They also identified several reasons why the association could disapprove a prospect’s application for approval of purchase. These included a record of financial irresponsibility, such as bankruptcies, foreclosures, or bad debts.
A prospective buyer, who made an all-cash offer, refused to submit his tax returns. He cited his good credit score, lack of history of bad debts, and clean background check. He also pointed out that the governing documents made no reference to a tax-return requirement.
The buyer ultimately canceled the sales contract and sued the association. Shortly later, the association amended its documents to provide that all applicants must provide complete tax returns.
To learn what happened when the case landed in court, and how your clients can help ensure new buyers’ are a good credit risk, read our new article, What Can Your Boards Request of Prospective Owners?