Help reviewing condo documents.

[pb4uski]

...There is a widely recognized lack of competence for most HOA Board members for adequately fulfilling their responsibilities (unpaid volunteers mostly).

That is my experience. We had a few who were well intended, but didn't know what they didn't know.

 

[pb4uski]

For clarification by way of example: a roof has a useful life of 20 years, the current replacement cost of this roof is $12,000. The reserve fund should be collecting 1/20th of $12,000 annually. At any point in time, the reserve fund should have 1/20 x the roofs age ("consumed portion" of roof). Therefore, a roof last replaced in the year 2000, would be 9 years old in 2009. In 2009, the reserve fund should be holding 1/20 x cost x 9 = to be held in the reserve fund (and typically invested in bank CDs or gov bonds, something bullet proof). If I'm studying that reserve fund, I want to see the "roof replacements" line item at 1/20 x $12,000 = $600 x 9 = $5,400 in the reserve fund account. For simplification purposes, I have not future-valued the $12,000, but reserve funds do, so each year an inflation figure (typically matching the federal governments calculation of annual CPI (our fund currently uses 2.8% annually compounded so that your always dealing with the most current marketplace costs. Again, using this example, if $5,400 is in the reserve fund, your reserve fund coverage is 100% for this line item. All items so evaluated, added together form the 'Reserve Fund Ratio". According to most auditors we've used, 70% is the minimum they consider reasonably healthy funds, but ideally the fund as a whole is 100% "funded" (which applies to the sum of "consumed portions", not the full 20 year replacement cost, that is not until it reaches the replacement year).

Good synopsis, but the calculations should use the expected future replacement cost rather than the current replacement cost. For things that far out, the replacement cost is often a scientific wild ass guess, but as you get closer to replacement you can get estimates from vendors and refine the estimated replacement cost. Each year, the required reserve contribution would be the estimated replacement cost less the current reserve divided by the remaining estimated life. To be clear, we didn't always assess for 100% of the required contribution but were working towards doing so.

However, 100% funding isn't really required because the funding formula doesn't consider interest earned on reserves. Let's say that you just had your roofs replaced and it cost $12,000. The estimated cost of the next roof, 20 years from now assuming 3% inflation would be ~$22,000. If you assess $1,100 a year for roofs at the end of 20 years and get 3% interest, you would have $29,557, much more than the $22,000 needed. In reality if you consider the 3% interest on reserves in the calculation, you only really need to assess $825 annually.

If you use the current $12,000 replacement cost and assess $600 annually for 20 years your reserve balance with interest is $16,122 and not near enough to cover the ~$22,000 replacement cost in 20 years.

All of that said, I think component reserving is a bit crude and is inferior to pooled reserves where you just run a 20-30 year forecast of reserves and calibrate assessments so you never have a negative balance during the projection time horizon.

 

[Jerry1]

The purchase of the condo is proceeding. I expect we'll close by end of the month. This thread has been very helpful but getting the information was not easy. In fact, I still didn't get everything and am going forward with a bit of hope that the good reputation that this complex has is deserved.

With respect to insurance, I was able to get documents that show exactly who owns and is responsible for the components of the building and grounds. I own from the paint in. An addendum was issued in 2011 ceding responsibility of the windows to the condo owners. I accept that. The hard part is determining the amount of insurance. In a catastrophic situation, I'd be given a shell and have to rebuild the interior. I estimated $250K for a 2100sqft 2.5 bath unit. My thought is that I could remodel the entire place for around $100K so I doubled that and added $50K. It seems like too much but I can refine it in the future.

Regarding the board. I'm not fully sure how this works yet. They have a management company so I'm not sure exactly what the board does. The management company is well regarded in our area so I'm hoping they are properly advising the board on things like insurance coverage. I'd hate to find myself in a situation as describe in another thread on this board where there isn't a clear understanding on who insures what. I see no option but to spend some time over the next year or two learning all I can about the board and management structure by reading everything I can get hold of and attending the annual meetings. Information will be much easier to get (insist upon) once I'm an owner. What a catch 22.

One of the things that DW and I have committed to is not investing much money into the unit for the first year. Condo living is new to us so we want to make sure we like it and we also want to make sure we understand and accept the conditions in this HOA (finances, reserves, etc.). I have no concerns (short of some catastrophic event) that if we don't like it that we can get out without losing any money. I haven't seen a condo in this complex be on the market for over two weeks in the past year or so I've been looking to move.

As for getting all the information and reading it and understanding it before the purchase, there's no doubt that would be ideal. Unfortunately, the reality is that the system and the market is just not set up to allow that to happen. Especially, the market. If I was to try to get everything answered before I bought, I would have never been able to purchase the house. The time restrictions in the purchase agreement were not sufficient to overcome the lack of response to the information requested. In that situation, your only option is to walk away and that's basically what I would have had to do if I was going to insist on getting all my questions answered. The sad truth is that either I have to take the risk or they will find a more willing buyer to do so. Obviously, reality is not ideal. I did do what I could and found no red flags but my honest evaluation is that I probably did 50% of what I should have and probably 75% or more than the average buyer. Here's hoping that it goes well. I thank you all for your input.

 

[simple girl]

Regarding the board. I'm not fully sure how this works yet. They have a management company so I'm not sure exactly what the board does. The management company is well regarded in our area so I'm hoping they are properly advising the board on things like insurance coverage. I'd hate to find myself in a situation as describe in another thread on this board where there isn't a clear understanding on who insures what. I see no option but to spend some time over the next year or two learning all I can about the board and management structure by reading everything I can get hold of and attending the annual meetings. Information will be much easier to get (insist upon) once I'm an owner. What a catch 22.

I'm glad my situation has helped elucidate another situation you should watch out for! At least it serves some positive purpose, lol.

In all seriousness, wishing you all the best with your purchase! It is indeed VERY difficult to get all of the information you would like before you actually become an owner. Quite the catch 22!

I found some free HOA board training seminars online for our state that were hosted by a legal firm. That has been helpful to me, but I still have so much to learn. Perhaps you could find something similar in your state.

 

[Dee]

Good synopsis, but the calculations should use the expected future replacement cost rather than the current replacement cost. For things that far out, the replacement cost is often a scientific wild ass guess, but as you get closer to replacement you can get estimates from vendors and refine the estimated replacement cost. Each year, the required reserve contribution would be the estimated replacement cost less the current reserve divided by the remaining estimated life. To be clear, we didn't always assess for 100% of the required contribution but were working towards doing so.

However, 100% funding isn't really required because the funding formula doesn't consider interest earned on reserves. Let's say that you just had your roofs replaced and it cost $12,000. The estimated cost of the next roof, 20 years from now assuming 3% inflation would be ~$22,000. If you assess $1,100 a year for roofs at the end of 20 years and get 3% interest, you would have $29,557, much more than the $22,000 needed. In reality if you consider the 3% interest on reserves in the calculation, you only really need to assess $825 annually.

If you use the current $12,000 replacement cost and assess $600 annually for 20 years your reserve balance with interest is $16,122 and not near enough to cover the ~$22,000 replacement cost in 20 years.

All of that said, I think component reserving is a bit crude and is inferior to pooled reserves where you just run a 20-30 year forecast of reserves and calibrate assessments so you never have a negative balance during the projection time horizon.

As I wrote: "For simplification purposes, I have not future-valued the $12,000, but reserve funds do, so each year an inflation figure (typically matching the federal governments calculation of annual CPI."

My example was to clarify what the all important 'reserve fund ratio' represents.

You're correct on annual funding & forecasting; you have to fund based on future value replacement costs. Inflation should be adjusted annually as appropriate. But inflation is not the only factor involved in reserve funds.

Line items can also get added, removed, and adjusted. Roofs may turn out to last 18 years on average vs. 20 originally projected. That means earlier owners did not pay their fair share and somebody, like a new buyer, inherits that shortfall. If I see a reserve fund with 25 years on roofs, I suspect it's not realistic (but doing so keeps homeowner fees lower) and if i see 18, I'm impressed. And what if inflation actually ran 4% rather than 3%? If that 1% difference was due to cost of food, then it's not relevant, otherwise, we need to adjust the upcoming year accordingly but rarely does it apply equally to all components.

And perhaps more lumber fencing was added in the community or removed. And some lumber decks were replaced with simulated Trex-like material to last longer (we converted wood to Trex over the course of 13 years), so we kept two line items, one for each group requiring replacements at vastly different costs and useful life. And perhaps cement for sidewalks increased 20% for several years owing to marketplace supply shortages (which happened to us). And our irrigation pumps replacement costs went way up as copper prices skyrocketed for a couple years. How to keep track of all these changes and their financial impacts.

When all reserve fund items are treated as one unit, nobody can spot these issues, especially at any moment in time, like a buyer's viewpoint. These are examples of an evolving component inventory in addition to inflationary factors.

As an informed buyer, I would not accept the former, I want to be able to evaluate the reasonableness of forecasted costs, useful lives, inflation estimates, and the degree to which the HOA demonstrates their standard of care over keeping updated reserve fund component inventory. I can't see that when everything is lumped together with focus on inflation only.

My point is that keeping reserve components by line item has many advantages, to include providing an audit trail that holds up over time so everybody involved can understand where we've been and where we're going and reasons for it.

Annual funding is one issue, but keeping line items separate allows us to accurately calculate the impact of not only time, but all evolving financial impacts unrelated to inflation as well.

Your reply was educational for readers, and I'm probably wading in too deep on details. But ignoring these kinds of details caused significant shortfalls in our reserve fund and trying to figure out why without prior line item details was a nightmare. So we learned the hard way to keep line items and detailed explanatory footnotes so we can keep track of where we've been and where we're going.

 

[Sunset]

OP - I know parking for visitors can be an issue of annoyance to condo owners depending on how it's handled.
Also are there limits on renting your unit, or limits on the age of who can live there ?

 

[Jerry1]

OP - I know parking for visitors can be an issue of annoyance to condo owners depending on how it's handled.
Also are there limits on renting your unit, or limits on the age of who can live there ?

Parking is pretty good. Two cars can fit on my driveway and there’s parking in one side of the street. Just no overnight parking on the street. Units can be rented, but has to be at least 6 months and approved by the HOA. One piece of information I wanted was the percentage rented but I could not get that. I suspect it’s pretty small given the area and how much rents would have to be to cover the costs involved. I’ll pursue further after closing. No age restrictions.

 

[MarieIG]

There should be a written contract with the management company outlining the responsibilities of both the management company and the condo / HOA.

 

[Stormy Kromer]

The purchase of the condo is proceeding. I expect we'll close by end of the month. This thread has been very helpful but getting the information was not easy. In fact, I still didn't get everything and am going forward with a bit of hope that the good reputation that this complex has is deserved.

With respect to insurance, I was able to get documents that show exactly who owns and is responsible for the components of the building and grounds. I own from the paint in. An addendum was issued in 2011 ceding responsibility of the windows to the condo owners. I accept that. The hard part is determining the amount of insurance. In a catastrophic situation, I'd be given a shell and have to rebuild the interior. I estimated $250K for a 2100sqft 2.5 bath unit. My thought is that I could remodel the entire place for around $100K so I doubled that and added $50K. It seems like too much but I can refine it in the future.

Regarding the board. I'm not fully sure how this works yet. They have a management company so I'm not sure exactly what the board does. The management company is well regarded in our area so I'm hoping they are properly advising the board on things like insurance coverage. I'd hate to find myself in a situation as describe in another thread on this board where there isn't a clear understanding on who insures what. I see no option but to spend some time over the next year or two learning all I can about the board and management structure by reading everything I can get hold of and attending the annual meetings. Information will be much easier to get (insist upon) once I'm an owner. What a catch 22.

One of the things that DW and I have committed to is not investing much money into the unit for the first year. Condo living is new to us so we want to make sure we like it and we also want to make sure we understand and accept the conditions in this HOA (finances, reserves, etc.). I have no concerns (short of some catastrophic event) that if we don't like it that we can get out without losing any money. I haven't seen a condo in this complex be on the market for over two weeks in the past year or so I've been looking to move.

As for getting all the information and reading it and understanding it before the purchase, there's no doubt that would be ideal. Unfortunately, the reality is that the system and the market is just not set up to allow that to happen. Especially, the market. If I was to try to get everything answered before I bought, I would have never been able to purchase the house. The time restrictions in the purchase agreement were not sufficient to overcome the lack of response to the information requested. In that situation, your only option is to walk away and that's basically what I would have had to do if I was going to insist on getting all myNo questions answered. The sad truth is that either I have to take the risk or they will find a more willing buyer to do so. Obviously, reality is not ideal. I did do what I could and found no red flags but my honest evaluation is that I probably did 50% of what I should have and probably 75% or more than the average buyer. Here's hoping that it goes well. I thank you all for your input.

You are smart for taking out that much coverage on your part of the unit. It costs more than you think. Quick question, who pays for the kitchen cabinets and the plumbing fixtures, such as sinks and toilets....Not being smart, I am only interested because I want to know how to cover this stuff.

 

[pb4uski]

As I wrote: "For simplification purposes, I have not future-valued the $12,000, but reserve funds do, so each year an inflation figure (typically matching the federal governments calculation of annual CPI."

My example was to clarify what the all important 'reserve fund ratio' represents.

You're correct on annual funding & forecasting; you have to fund based on future value replacement costs. Inflation should be adjusted annually as appropriate. But inflation is not the only factor involved in reserve funds.

Line items can also get added, removed, and adjusted. Roofs may turn out to last 18 years on average vs. 20 originally projected. That means earlier owners did not pay their fair share and somebody, like a new buyer, inherits that shortfall. If I see a reserve fund with 25 years on roofs, I suspect it's not realistic (but doing so keeps homeowner fees lower) and if i see 18, I'm impressed. And what if inflation actually ran 4% rather than 3%? If that 1% difference was due to cost of food, then it's not relevant, otherwise, we need to adjust the upcoming year accordingly but rarely does it apply equally to all components.

And perhaps more lumber fencing was added in the community or removed. And some lumber decks were replaced with simulated Trex-like material to last longer (we converted wood to Trex over the course of 13 years), so we kept two line items, one for each group requiring replacements at vastly different costs and useful life. And perhaps cement for sidewalks increased 20% for several years owing to marketplace supply shortages (which happened to us). And our irrigation pumps replacement costs went way up as copper prices skyrocketed for a couple years. How to keep track of all these changes and their financial impacts.

When all reserve fund items are treated as one unit, nobody can spot these issues, especially at any moment in time, like a buyer's viewpoint. These are examples of an evolving component inventory in addition to inflationary factors.

As an informed buyer, I would not accept the former, I want to be able to evaluate the reasonableness of forecasted costs, useful lives, inflation estimates, and the degree to which the HOA demonstrates their standard of care over keeping updated reserve fund component inventory. I can't see that when everything is lumped together with focus on inflation only.

My point is that keeping reserve components by line item has many advantages, to include providing an audit trail that holds up over time so everybody involved can understand where we've been and where we're going and reasons for it.

Annual funding is one issue, but keeping line items separate allows us to accurately calculate the impact of not only time, but all evolving financial impacts unrelated to inflation as well.

Your reply was educational for readers, and I'm probably wading in too deep on details. But ignoring these kinds of details caused significant shortfalls in our reserve fund and trying to figure out why without prior line item details was a nightmare. So we learned the hard way to keep line items and detailed explanatory footnotes so we can keep track of where we've been and where we're going.

While we agree on a lot of things, I think you may be making it more complicated than it needs to be. It's not rocket science, but basic math. It is true that the components, their remains useful lives, estimated replacement cost, etc are constantly reevaluated, particularly towards the end of their useful lives, it is part of the process.

 

[pb4uski]

There should be a written contract with the management company outlining the responsibilities of both the management company and the condo / HOA.

There often is but it is rarely granular enough to be really useful.

 

[Jerry1]

You are smart for taking out that much coverage on your part of the unit. It costs more than you think. Quick question, who pays for the kitchen cabinets and the plumbing fixtures, such as sinks and toilets....Not being smart, I am only interested because I want to know how to cover this stuff.

My understanding of the documents indicates that I would be responsible for everything inside the condo. I think that would include all interior items you mentioned and even interior walls. The schematic shows them owning the joists and the outer studs. I’m not positive about the sub floor and the drywall but I think in a catastrophic event, they’d be responsible to provide me a shell that I would have to completely finish off.

 

[pb4uski]

That is similar to the definition of the Unit in our former condo. The Unit was from the cement floor or slab upwards, from the drywall in for exterior and common walls and from the drywall down for ceilings. So primer, paint, wall coverings and flooring were owner responsibility.

After we sold/moved, one of the units had a fire and was a total loss. I would have thought that the owner would get a shell (no load bearing walls the way the trusses are designed) so the owner would have free reign on interior design subject to accommodating plumbing, sewer and electrical placement in the floor. But I'm told that the Association may be responsible to provide certain interior walls. They are still sorting it out but it was news to me.

 

[Jerry1]

. . . so the owner would have free reign on interior design subject to accommodating plumbing, sewer and electrical placement in the floor. But I'm told that the Association may be responsible to provide certain interior walls.

It makes sense that they could argue some control/responsibility for the interior walls/design because they own the space that controls all of the paths that the utilities take. I was surprised to read that they own the electric up to the point of the outlet/switch/fixture. So, to run the electrical back in the unit, the association may claim rights to interior walls. Of course, they may also want to limit their exposure but limiting exposure also limits control. I can see why it would need sorting out.

 

[pb4uski]

That's interesting and surprising to me too. In our condo, the association was responsible for the electrical service up to the main panel in the Unit and the owner was responsible for the main panel, breakers, and all wiring, electrical outlets and switches from the main panel.

Similiar with plumbing... the association was responsible for plumbing into the Unit... to and including the main shutoff valve... and the owner was responsible for plumbing from that point forward.

But it got a little dicey because wiring and plumbing sometimes ran from the Unit back into the Common Elements and then back into the Unit... for example where the water supply piping went from the Unit into the slab (which was Common Elements) across the slab under the top of the concrete floor and then back up into the Unit... that was Association responsibility.

I recall while I was on the Board a water supply pipe in the slab failed and was leaking. luckily it was an upper floor Unit and we were able to run a replacement supply piping up into the attic, across the attic and then back down into the bathroom in the Unit. There was a question who was responsible for the repair in that circumstance since it was after the main shutoff valve. It was decided that since the failure was the pipe in the slab that it was Association responsibility.

For example, some of the upper floor owners added ceiling fans and ran the wiring from a wall switch, up the wall cavity into the attic, across the attic to a box between the trusses in the attic that came out in the ceiling of the Unit. Even though all of that was added by the owner, technically, if the wire in the attic failed the Association was responsible since once the wire left the Unit and was in the common elements it was technically Association property according to the documents. A little wacky.

The devil is in the details.

 

[pb4uski]

...When all reserve fund items are treated as one unit, nobody can spot these issues, especially at any moment in time, like a buyer's viewpoint. These are examples of an evolving component inventory in addition to inflationary factors. ...
Annual funding is one issue, but keeping line items separate allows us to accurately calculate the impact of not only time, but all evolving financial impacts unrelated to inflation as well.

Your reply was educational for readers, and I'm probably wading in too deep on details. But ignoring these kinds of details caused significant shortfalls in our reserve fund and trying to figure out why without prior line item details was a nightmare. So we learned the hard way to keep line items and detailed explanatory footnotes so we can keep track of where we've been and where we're going.

Perhaps I wasn't clear... even with pooled reserving you have the same detail that you have for component reserving in terms of items/components useful lives, estimated replacement costs, etc. It is just that you look at reserve adequacy as a whole rather than for each component isolation... in other words, given your assumptions on reserve assessments and the timing and amounts of reserve expenditures will you ever run out of money for the items that you reserve for... rather than assessing reserve adequacy for each individual component in isolation.

While we used component reserving, we had somewhat of the same debate when we used crossutilization when we replaced the roofs to minimize special assessments to owners. Some were concerned about draining reserves from components other than the roof reserve to minimize the special assessment for the roofs. Luckily, the expenditures for the other components were far enough away that we were able to demonstrate that it was still prudent to use those other reserves and the the current level of reserve assessments would replenish reserves such that there would be enough money in reserves when it came time to pay for those other reserve components and owners ended up comfortable with the approach.

 

[richardf]

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.

View attachment 55530

Why? We looked into a condo and that life style is a bottomless pit you pour money into. HOAs , insurance and rules are out of control. Rent or lease something.

 

[pb4uski]

My experience is very different. Our Florida condo was very affordable... not a bottomess pit at all. Much more affordable than a SFH.

For example, when you replace a roof you get better pricing that you would for a roof for a SFH since it is a much bigger project, plus in our case it was a 2-story building so the cost is shared by more owners. We replaced our roofs in late 2021/early 2022 at a cost of about $5,100/unit... a lot less than to replace the roof for a similiarly sized SFH.

 

[Koolau]

Why? We looked into a condo and that life style is a bottomless pit you pour money into. HOAs , insurance and rules are out of control. Rent or lease something.

Nothing is perfect and Condos have their issues. With careful homew*rk and a bit of luck, you can find a Condo that meets your needs. Renting and leasing have their issues too. And so does owning a SFH. A blanket statement suggesting Condos are never the right solution for housing is simply inappropriate IMHO.

We have owned two Condos and have been relatively satisfied with our experiences. YMMV

 

[Jerry1]

Why? We looked into a condo and that life style is a bottomless pit you pour money into. HOAs , insurance and rules are out of control. Rent or lease something.

You “looked” into a condo and came that conclusion. I’m going in eyes wide open and will be giving actual ownership a try before I come to any firm conclusion. I know a few people that are happy with their condo. There are a number of people on this site who are happy with their condo. I’m not sure if a condo will be right for me but I don’t think renting or leasing is the next best place for me to go now that we’re looking for something other than the SFH we live in now and have lived in a SFH for over 40 years. I feel pretty confident that I’m ready to give up what I’ve had, which is a SFH on over an acre. I’m tired of taking care of land. We may not like the condo but if we moved back into a SFH, it would be a much smaller yard.