Help reviewing condo documents.

[Jerry1]

I'm looking at buying a condo. Everyone says, read all the association documents. I just received them and have a few questions. First, in the bylaws, etc, (the rules), what do you look for. I'm focusing on the section that discusses the things that I own and am responsible for verses the things the association takes care of. Any other critical areas?

Second, I'm looking at the financial statements. They do have a reserve of just over a million, but how do I evaluate that? There's at least a couple hundred units and I'm sure a $1M would go quick if something happened that wasn't covered by insurance, so is there a basis to evaluate the reserve on. Something like a ratio of reserve to total monthly dues? I'm just thinking the $1M in and of itself isn't really meaningful other than, they're not broke.

This is a screen shot of the complex. It's made up of mostly 4 plexes and there is a street of duplexes in the middle.

 

[braumeister]

I would consider reserves in terms of the annual budget (one year, two, ?)
Also look at their capital spending plan (things like reroofing, street paving, etc. can be very expensive and need to be planned for).

 

[pb4uski]

As a former condo Association treasurer I can help with the last part. Just think of the reserve as a savings account or sinking fund for big ticket items. Our biggest was roofs, followed by painting, followed by parking lot repaving. Our association had a schedule of the 6 or so items that they were reserving for, how much they expected the next one to cost, estimated life, estimated remaining life, annual assessments towards that item, etc.

For each item, you can look at the current reserve and add to that the annual assessments for that item for the estimated remaining life. Hopefully, that will exceed the expected cost.

I'm oversimplifying it here but you get the idea. One thing that I did was to schedule the various reserve items, adding assessments each year and subtracting the expected costs in the years they were expected to be spent to see if there were any points in time that we would not have enought money in reserves to pay for the expected reserve items, in which case we would need to do special assessment for the deficit.

If you want to get fancy you can add interest since the reserve will be invested and earning some interest. Some people want each item to stand on its own or others (such as myself) are ok with "pooled" reserves where the reserve is a big pool of money from which reserve items are paid for.

But you are right... $1m in reserves for an association that size doesn't seem like much unless they recently replaced roofs and painted so there is a long runway to the next repainting or next reroofing.

 

[MarieIG]

Be aware of the insurance, additional insured requirements, and defense & indemnification requirements. Not only prior to purchase - but ongoing.

I would read the totality of the documents, and make notes for any language / issues which need clarification.

 

[Souschef]

I was the treasurer of my condo for 25 years. The amount of the reserves is not as important as the Reserve Study. This should be done annually and provided to you.
It should contain an analysis of all reserve items, their expected life expectancy, the replacement/repair cost, and the amount set aside for each.
Assuming the complex has 200 units, the reserve for each unit is $5000. This does not consider common areas such as pools, rec centers, etc.
As an example, if a roof has an expected life of 10 years, and the replacement cost is $15,000, $1500 per roof should be set aside every year.
Side note: In many condos there is pressure to keep the condo fees low to enable resale, but this can lead to deferred maintenance and/or inadequate reserves.

 

[badatmath]

I don't live in a condo but the HOA is not required by law in my state to maintain any specific level of reserves and THEY DON'T.

 

[MichaelB]

+1@ reserve study. You need to understand what costs are paid by the association and which the responsibity of the property owner. That will help assess the current reserve level.

I’d also look at meeting and budget requirements, and browse the minutes of the most recent board elections and budget. How many homeowners voted in the last election is a good indicator of the level of involvement.

 

[Lewis Clark]

The amount of the reserves is not as important as the Reserve Study.

+ 100 on the importance of the reserve study. Professionally done reserve studies are usually done every 3 to 5 years. This is the recommendation of the Community Associations Institute.

If there is no recent reserve study the Board probably has no idea whether or not they are reserving enough each year to cover their obligations. Highly likely they do not, which will lead to special assessments. Be VERY cautious if there is no current reserve study.

 

[COcheesehead]

I was the treasurer of my condo for 25 years. The amount of the reserves is not as important as the Reserve Study. This should be done annually and provided to you.
It should contain an analysis of all reserve items, their expected life expectancy, the replacement/repair cost, and the amount set aside for each.
Assuming the complex has 200 units, the reserve for each unit is $5000. This does not consider common areas such as pools, rec centers, etc.
As an example, if a roof has an expected life of 10 years, and the replacement cost is $15,000, $1500 per roof should be set aside every year.
Side note: In many condos there is pressure to keep the condo fees low to enable resale, but this can lead to deferred maintenance and/or inadequate reserves.

+1 The reserve study is key. You can have a million in reserves, but if the reserve study shows 8 million in repairs are due in a year, you are going to get a nice special assessment

 

[braumeister]

Be aware of the insurance, additional insured requirements, and defense & indemnification requirements. Not only prior to purchase - but ongoing.

This is probably a bigger issue than many realize. Insurance costs for condo HOAs has been skyrocketing in recent years, and even becoming unavailable in some areas

 

[OldShooter]

I would consult a CPA or an attorney with expertise in condo finances in general and, if possible, familiarity with this specific development. WADR, @Jerry1, it seems likely that your personal expertise in reading legal documents is not adequate here. I would not consider mine to be.

 

[badatmath]

Also check with your insurance company if "loss assessment insurance" is right for you.

It is basically a rider on my HO policy that is supposed to ensure I'm not on too big of a hook for things the HOA master policy doesn't cover. As this has not happened IDK if it works but it was quite cheap, my HOA is quite small. . .
I think the deductible is something ridiculously high but I no longer rememeber.

 

[sheehs1]

Ask for the most recent Reserve Study, copies of minutes for the last 2 years, if the minutes don't include it ( but the annual meeting should) ask for the budget as well (not sure what financials you are reviewing). Roofs will be the most expensive replacement item so ask when the roofs were last replaced if not apparent (should be in the Reserve Study listing remaining useful life). I also asked for a list of Special Assessments for the last 5 to 10 years.
I was on our BOD of Directors for a condo I bought as a second place in 2017 for 4 years. I just resigned this past February to get younger members on the BOD. It was also a full time job! I enjoyed it and getting to know everyone! Our condo is 108 units, nine buildings-low rise 3 story condos, guard house, pool/mechanical room building, gazebos and a shed. We are water front on the Chesapeake Bay in Virginia. We are in the process of replacing roofs. Cost is close to $500,000 and we were happy to get it done at that price. We had a little over 1.1. million in reserves before this and we set aside $220,000 a year for Reserves (we have been doing expensive Reserve projects the last 3 to 4 years and still had 1.1 million before these new roofs).
Understand what the Master Condo Insurance covers and what it doesn't.
Regarding Budget, our recommended Reserve Allocation recommended in the Reserve Study of over $220,000 which had dramatically climbed the last 2 to 3 years due to Inflation, Master Insurance costs and Water (complex built in 1993 and were not individually metered) made up 71% of our budget. We had to increase HOA fees the last 3 years due to Inflation (they had been kept unreasonably low for a very long time). Low HOA fees respective to other associations close to the same size, amenities, with or without elevator maintenance etc. around you (if apples to apples compare) can be a bit of a red flag in my honest opinion.

 

[pb4uski]

I'll offer a contrarian view. A reserve study is nice to have, and if they have one get it and review it, but it isn't critical. The important thing is that the things that will require periodic replacement and to be reserved for are identified. The people who do reserve studies don't have any special insights on what your 5 year old roof will cost to replace in 15 years. If you talk to them they'll tell you that they use today's cost and adjust for 15 years of inflation. We had the information to do that simple calculation. The math of the reserve schedules is very simple.

 

[MichaelB]

I'll offer a contrarian view. A reserve study is nice to have, and if they have one get it and review it, but it isn't critical. The important thing is that the things that will require periodic replacement and to be reserved for are identified. The people who do reserve studies don't have any special insights on what your 5 year old roof will cost to replace in 15 years. If you talk to them they'll tell you that they use today's cost and adjust for 15 years of inflation. We had the information to do that simple calculation. The math of the reserve schedules is very simple.

The point is not only the math of the reserve study, it’s also looking at what is included, and more importantly, what is not. If common areas or HOA facilities are in need of repair and the reserve study doesn’t provide for that, it’s a future unfunded liability.

 

[Jerry1]

Thanks everyone. I just got done reading all the documents I was given and I think they're lacking. They answered a lot of my questions, but not the detain mentioned here - specifically the reserve study or a plan of future expenditures versus reserves. I also saw an amendment requiring an audited financial statement and all I was provided was a print out of an internal balance sheet. Worse, printed in January 2025 and dated November 2024. Going to have to call out the seller on that one for not providing the documents needed in a timely manner based on the selling agreement. More work to do.

 

[MarieIG]

Kudos for reading the documents Jerry. Way too many buyers don't.

 

[MarieIG]

Thanks everyone. I just got done reading all the documents I was given and I think they're lacking. They answered a lot of my questions, but not the detain mentioned here - specifically the reserve study or a plan of future expenditures versus reserves. I also saw an amendment requiring an audited financial statement and all I was provided was a print out of an internal balance sheet. Worse, printed in January 2025 and dated November 2024. Going to have to call out the seller on that one for not providing the documents needed in a timely manner based on the selling agreement. More work to do.

Also, you may wish to request and correspondence issued to the owners in the last year regarding reserves (and to the extent that you can get them, any minutes relative to maintenance, property conditions, vendors, anticipated changes to expenses, insurance coverage, HOA fees, anticipated work/ upgrades, etc. - see, #13, supra.)

 

[Koolau]

Some red flags to look for: Has the Condo ever had special assessments - IOW found themselves in a situation where reserves didn't cover special expenses?

As you look at the unit for sale, look at the property with a seriously critical eye. Are the grounds and buildings and equipment in good shape? (Well painted, well maintained, all in w*rking order.)

If I had a choice, I would choose a condo WITHOUT a pool. They are expensive to maintain and they only get more expensive over the years. I don't use our pool and wish we didn't have one, but every condo has a pool, so I didn't really have a choice.

Try to catch some residents and talk to them about the management and the building/grounds. Residents will tend to be honest about their feelings - but don't let one person sway you.

Try to talk to the resident manager and get some idea if s/he is approachable and responsive. Talk to your realtor about the building and management. Keep in mind that s/he may be biased toward selling - not being brutally honest.

I generally like condo living, but there can be issues with a board and misunderstandings about details of the "rules." Try to find out before you buy, though it's not always easy.


Best luck!

 

[Teacher Terry]

I love my condo but money goes fast when you are paving parking lots and replacing roofs. We do our reserve study every 5 years. I carry loss assessment insurance in case we ever need a special assessment.

We are in Nevada and have 150 units. Our insurance premium doubled this year. Unfortunately, we are lumped into a category with California in regard to wildfires. Also our buildings are 47 years old which doesn’t help.

 

[pb4uski]

The point is not only the math of the reserve study, it’s also looking at what is included, and more importantly, what is not. If common areas or HOA facilities are in need of repair and the reserve study doesn’t provide for that, it’s a future unfunded liability.

I understand that. We had 40 years of experience with the property as well as an experienced property manager so we had a very good idea of what major items would need to be done. We got input from the property manager and vendors on costs, remaining life etc. Our situation was very simple, so simple that we didn't believe that a reserve study would add value commensurate with the cost which was $4-5k as I recall.

 

[Koolau]

We've discussed reserves in every meeting of our Condo assn. that I recall. We've never NOT added MORE HOA dues to increase reserves. So, instead of usual inflation (say 2 to 3%) our HOA dues have typically gone up more like 7 to 9%. This year (as relayed elsewhere) our dues went up 40% to cover insurance increases plus increase reserves.

 

[pb4uski]

Thanks everyone. I just got done reading all the documents I was given and I think they're lacking. They answered a lot of my questions, but not the detain mentioned here - specifically the reserve study or a plan of future expenditures versus reserves. I also saw an amendment requiring an audited financial statement and all I was provided was a print out of an internal balance sheet. Worse, printed in January 2025 and dated November 2024. Going to have to call out the seller on that one for not providing the documents needed in a timely manner based on the selling agreement. More work to do.

Our audit typically wasn't completed until May, June or July. However we never had an audit adjustment other than to accrue income taxes (which were negligible) so the December unaudited financial reports were reliable.

For our monthly financial reports we typically received them 2-3 weeks after the end of the month and they included bank reconciliations.

 

[pb4uski]

Some red flags to look for: Has the Condo ever had special assessments - IOW found themselves in a situation where reserves didn't cover special expenses? ...

At least in Florida, reserve money can only be used for reserve items. So for example if you need to resurface the pool but don't have a reserve item for pool resurfacing or anything close to pool resurfacing then you can't use reserve money and would need to pay for it through operations (regular assessments) or a special assessment.

 

[Koolau]

At least in Florida, reserve money can only be used for reserve items. So for example if you need to resurface the pool but don't have a reserve item for pool resurfacing or anything close to pool resurfacing then you can't use reserve money and would need to pay for it through operations (regular assessments) or a special assessment.

I don't know about our reserves as far as being specific. I do know that we have reserves for some specific items (such as elevator and pool). After 15 years, I've found our board to be pretty open and up front about everything, so I've developed a fair amount of trust in them.

One thing to be aware when thinking about increasing reserves: Each owner "owns" their share of those reserves. The practical significance of that fact is debatable but needs to be considered.