Condo financials deserve special attention
Originally appeared in Bay Area News Group publications on April 4, 2014
“You must trust yourself more than you trust others.”
– Suze Orman
If you plan to buy a condo, you are choosing to become partners with from one to hundreds of strangers in a shared financial arrangement. The others are the current condo owners in the building. Additional strangers (new buyers) will later join the group.
You will be participating in a written agreement to share the costs of maintaining and/or upgrading the building and its common areas. In the right building, with the right co-owners, this can work beautifully. If, however, you buy in a problem building with uncooperative or unrealistic owners, your condo ownership experience could be truly troubling.
I recently wrote an article about hidden problems in condo buildings and received a number of reader emails substantiating my warnings.
HOA dues
Some potential buyers mistakenly cheer when they see low HOA dues for a particular unit. As these dues are intended for maintenance and reserves, inadequate monthly fees are a clue to the likelihood of a building with management problems. If there are management issues, sooner or later, there will be deficiencies in the building itself.
Reserves
Healthy reserves are the fulfillment of proper planning and a reflection of a well-run condo association. Human nature is the biggest stumbling block to this process. Given a choice of charging themselves more each month to protect the future of the building or paying less and rolling the dice, too many condo associations choose the latter.
Insufficient reserve funding is part of a vicious cycle. Over time, the HOA realizes there are not enough dollars to adequately handle problems that inevitably arise in buildings. This leads to a sort of “triage effect,” where situations are ranked in priority order.
What sounds like a rational path is actually the beginning of a dangerous downward slide where problems are tackled mainly on a cost basis. The worst problem is repaired, but in the least expensive way, which means it will, possibly, resurface again. Problem number two is handled similarly, if at all.
Other items that need attention now are put off until added funds are available. It does not take long before the building is more a list of serious deferred maintenance than a good investment and pleasant place to live.
At some point, owners have the unenviable choice of a huge dues increase and/or a sizeable special assessment. They grumble and wonder how this could have happened. Meanwhile, how much responsibility did each owner take to be truly informed about the relationship between reserves and building care?
A reader of my last condo article commented about the nondisclosure of “chronic underfunding of the reserve account.” He said, “Everyone focuses on the monthly HOA dues, but ignores the recommendations in the legally required ‘reserve study.’ Many larger, older condo buildings think they are fine if they have a few hundred thousand dollars in their reserve fund, when they should have a couple million. A small dues increase, multiplied by many years, would correct this problem, but who elects not to buy a condo because the dues have been too low to properly fund the reserve account?”
The HOA
Homeowner’s Associations are composed of unit owners who volunteer their time and effort to help govern the building. Once again, human nature reveals that too many will allow others to do for them what they should also be doing, i.e., participating on the HOA board of directors.
Over time, competent, long-time HOA directors get tired of this unpaid, high-stress part-time job and quit. Positions now open to those who may be less competent, less caring or less committed. Although this scenario is not always the case, it is not unexpected. This observation was supported by another reader with HOA governing experience.
One more reader wrote that she was told, about the HOA, when she bought some years ago, “the finances were in great shape and it was well run. The board president undertook a massive dry rot repair a couple years later, with no experience in managing massive projects. It went way over budget and caused assessments and huge upset in the association. The management company was useless in sorting it all out. Dues were so high at one point no condos would sell. With much hard work, things are a bit better now.”
Her email continued, “People think the HOA will handle everything and your life will be carefree. Nothing could be farther from the truth as owners have to spend much time and frustration dealing with the financial and other issues in an HOA. High management fees and still owners must work hard at all the issues”
She went on to say, “I recently attended our annual meeting and a graph showed [almost half] of expenses are for management company, insurance and bureaucracy. [About forty percent] on property maintenance! So more spent on the tremendous amount of bureaucracy created than on property maintenance.” This reader ended with, “If the economy in the SF Bay Area was not so good, I feel our HOA would be in real trouble.”
Final thoughts
Condos are a wonderful choice for some people and they buy for different reasons. In certain cases, it is the most affordable first-time buyer option. For others, it is a step toward simplification and less time spent on home and garden maintenance. Regardless, there is a vast difference between owning a single-family residence and a condo.
As one of my readers opined, “This is a subject people do not discuss when buying near enough!” Do your homework and know what you are buying beforehand or risk suffering the consequences.
Related Articles:
Condo Buildings May Hide Serious Secrets