Healthy condo has a flush reserve fund
All condo owners contribute to their association’s reserve fund through their condo fee. But when the reserve fund isn’t enough to cover urgent work, owners are handed a big bill in the form of a special assessment. That can be especially painful for retirees on fixed incomes.
There’s no reason for condo owners to be blindsided. If you see something in your building that causes concern, say something, says Dawn Bauman, a senior vice president of the Community Associations Institute. Even better, she says, put your questions, concerns or requests for information in writing, addressed to the board.
If you’re not attending board meetings, read the meeting minutes, which are generally posted online or sent to owners. “Be concerned if there are no meeting minutes, some are missing, or the board has been preoccupied by minor issues at the expense of important decisions that affect home values,” says Robert Nordlund, CEO of Association Reserves, which conducts reserve studies for properties. He publishes a free guide, “7 Tips That Will Turn You Into an Informed Owner or Buyer,” at reservestudy.com/ older-condos-resources.
Some of the same benchmarks that Nordlund tells buyers to look for can also help condo owners determine if the association is prepared for future repair bills. Condo fees, for example, should have been raised at least three times in the past five years, but condo owners often pressure the board of directors to keep the fee low. Without
adequate funding, maintenance and repairs are deferred only to become more expensive later, increasing the odds of a crisis and the need for a special assessment.
Eric Glazer, a lawyer in Orlando, Florida, who specializes in condo law, says that retirees often like to brag about who has the cheapest condo fee. “The winner is actually the loser,” he says.
Another benchmark can be found in the reserve study, which should have been prepared by a credentialed specialist within the past few years. Owners should ask for a copy and check the percentage of anticipated needs met by current savings. This percentage “is the only way to link a condo’s financial and physical health,”
Nordlund says. A condo is in good shape when the needs are more than 70% funded.
What if you want to sell and know that something is amiss in your building? By law, you need only disclose defects that you know about within your unit, not those in the building or common area. Still, if many of your neighbors also list their units for sale, that can alert buyers that something’s up. Fannie Mae and Freddie Mac have imposed new guidelines for lenders to ferret out buildings that are too risky for mortgage loans. Lenders who want to sell loans to Fannie and Freddie must determine if a building has significant deferred maintenance, special assessments that adversely affect the condo association, insufficient reserve funding or no reserve study. The guidelines are temporary and subject to revision, but Bauman expects they will become permanent, making it harder for sellers of units in troubled buildings to get out.