One of the first things you should look at when evaluating a condo is whether it is in good financial health or not.
Condos are a popular choice for many buyers in the DC Metro area because they fit the needs of many but typically come with a smaller price tag. Whether you are a new professional ready to buy your first home, an empty-nester determined to downsize, or simply prefer the low(er)-maintenance of an apartment, you are going to be a part of a condo association and will share in the financial responsibility of this community with your neighbors. Therefore, you will want to determine how stable and financially sound this community is before becoming a member.
The Right to Review
If you’re purchasing into a condo association or homeowners association (HOA) in DC, MD, or VA, you will have an opportunity to review the association’s official documents and financials. This opportunity arises once you are under contract to purchase the property, but how long you have to review depends on the location of the property:
• District of Columbia – Three business days (based on Federal Gov’t holiday schedule) following the date of receipt
• Maryland – Seven calendar days following the date of receipt
• Virginia – Three calendar days following the date of receipt
• If you are purchasing in a new development with an HOA or condo association, then you will have 15 days following the date of receipt
If there is anything in the condo documents that causes you to change your mind about purchasing the home, then you have the right to cancel the contract (so long as you do so before your deadline) and have your earnest money deposit returned. You do not have to provide a specific reason for canceling the contract.
What Are Condo Docs?
Condo docs are a snapshot of the association on paper. You will typically receive the Association Declaration, By-laws, Rules and Regulations, Financial Statements, and Budget. These documents are intended to demonstrate the legitimacy and viability of the association. However, many buyers are immediately overwhelmed when receiving the documents because they are massive….typically hundreds of pages. No need to panic though! While most of us aren’t trained attorneys with a specialty in real estate associations, there is still an opportunity for you to approach this process thoughtfully.
Financial Statements and Budgets
These documents provide an overview of the financial condition of the association. While you will never know everything about the association through these documents, a focus on the Reserve Fund and Operating Budget can provide crucial information on the stability of the association.
The Reserve Fund
If your condo has a low reserve fund, it will require a special assessment (additional fees) when a major repair or renovation is needed. It’s something to consider if you’re looking at an older building, especially ones that are around 25-30+ years old. Keep this in mind for older apartment buildings that have been condos for only a few years. You can also ask your home inspector to assess the condition of the common areas (roof, structure, windows, siding, etc.) to shed light on any potential repairs.
Operating Budget
Monthly fees are what fund most of the operating budget. Experts say about two-thirds of the operating budget should be used toward expenses, but each association has its own agreed-upon approach to budgeting. You should be looking at how your condo fees are allotted each month for employee paychecks, utilities, trash pick-up, etc. If your condo has a 24-hour front desk, swimming pool, elevators, a full-time engineer on site, then you will typically see more expenses and higher association fees.
Bylaws and Rules/Regulations
You want to check these out to see if you will be able to live by the rules and regulations of your community. Remember, you’re living with many other people, and there will be certain expectations and restrictions. Do these suit your lifestyle? These rules can vary widely from community to community. In general, these documents could specify a range of items, including its pet policy, whether you need to have carpeting, if can you install hardwood floors, or if you can rent your condo at any time. Also, review any grandfather clauses since you might not have the same “rules” as an earlier buyer.
Other Important Questions to Ask
Each association tends to have its own rules and processes while assisting with the transaction. You will find some associations willing to address every question you may have, while others only provide the documents required by law. If you have an opportunity to communicate with the association, then you should! This additional information can help round out your review of the condo docs, so here are a few of the most common questions:
Are there any upcoming upgrades or projects planned in the building?
How are those projects going to be paid for? Reserves? A special assessment?
What projects are on the 5-7 year horizon? Are there adequate reserves being funded for these projects? Make sure you get a copy of the most recent Reserve Study.
What are the major issues the board is discussing at the last several board meetings? Ask to receive a copy of the board meeting minutes from over the last year, but note that they are not required to provide this information.
Is the condo experiencing any litigation? Whether it’s a small or large lawsuit, reserves can be depleted quickly to cover this.
What percentage of the units are owner-occupied? Generally, the higher the percentage of owners, the more marketable the unit will be for resale. It’s not unusual to find some associations in financial trouble over short sales or foreclosures. This is also information that you will seek during the financing.
What does the association’s master insurance policy cover?
Red Flags to look for:
One of the first things you should look at when evaluating a condo is whether it is in good financial health or not. In this edition of First-Timer Primer, we review five potential red flags you may encounter when reviewing documents for a condominium you are considering purchasing.
1. Use Restrictions That Don’t Align With Your Plans For The Condo
The Bylaws and any Rules and Regulations (also sometimes called House Rules) of a condo building will set forth restrictions on how you will be able to use the condo. Here are some of the more common restrictions to consider:
If you have a pet, make sure there are no size or breed restrictions, and that your type of pet is allowed. Many condos only allow “ordinary domestic pets” (dogs, cats, and caged birds) and aquarium fish.
If you think you may rent out the condo, check for any restrictions on leasing, such as minimum lease term or a rental cap. Most condos prohibit short term rentals such as Airbnb and VRBO, so if generating revenue from these platforms is part of your plan, you’ll want to make sure you’re allowed to do so.
Many condos prohibit smoking in common areas like roofs and courtyards, and some even prohibit smoking (and vaping) within individual condos.
2. Lack of Meeting Minutes
While meeting minutes must be provided to potential purchasers in Virginia, they are not required to be provided in DC and Maryland. Ask for them anyway. If no meeting minutes exist (as is sometimes the case with small associations), that will give you insight into how the association is run. If they exist, but a DC or Maryland condo refuses to provide them, you should ask questions about the reason that minutes are being withheld and consider whether there may be issues reflected in the minutes that may turn off a potential buyer.
3. Outdated Reserve Study
A reserve study is an engineering inspection and analysis of a condo building’s common capital systems and elements, such as the roof, exterior walls, and mechanical equipment (like elevators and HVAC systems). It provides a roadmap for how much money the association should be saving in its reserve account based on the cost to replace these components. Best practice is to perform a reserve study or a reserve study update every three to five years. If a condo’s reserve study is older than that, the pricing in the study may be outdated or the study may not reflect current conditions like a roof that has started to leak since the last study.
4. Frequent Special Assessments
A special assessment is a charge to unit owners above and beyond the regular monthly assessment. Sometimes special assessments are necessary because of an unexpected cost that the condo building does not have the funds to cover. Especially in smaller associations (which tend to hold less money in their reserve account), special assessments are not necessarily a bad thing. However, if a condo has a history of multiple special assessments, you should investigate why, as sometimes special assessments can be the result of poor management or oversight by the association.
5. Low Condo Fees
One of the first things that buyers look at when searching for a condo are the condo fees, since they add to the monthly cost of ownership. You should be wary of condo fees that seem too low. If an association doesn’t generate enough money to both operate and save into a reserve fund, residents may face deferred maintenance, lack of preventative maintenance that can lead to increased costs later, and often the need for special assessments, which can have a huge financial impact on unit owners.