When buying a condo, you are joining a group of people that own the condo complex together, sharing responsibility for repairs and upkeep of the common areas and systems in the building. One of the things that you need to evaluate is the health of the Home Owners Association (HOA). You will already know the home owners dues for the condo you are purchasing, but what do those dues include? Is the association proactive about maintenance? Is the association well-funded so that it can take care of potentially large repairs in the future? As a condo owner, you will become a voting member of the association and will have the opportunity to be a potential board member, so it is important to take a closer look at how the association is run.
As part of the purchase, you will receive a packet of information called a “Condo Resale Certificate” or a “Public Offering Statement”. This is usually a packet of hundreds of pages of legal documents that can be intimidating to sift through. Here are some handy tips to help you evaluate those documents and the health of an HOA.
- Visual Inspection – Before you ever delve into the HOA documents, a simple visual inspection of the property can say a lot about how the building is run. Make sure that the common areas are clean and that there are no obvious signs of deferred maintenance. If carpets are dirty, walls battered, or water leaks evident, it is probably a sign that the HOA is not proactively caring for the building. Also, if the building is older, have the common areas been updated over time or are they horribly outdated? This will affect your ability to sell the condo later on.
- Meeting Minutes – Condo associations keep written copies of meeting minutes when the board of the association meets. Sometimes this is once a year, but sometimes more frequently. Frequency of meetings largely depends on the size of the building and the number of issues that need attention. A well-run association will meet regularly and the minutes will show that they are proactively making maintenance decisions for the building (and spending money to do so). A poorly run association will have meeting minutes that likely show discussions about deferred maintenance and updates, with no concrete decisions or plan of action. Also look for financial red flags, such as consideration of a special assessment if the HOA is underfunded.
- Operating Budget – You will receive a current set of financials for the association. A well-run HOA will have clear and timely accounting of all the dues coming in and all of the expenditures going out. After regular operating expenses, there should be extra funds left over that are allocated to a reserve fund to pay for large repairs in the future for things like a roof, elevator, fire sprinklers, etc.
- Reserve Study – Sometimes an HOA will commission a reserve study to analyze future expenses and the ability of the HOA to pay for them out of their reserve budget. Ideally, the HOA has a reserve level of 70%-90% of anticipated expenses, but this is a very rough guideline. It is important to look closely at the age of the complex and what realistically will need repair or replacement. A five-year old building that is underfunded may not incur large repair expenses for 15-25 years, giving them plenty of time to properly build up reserve funds. A 30-year old building that is underfunded may face immediate repair needs and have to issue a special assessment to the residents to cover these expenses.
- Special Assessment – If a condo association does not have enough money budgeted for large repairs, they will issue a special assessment to the homeowners. This is a one time payment of additional homeowners dues, sometimes paid in a lump sum and sometimes paid over time if the amount is large enough. I’ve seen special assessments reach over $10k-$30k per unit, so they can be substantial. If you are buying a condo with an upcoming special assessment, it is not all a bad thing and shouldn’t necessarily deter you from buying the home. The updates that are being paid for will improve the building and ultimately improve the value of what you are buying. Obviously if the amount is substantial, you should negotiate with the seller to see if they will contribute some or all of the special assessment as part of your transaction.
- Rules & Regulations – Every condo has a set of rules & regulations that the homeowners agree to live by. These cover a wide variety of topics like quiet hours, pet policy, rental policies, etc. These rules are difficult to change, so make sure that you are comfortable with them before agreeing to become a resident.
- Insurance – The HOA will take out an insurance policy that covers the building in case of fire or other catastrophe. That policy may or may not cover the interior fixtures in your condo, and definitely does not cover your personal possessions. You should pass along a copy of the HOA insurance policy to your insurance agent who will figure out the appropriate level of coverage that you will need when you buy your condo.
Buying a condo can be more complex than buying a single-family home. Be sure to seek out an experienced real estate agent who can guide you through the process and analysis.