Homebuyers

Buying a Condo? Why You Should Check the Building’s Financial Health First

Condos may offer homebuyers a more affordable path to homeownership, often with amenities and less maintenance to deal with themselves.

Before purchasing one, however, it’s important to look beyond the individual unit. A condominium’s financial problems can become a homebuyer’s issues after closing.

An underfunded association, expensive repairs, unpaid owner dues, delayed maintenance, inadequate insurance, or a looming special assessment can add significantly to the cost of owning your unit. Many condos will issue special assessments, which are temporary bills added to your monthly housing payments, to pay for these problems. 

Some problems can also complicate your ability to secure a mortgage.

Many of the warning signs can be found in documents homebuyers can request before purchasing. These include the minutes from board meetings, financial statements, and when the roof and major systems have been replaced or repaired.

“The minutes are where you find the problems the seller won’t volunteer,” said Justin Black, a real estate advisor with LIV Sotheby’s International Realty in Breckenridge, Colo.

Here’s how to get a clearer picture of a condo building’s financial health before buying.

Start with the condo documents

A condo association’s records can reveal much more than its rules about pets, parking, or renovations.

Steve Wallace, a real estate attorney licensed in Florida, New York, and Texas, recommends reviewing the declaration of condominium, articles of incorporation, bylaws, rules and regulations, recent budgets and financial statements, board meeting minutes, pending lawsuits, assessment delinquencies, and any financing agreements taken out by the association.

Homebuyers should also request the master insurance certificate, reserve study, and available reports concerning the building’s structural condition.

If an association is reluctant to provide important records, pay attention.

“One warning sign is a condo that will not turn over the documents,” said Elyse Berman, a real estate agent with LoKation Real Estate in Delray Beach, Fla. “What are they hiding?”

Find out whether the reserves can cover future work

Condo associations typically put a portion of owners’ monthly dues into reserves for major expenses such as roof replacements, façade repairs, elevators, plumbing, or other large projects.

A big reserve balance doesn’t necessarily mean the building is financially prepared.

“Don’t look at the dollar balance, look at ‘percent funded’ in the reserve study. [This] compares the current balance to what the study says the building should have,” said Black. “A big-looking balance tells you nothing without the study behind it.”

Reserve requirements vary by state and property. A reserve study, when available, can help homebuyers understand what major work is expected, approximately when it may be needed, and whether money is being set aside to pay for it.

Search the meeting minutes for upcoming problems

The annual budget shows what an association is spending today. Board meeting minutes may offer clues about what owners could be paying for tomorrow.

Look for discussions of roof replacements, structural repairs, elevator work, plumbing problems, insurance increases, lawsuits, or other significant expenses.

Homebuyers should also determine whether previously announced repairs have been completed. Deferred maintenance is one of the biggest warning signs Wallace looks for, as postponing necessary work can leave an association facing a larger expense later.

Investigate special assessments

A special assessment is an additional charge imposed on condo owners when the association needs money beyond what it collects through regular dues and its available funds.

An existing assessment isn’t automatically a reason to reject a condo. Find out how much it is, why it was imposed, how long payments will continue, and whether other assessments are being considered.

Homebuyers should also determine if they or the previous owners will be responsible for any outstanding assessment payments as part of the purchase.

Look at HOA fees, delinquencies, and debt

The monthly homeowners association (HOA) fee doesn’t tell the entire financial story.

Review several years of budgets and financial statements to see where the money is going and whether expenses have been increasing. A building with elevators, a pool, extensive grounds, or other amenities often costs more to operate.

Association debt deserves scrutiny as well. If the condo association has borrowed money, find out how much it owes, why it borrowed, and how the debt is being repaid.

“The biggest red flags are major assessments [and] very high monthly maintenance,” said Berman.

Wallace said problems with assessments, reserves, debt, and maintenance can follow an owner well beyond the initial purchase.

“These are all issues that will affect the marketability of your condo as well as the yearly carrying cost to maintain and retain ownership of the unit,” said Wallace.

Check the building’s insurance

Insurance is another expense that can have a significant effect on a condo association’s finances.

Ask for the association’s master insurance certificate and find out what the policy covers, its deductibles, and whether coverage or premiums have changed significantly.

Individual condo owners may also need their own insurance for portions of the unit or improvements that aren’t covered by the association’s policy.

“Master insurance premiums have jumped, especially in mountain and wildfire-exposed buildings,” said Black. “That flows straight into higher dues or an assessment, sometimes both.”

A homebuyer who isn’t sure what the association’s policy does and doesn’t cover can review it with an insurance professional before purchasing.

Find out whether the building could affect your mortgage

Getting a mortgage on a condo can involve another layer of review.

Depending on the loan and property, lenders may need to evaluate the condo project as well as the homebuyer. The association’s finances, insurance, owner delinquencies, litigation, and physical condition are among the factors that may be relevant to a project’s eligibility to qualify for a mortgage.

Requirements vary depending on the mortgage program and the condo. Conventional, Federal Housing Administration (FHA), and Department of Veterans Affairs (VA) loans can have different requirements for condo properties.

Homebuyers considering a condo should speak with a lender early in the process to find out whether the property may present potential financing issues.