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Should you buy that condo? How strong is your HOA?

Wall Street Journal

Should you buy that condo?

Purchasing a condo often is the first step in the homeownership process, and can be a good opportunity for first-time buyers. However, as more homeowners living in community developments with homeowner associations find themselves in trouble, many are not paying their dues. As a result, residents who do pay their HOA dues are seeing increases in their monthly bills or unexpected special assessments. This is especially true for communities that do not have enough funds in reserves to pay for property maintenance and repairs. Buyers considering the purchase of homes in community developments with HOAs are advised to closely monitor the homeowner association’s financial health.

MAKING SENSE OF THE STORY

· Buyers are advised to request all financial documents relating to the homeowners’ association during the home inspection period. In most cases, buyers receive these documents one to two days before closing, or find they are incomplete. Financial advisors recommend that buyers work with their REALTOR® to ensure the documents are received in a timely manner—preferably with at least three days to review.

· When reviewing the financial documents, buyers should note that two-thirds of the association’s budget should be operating expenses such as water, lights, elevator maintenance, and landscaping; the rest should be set aside in a reserve fund for long-term maintenance and repairs.

· If the expenses exceed revenues due to foreclosures, unpaid dues, or other reasons, buyers should ask the association’s manager or board of directors what its plans are to make up for the shortfall, and whether the association expects an assessment or higher dues. It also is important to note if the financial deficit will be made up with shorter pool hours, or a reduction in landscaping and other community amenities, as these could affect not only the comfort of the community, but also the future marketability of the property.

· While the financial health of a homeowners’ association is an important factor in the purchasing decision, it shouldn’t deter home buyers from purchasing condos. Many first-time buyers purchase condos to enable them to become homeowners. Typically, condos are more affordable than single-family homes, offer community amenities, and may allow a buyer to purchase a home in a highly desirable area where they otherwise could not afford.

· Although not required, it is becoming more common for associations to hire outside firms to look at all long-term anticipated repairs and replacements within communities over a period of 30 years, add up the costs, and create a payment and maintenance schedule. The monthly dues charged to each owner should reflect the amount of money needed to pay for the necessities.

· Associations ideally should save enough money over time to pay for every contingency, such as roof leaks, pipe bursts, sidewalk cracks, and the like. However, most associations often deplete reserve funds to pay for operating costs and other expenses. Although the percentage of funding necessary varies by the age and size of a community, in general, buyers should be concerned if funding is below 40 percent, as it could result in a special assessment in the future.

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