When Marsh Williams and his wife, Carol, of Columbus, Ohio, wanted to buy a low-maintenance home in 2013, they knew a condominium would let them travel without fretting about forgoing necessary yard work or exterior upkeep. The couple, both then 61, thought they’d found the ideal unit. Marsh reviewed the condo association’s financial statements, budget and board minutes, determined everything was in order and closed the deal. Two years later, though, they were hit with a $17,000 assessment for a new roof — as was every condo owner in the building.
Before purchasing the condo, the Williamses didn’t know they should have scrutinized a document called the reserve study, an independent analysis of the condo association’s reserve fund for large expenditures. If they had, they would’ve seen that the building was estimated to need a new roof between 2015 and 2018.
Marsh knew he was in trouble after he moved in, got a copy of the reserve study and compared the reserve fund amount with the funds needed. “It wasn’t even going to be close,” he says. The reserve account had been underfunded for years. “People here were very upset,” says Marsh. ”
Buying a condo isn’t like buying a house
As a condo owner, unlike being the owner of a single-family home, you’re part of a community where majority rules. That can lead to frustration. The condo board might use a portion of your monthly homeowners’ association (HOA) dues to pay for amenities you don’t want. Other condo owners in your building might vote against improvements you favor.
“You co-share ownership with neighbors, and you can’t pretend you’re there on your own,” says Reba Haas, a Seattle real-estate agent.
That’s why it’s so essential to review the condo building’s financial records, budget, bylaws and other documents before purchasing. Friendly warning: they can range from 125 to 200 pages. “Most people get bored after the first three pages,” says Haas. “That’s a mistake.”
Before purchasing a retirement condo, make sure you investigate these eight factors to ascertain whether it’s likely to be a retirement haven or an investment hell:
1. What information must the seller provide? Condo seller-disclosure laws differ by state. For example, Washington state requires the seller to provide the buyer with a resale certificate that includes a copy of the current reserve study, declaration budget, bylaws, assessments and other documents.
2. Is the reserve fund adequate? HOA dues pay for things such as grounds maintenance and, if the location warrants, snow removal. However, a portion of those fees also goes into the reserve fund, a separate account for large expenditures like insurance and major repairs.
The condo association likely has a copy of the current reserve study analyzing whether the reserve fund has enough money to cover coming expenditures. Ideally, the reserve fund should contain a minimum of 10% of the capital budget. Ask the seller for a copy of the current reserve study.
In Marsh’s case, the board funded the reserve at just the minimum required by state law. “They didn’t know that would lead them to be upside down in the reserve fund,” he says.
3. What’s in the annual budget? Request copies of the last two years’ budgets from the seller, suggests Beth Grimm, an HOA attorney in Pleasant Hill, Calif. Examine them for red flags like high utility bills, ongoing repairs and steadily increasing HOA dues. Also keep an eye out for annual legal fees exceeding $2,000 to $5,000, which could signal potential or pending litigation.
4. Are there assessments? Haas has sometimes discovered “massive assessments” from $10,000 to $100,000 while reviewing condo documents for potential buyers. There may be small assessments for insurance increases or repairs, and that’s fine, but a history of large assessments could indicate poor financial management.
Look for assessments in the budget or mentioned in board minutes.
5. Is the condo warrantable? That means its loan is eligible to be sold to government-backed Fannie Mae or Freddie Mac. Most condos are warrantable, but some are not. If the one you want to buy is not warrantable, you may have trouble getting financing for it or may be charged a higher mortgage rate.
Watch for these factors, which can cause mortgage problems:
- Inadequate reserve fund. Neither Fannie Mae nor Freddie Mac will purchase a condo mortgage if the condo association or management company has less than 10% in its reserve fund.
- Too many investor-owned properties. Neither Freddie Mac nor Fannie Mae will purchase a mortgage on a condo in a complex of more than 21 units if more than 10% of them are owned by an individual or single investment entity. Smaller condo communities also have specific restrictions.
- Delinquent HOA fees. Freddie Mac and Fannie Mae won’t buy the mortgage if more than 15% of the total number of units are over 60 days delinquent in HOA fees.
6. Is there pending or potential litigation involving the complex or the unit? Ask the seller. Not all states require disclosure of litigation, so be sure to check your state’s condo laws. Often, you can perform free searches of city, county and state court systems online for lawsuits.
7. What is the master insurance policy deductible? Your condo association’s master insurance policy covers your building from your unit walls out, but you’ll have to chip in with other owners on the deductible — that can be $10,000 or more per claim.
You’ll need to purchase a “walls-in” policy covering all parts (excluding walls) of the actual condo, says Gerald Grinter, an insurance agent in Seattle. Grinter recommends a policy of at least $75,000 coverage plus a minimum of $20,000 for personal property.
It’s also wise to get loss assessment coverage of at least $5,000, which costs about $20 annually and covers your portion of the condo association’s insurance deductible.
8. How well-managed is the homeowners’ association? Ask the seller to obtain the last two years of minutes from the condo board for your review. Look for past or pending special assessments, talk of litigation, infighting or ongoing problems.
Marsh, who is now president of his condo’s homeowners’ association, recommends meeting with, or calling, at least two condo board members before buying a condo. That, he says, will help you get a feel for the management.
“In our case, the board was completely dysfunctional, which I found out after speaking with two members the day we moved in,” says Marsh.