Buying a Condo? Don’t Overlook this One Detail

by Neal Frankle, CFP ®

If you’re buying a condo, you can’t afford to overlook the financial strength or weakness of your homeowners association. This is more important than getting the right mortgage, in many ways.

Today, many associations are struggling with unpaid assessments and deferred maintenance. Why? Because so many of your would-be neighbors don’t have the bucks to pay their dues – so they don’t.

 

buying a condo

 

As a result, your homeowners association may not have the money they need. If your homeowners association faces financially troubled waters, it could leave a very bad taste in your mouth.

The reason is, they’ll likely pass those problems on to you in the form of special assessments or continued deferred maintenance. Both drive the value of your condo down. Bottom line? Don’t buy a condo if the association is in trouble. You want a trouble-free life. How can you find out if your homeowners association is on firm ground?

1. Review state laws.

States require homeowners associations to provide certain disclosure documents. Find out what they are and make sure you get them.

2. Ask.

Talk to the association and ask lots of questions. Find out as much as you can about the financial health of the organization. Ask to see the minutes from the board meetings. You may not get the association to cough these up, but the seller can provide them – if you insist. If the association is having a hard time, you’ll probably see mention of it in the board minutes. Pay special attention to any hint of inadequate reserves and unpaid dues.

Remember, the association can’t tap the reserves for operating problems. The reserves are…reserves. They’re meant to pay for specific upcoming projects.

Find out if there are any special assessments coming up and if the association uses an outside manager or is governed by residents. This information should all be available in the disclosure documents.

Have you purchased a condo and then regretted it? What additional steps should good Wealth Pilgrims take? (If you are buying a condo because you don’t have a good enough credit score for a larger purchase, read “How to Improve Your Credit Score To Buy A House.”)

 

photo by Owlhere

 

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{ 8 comments… read them below or add one }

Kay Lynn Akers October 2, 2010 at 5:02 PM

Neal, this is a very good point. We have a solid HOA with financial reserves for repairs. Unfortunately, the last couple of years we’ve had a few homeowners that were in over their head and stopped paying their monthly fees.

Eventually, they went into foreclosure and the past dues were paid but it does put the burden on the remaining owners for a while.

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Jerry October 1, 2010 at 3:41 PM

I prefer a house over a condo. We bought our house a few years ago and the mortgage, taxes and insurance and well within what we can afford and we’re grateful. It may lead us to look into buying an investment property because rates are so low.

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al23 September 30, 2010 at 7:09 AM

Very good points here. I was on a condo board for about 3 years (not recommended if you want to continue to talk to your neighbors!) Anyway, the laws vary a lot from state to state as far as disclosure goes. Here in Connecticut they’ve just required condo associations to publish meeting minutes and allow attendance at all board meetings. Sadly the legislature failed to place these regulations under the Department of ‘Consumer Protection, so if your board is ignoring these new regs, your only recourse is to take them to court. (ugh)
Try to get the ratio of resident owners to renters. (more renters is generally not good)
Walk the property and check for signs of deferred maintenance, often a sign of financial problems. Watch out for unrealistically low common charges. This can often mean an underfunded association or if its a new development, it may mean the developer is simply trying to entice buyers, not caring that the association will soon need to raise charges or defer needed maintenance.

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Richard Hurt September 28, 2010 at 6:52 PM

I agree that in addition to what the article points out on the financial condition of the HOA, the question of control must be examined before you jump in. If the developer, board or management company has too much control and the homeowners have too little – red flag! But know it beforehand, read the covenants first!

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Neal@Wealth Pilgrim September 28, 2010 at 12:54 PM

Maria,

WOW….quiet a story. I can see how you’d be really upset. You also bring up an EXCELLENT point. Many retirees “downsize” to the condo and then get really ugly surprises when the expenses are much higher than they anticipated. Great comment….Of course I’m sorry you had that experience.

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Maria September 28, 2010 at 8:27 AM

It isn’t merely the financial strength that you have to look into — you’d better find out exactly what the politics of the board are, too. If you don’t investigate this and try to get residents to be completely honest with you before you close the deal, you could end up with a board that embarks on costly projects without the owners’ consent, projects you’ll pay for — and legally, too.

Five years ago, my condo association of 82 units in two connected buildings had a board full of old biddies who essentially used the board as a social club. That was fine until a serious matter arose: a handful (4 or 5) of balconies had deteriorating concrete that needed to be replaced, but only one balcony was in immediate need of repair. Had only one balcony been replaced and repairs undertaken for the rest, the residents wouldn’t still be so angry five years later.

This is a building built circa 1960, but most of it is holding up very well and has been decently maintained. The half-dozen balconies in question were mostly on the north side of the complex (the side most exposed to winter weather here in the Midwest). Because there was a safety issue with just one of those balconies, the board president used a little-known clause in the by-laws to order *all* the balconies replaced. Sure, there was some discussion with the owners and inspection of all balconies, but no vote to approve wholesale replacement. The one consultant the board got to support their view wasn’t even a certified consulting engineer but rather a contractor whose own inspectors disagreed about all the balconies needing replacement. Instead of getting a second opinion from a qualified consulting engineer (which would have cost a mere $14,000 or so the board claimed), we ended up with half the balconies on the *south* side of the complex the undamaged side) being torn down before 30 or so of the owners could get an injunction to stop the deconstruction. The management company, a small outfit that depended on its business with our board, was supposed to be neutral but sided with the old board (we subsequently tossed them out of office and got a new board, but not before the damage was done). Moreover, the board’s lawyers suggested to the court that a receiver be appointed, which we protested — and the judge, who could have said ‘no, you’ll go to arbitration first,’ which would have been free to all parties, instead handed the case over to a property manager who’d never been a receiver before and who charged out association about $15K per month until the matter was settled, which took another year and a half. And then the judge and the receive both stopped listening to us.

In the end, because those undamaged balconies had already been torn down, the receiver decided we may as well replace all of them. He took bids and got a different contractor to finish the job and replace all 82 balconies, for which the new board had to get a loan of between $750K and $800K — and the owners couldn’t do anything about it, despite the fact that nearly all of the removed balconies were judged adequate for another 20 or more years. And between court costs, the receiver’s fees, and construction costs, I got stuck paying for a $13,000 (that’s right, $13K!!!) balcony that I didn’t need and couldn’t afford. What’s even worse is that we were all required to pay for the balconies in a lump sum. Worst of all, while all this was going on but before any balconies were torn down, at least another 6 or 7 units were sold to new owners who WERE NOT INFORMED by the management company about either the dispute or the lawsuit, and these people faced additional unanticipated costs for new balconies they didn’t need and didn’t know about — and the cost of which they hadn’t included in their mortgage applications, so they faced having to come up with that money some other way.

Our complex is about one-third retirees on limited incomes who have owned their units for decades, one-quarter single people of various ages, and the rest small families or couples, all middle to lower-middle class in a working-to-middle class suburb of Chicago. None of us are rich, and this isn’t an affluent area, although property taxes have gone up twice in the last decade because another part of the township IS becoming far more affluent than we are. Few of us could afford the new balconies. Many of the owners had to cash in insurance policies or dig into their savings because they couldn’t get loans, and many others had become unemployed since the balcony trouble began and definitely couldn’t get loans (me included). The receiver was unsympathetic and unbending about the cost being paid as a lump sum rather than as a special assessment stretched out over time, even though the loan taken out by the new board was for a five-year period and the payments could have been easily stretched out for the owners. Several people ended up selling their units at a loss after the new balconies were completed, but by that time, the economy had tanked and we were well into the recession.

The entire business took more than two years. I’m STILL pissed off about it and was only able to afford the cost of the superfluous balcony because I came into a small, unexpected inheritance just as I was about to tell the receiver what he could do with himself and that I wasn’t paying a cent (the balcony ate up most of that bequest, BTW).

Bottom line: the old board was devious, deceptive, secretive, and we couldn’t get rid of them soon enough to avoid damage to the association and great cost to ourselves. All because one tiny clause in the by-laws said that where a matter of safety was concerned, the board could act on its own without the owners’ consent.

Remember: the bigger the complex, the less control and oversight you have over your board. And as an owner, you have even less oversight over the management company, although you *can* in time fire the board through an election and hire a new one in order to change management firms. But that assumes the new board will do that (they can promise you anything before the election, but you’re stuck once they’re in, at least until the *next* election).

The lesson? Let the buyer beware. Real estate agents exist to protect the seller, NOT the buyer. If you make an offer on a condo and don’t have a real estate attorney go over the association’s by-laws with a fine-toothed comb **BEFORE** you close the deal, a) you’re a fool, and b) you could be stuck with a real time bomb. I inherited my unit when my dad died, so I was stuck anyway; but at least it was paid for and there’s no mortgage. But if you’re buying, you have a choice. Make sure it’s an informed one. And don’t count on the seller or the management company telling you what you need to know — assume they’ll lie, if only by omission. Talk to the neighbors instead, LOTS of neighbors, before you plunk down the money. You’ll be sorry if you don’t.

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Neal@Wealth Pilgrim September 28, 2010 at 6:42 AM

Thanks Beth,

I’m also surprised that you don’t hear much about this issue but I agree…it’s really important.

Neal

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Beth September 28, 2010 at 4:34 AM

It’s nice to see someone talking about this issue! A friend of mine recently had to take out a substantial loan for repairs on the condo complex because there weren’t enough funds. The condo fees also went up by $100 a month!

The extra expenses can be a burden if you’re not planning for them.

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