Owning a condo can be a financial money pit – what you don’t know can hurt you!
If you are a real estate agent or home buyer, it is worth researching the financial status of condo homeowners associations before listing or making an offer to buy. Failure to do so can lead to a rude awakening with dire financial consequences.
Most people buy condos without a real understanding of the financial burden they are committing to. They have a vision of “carefree condo living”, not realizing that active participation in the homeowners association (HOA) is necessary to protect their investment. Worse, many are unaware of the pre-existing financial conditions that may require them to write large checks shortly after moving.
In today’s market, many condo complexes have multiple units in foreclosure. Also, there may be more units behind on their installments and they are likely to go into foreclosure in the near future. What this means to a potential buyer is that the monthly HOA fees are likely to increase because fewer pay units will have to cover fixed operating expenses.
Perhaps the most terrifying situation for a potential condo buyer is insufficient financial reserves to cover required maintenance. Many homeowners associations have taken the attitude of avoiding special assessments or increasing the monthly payment because homeowners would not approve of them. Consequently, many (and perhaps most) condo complexes have a reserve account balance well below where it should be. This is a great red flag for buyers because they are likely to be hit by a strong special assessment in the future. Deferring maintenance to keep the monthly payment low and avoid special evaluations is a counterproductive strategy that always affects condo owners.
Many states now require full disclosure of the status of HOA reserve funds as part of the purchase process. This involves a formal reserve study that determines the life cycle of the major complex components (roofs, swimming pool, etc.) and then determines how much reserve money should be set aside each year to ensure that adequate funds are available when repairs are due or replacements. California, for example, requires the unit owner to access its reserve study and full disclosure of the reserve fund status annually. Obviously, these documents are an important part of the custody process.
Most condo complexes are realizing that their units are non-negotiable if reserve funds are grossly inadequate, and special evaluations are beginning to take place to make up for the difference between existing reserve balances and recommended funds. . For example, I live in a condo and my HOA has collected special assessments totaling almost $ 20,000 per unit over the past two years. It hurts, but it is necessary. And there are strong rumors that California will soon require reserve funds to meet levels recommended by a formal reserve study. What California does, the rest of the nation often follows.
When reserve funds are inadequate, the financial impact on condo owners can be severe. In fact, it often leads to a double “wammy” because special assessments can force some condo owners to foreclose, meaning fewer units are paying monthly HOA fees. Therefore, foreclosure not only ultimately means losing a portion of the advance reserve funds (to the uplinks), it also means less income coming into the HOA for six to nine months during the foreclosure period. mortgage. And there is only one solution for an HOA to stay afloat: a monthly increase due to cover ongoing operating expenses.
What are the most dangerous situations? Small, older condo complexes are mature suspects that require close financial scrutiny. Next, any complex that had multiple sales backed by subprime loans should turn heads. Many of these are 100 percent financed, have no equity, and are falling into foreclosure.
Therefore, it is up to both realtors and buyers to carefully review the studies and balances of the condominium reserve funds, as well as the number of units in foreclosure and additional condos that are behind in their installments. . For real estate agents, this is essential to ensure compliance with full disclosure laws and avoid legal ramifications, and buyers can sidestep situations that come with a hidden price tag. In other words, it’s time to start doing your homework to avoid getting involved in the “do-do” of the condo.