The following article was written by fellow inspector and Condo Owner Paul MacLean from Austin Texas. I'd like to thank Paul for allowing me to share this information with my Clients.
Check Your Homeowner Associations Financials
By Paul MacLean
Buying a Condo or Townhome is like buying shares in a nonprofit Real Estate holding corporation. You don't just buy a home, you enter into a partnership. Check the Associations financials before buying, or you may end up in one of three homeowner associations (HOA's) unable to make major repairs because of insufficient reserves, according to the company, Association Reserves Inc., a company that performs reserve studies for residential and resort properties. This company backs its claim with more than 10,000 reserves studies in 43 states.
What's at Stake?
Condo's, townhomes and some single-family communities are common-interest developments. You own your unit, or at least everything on your side of the walls. But you also own a share in common areas, and sometimes also the exterior walls of living units - and you're responsible for their upkeep.
Guided by a board of directors, the HOA manages dues and other money collected to fund the annual budget. Monies are dispersed for repairs and upkeep of common areas, buildings, other structures, landscaping, lighting, walks, paving, pools, decks and the like, and other operating expenses. If a shortfall develops, the HOA looks to homeowners for more funds, usually by special assessment. This one time fee or short-term increase to monthly dues can run thousands of dollars per owner.
Percent of Reserves Funded
A part of the HOA's budget called the Reserve Fund, available from HOA management, reveals how much cash is available for future obligations. The level of reserves is based on the size, age, construction type, maintenance level and type of community. The American Institute of Certified Public Accountants recommends associations conduct annual reserve studies to guage fiscal fitness, but only a few states mandate them. Generally, if an HOA has 70% or more of the reserves a study says it needs, it's in good condition and there's little chance of an assessment. With 30% to 70% funding, reserves are in fair condition and an assessment may be needed. Under 30%, the reserves are in poor condition and an assessment is likely.
Ask about Owner-Occupancy & Delinquencies
Low reserves aren't the only assessment risk. More owner-occupied units foster a community's well-being. With 75% or more units occupied by owners, conditions are good. At 60% to 75%, more upkeep may be required. Below 60%, there's a greater risk not only of extra assessments, but less community participation and more infractions of association rules.
Monthly dues fund the HOA budget. If 5% to 10% of dues are late, it's a warning call. More than 10% late is a red flag signaling poor budget management and more risk of assesssments.
In summary, get solid answers to these questions before you buy a condo or townhome.
*How much does the HOA have in reserves, and what percent of its obligation is that?
*What percent of living units are owner-occupied?
*What percent of owners are 60 days or more delinqent in their dues?
*Finally, are there any outstanding lawsuits against the HOA? If so, for how much?
Do your homework, and you'll likely make a wise purchase when buying a condo or townhouse. When you find one you like, give us a call, we do Houston condo inspections.