July 21, 2021 – So you managed to get lucky. It looks like you might win the bidding to buy that condo, or a home in an active adult community. But before you submit the winning offer and break out the champagne, here are 4 things you need to do first. Your new community’s financial picture deserves some extra looks, particularly in light of the collapse of the Champlain Towers South condo building in Surfside, FL. A community might look healthy, but until you have examined its financial reserves you really don’t know.
This week we listened to an insightful interview on NPR with Robert Nordlund, founder and CEO of Association Reserves. An expert on reserves and the financial health of communities, he lists four things things you need to do before you invest your hard-earned money in a condo or home in a community. We have added some of our own commentary to his questions.
- Look at the last year’s worth of the condo or Home Owners Association board minutes. Look to find out what issues they are working on? Are there expensive projects on the docket – and does it seem like the Board has a solid plan for addressing them? If you see expensive repairs that are either unfunded or kicked down the road, be careful.
- Ask careful questions of the seller. Have there been special assessments over the years – and how big were they? Do big repairs get fixed on time? Do condo fees regularly increase to keep up with expenses and planned obsolescence? Most experts agree that a well run association does not have special assessments, because the reserves are carefully predicted and collected so that when the time comes to fix infrastructure items like roofs, roads, and elevators, the money is sitting there ready to be used.
- Look around and be curious. Do you see cracking, old equipment, tired roofs, and aging buildings? Does it look like the property and buildings are being well-maintained? If not, look elsewhere.
- Study the reserves carefully. The association should be able to give you a copy of the reserve study. Is it funded at the level it says it should be, or has the board waived putting money into the reserves? Do the figures to replace major infrastructure look reasonable? If you don’t feel like you know enough, ask your financial advisor or accountant to take a look at the reserve study for reasonableness.
Bottom line. We will never know if recent buyers in the Champlain Towers were aware of the cost of the planned repairs for the building ($15 million), or that the association did not have the money to pay for it. Far too many associations and condo boards either do not have reserve funds or they are woefully unfunded. The NY Times reported today that Mayor Steven Fulop of Jersey City, NJ recently learned of a condo association there that had “almost $50 million in deferred maintenance,” which worked out to hundreds of thousands in future assessments for building owners. Buying into a building in situations like these is just asking for financial trouble, maybe even disaster.
For further reading:
- FL Building Collapse Upends Florida Condo Market
- Does My Association Have Adequate Financial Reserves
- What You Need to Know About Homeowners Associations
Comments? Have you looked at your association’s reserve study recently? Is it fully funded? Have you backed out of buying property because it looked like the association was in financial trouble? Please add your Comments below.