Owning a condo can be a financial money pit – what you don’t know can hurt you!
If you’re a real estate agent or homebuyer, it’s worth researching the financial status of condominium homeowners associations before listing or making an offer to purchase. Failure to do so can lead to a rude awakening with rocky 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 HOA involvement is necessary to protect their investment. Worse yet, many are unaware of pre-existing financial conditions that may require them to write large checks soon after moving.
In today’s market, many condominium complexes have multiple units in foreclosure. In addition, there may be more units that are past due and likely to go into foreclosure in the near future. What this means for a potential buyer is that the HOA’s monthly due is likely to increase because fewer payment units will have to cover fixed operating expenses.
Perhaps the most frightening situation for a prospective condo buyer is inadequate financial reserves to cover required maintenance. Many HOAs have adopted the attitude of avoiding special assessments or monthly fee increases because the owners would not approve of them. Consequently, many (and perhaps most) condominium complexes have a reserve account balance far below where it should be. This is a big red flag for buyers because they are likely to be hit by a strong special appraisal in the future. Deferring maintenance to keep your monthly payment low and avoid special appraisals is a self-defeating strategy that always plagues condo owners.
Many states now require full disclosure of the status of the HOA’s reserve funds as part of the purchase process. This involves a formal reserve study that determines the lifecycle of major complex components (roofs, pool, etc.) and then determines how much reserve money should be set aside each year to ensure adequate funds are available when they need to be repaired or replaced. . California, for example, requires the unit owner to access their reserve study and full disclosure of the reserve fund status annually. Obviously, these documents are an important part of the custody process.
Most condominium complexes are realizing that their units are not marketable if reserve funds are severely inadequate, and special assessments are beginning to occur to make up the difference between existing reserve balances and recommended funds. For example, I live in a condo and my HOA has imposed special assessments totaling almost $20,000 per unit for the last 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 double “wammy” because special assessments can force some condo owners into foreclosure, meaning fewer units are paying the monthly HOA due. Therefore, not only does foreclosure ultimately mean the loss of a portion of the anticipated reserve funds (to principal liens), but it also means less revenue for the HOA for six to nine months during the foreclosure period. mortgage. And there’s only one solution to keeping an HOA afloat: a monthly increase due to cover ongoing operating expenses.
What are the most dangerous situations? Small, older condo complexes are ripe suspects that require close financial scrutiny. Next, any complex that has had a string of sales backed by subprime loans should draw attention. Many of these are 100 percent financed, have no equity, and are going into foreclosure.
Therefore, it behooves realtors and buyers alike to carefully review condominium reserve fund studies and balances, as well as the number of units in foreclosure and additional condominiums that are behind on their payment. For real estate agents, this is essential to ensure compliance with full disclosure laws and avoid legal ramifications, and buyers can avoid situations that come with a hidden price tag. In other words, it’s time to start doing your homework to avoid getting in the way of the condo “do-do!”
