Also published on the Huffington Post
Condominiums. Not always everyone’s first pick for housing, however the combination of affordability and location usually make them an ideal choice for city dwellers, especially here in DC.
Many people don’t realize how communal condo living can be, particularly when it comes to finances. They think you just magically pay your condo fee, and everything is taken care of for you... but boy, are they wrong.
You’ll be sharing expenses with all your neighbors, which can end up being a horrible or wonderful experience.
Here are 5 warning signs that a condo association may be in trouble:
1. Low Reserves
Once you go under contract on a condo, you will get what’s called the resale package, which includes the financials and rules and bylaws for the association. You are typically granted a set period of time to review this package. Review timeframes vary by state so make sure you understand how much time you have.
Part of the resale package will include the Financial Statements (balance sheet, bank statements, profit/loss statements). If those don’t exist, RUN! If they do, check the operating and reserve account balances (basically, their savings accounts) and see if the amount they have is sufficient.
What’s a sufficient amount? Good question. There are general guidelines based on building type and size, amenities in the building and number of units. A small building with little common space and no elevator doesn’t need as much in reserves as a building with elevators, a fitness center or a pool. These big ticket items all require money to operate, and a lot of money to fix. Check to see if they have a recent reserve study. This is a third party report that inspects the common elements, estimates the rest of their useful life and their estimated repair value.
2. Condo Fee Too Low or Too High
People love to find out that a building has low condo fees, but this can sometimes be a bad sign. Sure, it’s possible that the building is exceptionally well run, and they have managed to keep fees low. But it’s important to check the reserves as mentioned above, and the profit/loss statement to make sure they aren’t overspending.
Also, in new construction, developers notoriously set up the condo association with very low fees to entice buyers. Those fees usually go up once the condo association starts running on its own. Why you may ask? The initial budget is set-up by the developer and they usually underestimate it and don’t account for reserve fund contributions.
What’s too high of a condo fee? Check other buildings that are similar in size, age and amenities. If one building has a condo fee that is double or triple the typical condo fee, it could be a sign that they are either building up reserves or they have a big project in the works.
A self-managed building can definitely save on condo fees, but the mere fact that unit owners are functioning as volunteer management can create a host of problems. First, you don’t have professional management, which means they may not be filing the proper taxes, maintaining proper insurance, keeping meticulous accounting records or just not keeping up to date with maintenance. This has been a difficult conundrum for many small condominium associations. They either need to choose to raise fees high enough to compensate a management company or they have to be responsible enough to do it themselves.
4. Limits on Rentals
For most people, a condo makes a great first home. No yard, no roof, and no major maintenance issues that are solely on the owner to repair. Many buyers eventually envision themselves moving up to a bigger home, and often the idea of renting their current condo is appealing for many reasons - building equity while someone else “pays the mortgage” or building a real estate portfolio. Either way, having flexible renting rules ensures interest from a wide range of buyers when you sell. If there are rental caps, waiting lists or other intricate rules to be followed with respect to renting, buyers may pass the community by for one that is less strict. The less potential interest you have from buyers, the lower prices will stay.
5. Maintenance Items
Frayed hallway carpet, damaged common areas, broken elevators - they are all signs that a building or community needs some attention, but find out what is really going on there. Is it lackluster management who is just slow to act, or is it because money is tight? Either way, deferred maintenance you can see often means there is much more deferred maintenance you cannot see.
In the end, make sure to read through all of the documents provided to you and ask for the most recent condo association meeting minutes. You can find out a lot about the building by what happens at those meetings.