I am in the market to purchase my first condominium, and I am nervous after hearing horror stories of associations not maintaining buildings and outrageous special assessments. What should I be looking for to ensure that I make a good investment?
I applaud your due diligence prior to purchasing in a condominium association. All too often, buyers proceed with the purchase of a condominium without performing the vital research necessary to ensure that they are making a sound investment.
While simply inspecting the community common areas and the building structure both inside and out is important, it does not provide a complete account of the strength of an association.
Pealing paint, dilapidated roofs or unkempt common areas are obvious indicators of an association in poor health, but it is important for homebuyers to obtain and review the association’s financial statements, reserve study, meeting minutes, and insurance coverage when evaluating whether or not to purchase in a community.
Additionally, a buyer should ask if the association hired a professional property-management company to assist with oversight and regular administrative tasks, including billing, maintenance work orders and monthly financials.
Associations are legally required to meet at least quarterly to review and approve association financial statements. When reviewing financial statements, pay special attention to both the operating account balance, as well as the reserve balance.
The operating account balance should cover at least three months worth of typical monthly operating expenses. Also look at the year-to-date net-income variance as it relates to the annual budget as an indicator of whether the association is meeting budget expectations. While the reserve account balance is important, by itself it does not indicate whether or not the association is adequately saving for regular maintenance and long-term infrastructure improvements.
To have a clear understanding of the association’s fiscal health and whether the association is properly accruing reserve funds, you must compare the reserve balance to the association’s reserve study.
On-site reserve studies are required every three years, however, I recommend having updates performed annually. A reserve study is a thorough analysis of all of the association’s common elements, including building structures and common areas, accounting for regular maintenance expenses and future replacement costs.
A reserve study will provide both a monetary recommendation for a given point in time as well as a percentage funded. A reserve study with a percentage funded of 70 percent or greater indicates that the association is properly funded and fiscally healthy.
General-session meeting minutes must legally be taken at every board meeting and made available to members upon request.
Meeting minutes are a great resource summarizing board actions. It is also important to take note of how often the association’s board of directors meet.
As stated above, the board of directors are required to meet at least quarterly to approve financial statements, but depending on the association quarterly meetings may not be sufficient. How long do the meetings last? Meetings in excess of two to three hours may indicate a board that is inefficient or meeting too infrequently.
It is important to also request and review the association’s insurance coverage. Although your lender will ensure that there is adequate coverage to insure their interest, earthquake insurance is typically not a prerequisite to obtain financing.
Is earthquake insurance important to you? I often speak with homeowners who are shocked to realize that their association does not carry earthquake insurance. Earthquake insurance is expensive and deductibles are significant, so many associations make a conscience business decision to not carry earthquake coverage.
Lastly, has the association retained a competent, professional management company to help guide the board of directors and oversee the community’s daily operations?
Professional management firms typically have a team of industry experts trained to assist and guide the board of directors and ensure the association is adhering to governing laws and regulations. Many associations self-manage to try to keep expenses down, but often the long-term impact on the association far exceeds the cost of a professional management partner.