If you are a real estate agent or homebuyer, it pays to research the financial situation of condominium homeowners associations before listing or making an offer to buy. Failure to do so can lead to a rude awakening with jarring financial consequences.
Most people buy condos without a real understanding of the financial burden they are committing to. They have a vision of “worry-free condominium living,” not realizing that active participation in the HOA 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. Additionally, there may be more units that are in arrears and are likely to fall into foreclosure in the near future. What this means to a potential buyer is that the HOA’s monthly due date will likely increase because fewer payment units will have to cover fixed operating expenses.
Perhaps the scariest situation for a prospective condo buyer is inadequate financial reserves to cover required maintenance. Many HOAs have taken the attitude of avoiding special assessments or increases in monthly dues because the owners would not approve them. Consequently, many (and perhaps most) condo complexes have a reserve account balance well below where it should be. This is a huge red flag for buyers because they are likely to be affected by a strong special assessment in the future. Deferring maintenance to keep the monthly payment low and avoid special assessments is a counterproductive strategy that always plagues 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 major complex components (roofs, 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 their reserve study and full reserve fund status disclosure on an annual basis. Obviously, these documents are an important part of the custody process.
Most condo complexes are waking up to the fact that their units are not marketable if reserve funds are grossly 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 condominium and my HOA has imposed 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 the 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 condominium 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 pay the monthly HOA due. So not only does foreclosure ultimately mean the loss of a portion of the anticipated reserve funds (to principal liens), it also means less revenue for the HOA for six to nine months during the foreclosure period. mortgage. And there’s 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 ripe suspects that require close financial scrutiny. Next, any resort that has had a string of subprime-backed sales should turn heads. Many of these are 100 percent financed, have no equity, and are falling into foreclosure.
Therefore, it is incumbent on both real estate agents and buyers to carefully review surveys and condominium reserve fund balances, as well as the number of additional foreclosed units and condominiums that are behind on their payments. 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!”