Review those Condo Docs or Else!
This is the tenth article in our series called Buying a Home 101: Everything You Didn’t Know You Needed to Know Before You Buy Your First Home. This step-by-step series will take you through the entire home-buying process — from finding a buyer’s agent to settlement day, and even to maintaining your home after you’re all moved in. Make sure to tune in every week!
Purchasing a condo unit is like you’re buying into a business. You need to determine how stable and financially sound this “business venture” is before taking it on, and that’s where reviewing condo docs comes in.
Once you’re under contract, you’ll have the chance to review a stack of “condo docs” or condominium documents, which will give you a better idea of the financial outlook of this particular condo community. (Yes, it does seem backwards to review these docs after your offer has been accepted, but that’s how the process works!)
This is a very important step since you will share in the financial responsibility of this condominium community with your neighbors. Both you and your lender need to know what you are getting into with this purchase!
In DC, MD and VA, you have three days to review these documents and can cancel a contract without cause if necessary. If it’s a new construction property or the first resale of a condo, you have 15 days to review the documents. Take every ounce of that time to review these important documents and show them to a lawyer.
What Are Condo Docs?
Condo docs include but are not limited to the following: Declaration; By-laws; Rules/Regulations; Financial Statements; Budgets; and Minutes from Meetings.
Let’s go over some of these:
Financial Statements and Budget
Basically, these documents provide crucial information on the financial status of your building. Most importantly, take a look at the condo’s reserve funds and operating budget.
•Reserve Fund: These docs will tell you if there are enough reserves. A reserve fund (or savings account) is used for major repairs or improvements to the building. Projects can include new windows or a roof, for example. A condo needs to build up reserves for future repairs so a percentage of your monthly fees should be deposited into this fund. Also make sure you see how that money is invested.
If your condo has a low reserve fund, it will require a special assessment (additional fees) when a major repair or renovation is needed. It’s something to consider if you’re looking at an older building, especially ones that are around 25-30 years old. Keep this in mind for older apartment buildings that have been condos for only a few years.
A good rule of thumb is at least 10 percent of the condo or co-ops budget should be going to the reserve account. This is also what lenders require before they will give a loan for a purchase in a building.
•Operating Budget: Your monthly fees are what fund most of the operating budget. Experts say about two-thirds of the operating budget should be used toward expenses.
See how your condo fees are allotted each month for employee paychecks, utilities, trash pick-up, etc. Remember, somebody has to pay for those hallway light bulbs! Plus, if your condo has a 24-hour front desk, swimming pool, elevators, full-time engineer on site…these expenses add up and so will your fees.
Keep in mind your condo association shouldn’t be dipping into the reserve fund for basic maintenance like trash removal, recreational facilities, common-area landscaping, etc.
•Delinquencies: It’s important to know what percentage of unit owners are delinquent on their monthly fees. If more than 15% are more than 30 days delinquent, Fannie Mae may not approve your mortgage. Plus, if too many units go into foreclosure, the association could go into a budget shortfall, which could mean a special assessment is issued.
Rules, Regulations and By-Laws
You want to check these out to see if you will be able to live by the rules and regulations of your condo community. Remember, you’re living with many other people, and there will be certain expectations and restrictions. Do these suit your lifestyle?
These rules can vary widely from community to community. In general, these documents could specify a range of items, including its pet policy, whether you need to have carpeting, can you install hardwood floors, or if you can rent your condo at any time. Also, review any grandfather clauses since you might not have the same “rules” as an earlier buyer.
Other Important Questions to Ask
Definitely contact board members or the property manager to ask questions. This additional information can help round out your review of the condo docs. Here’s a “must ask” list:
•Are there any upcoming upgrades or projects planned in the building?
•How are those projects going to be paid for? Reserves? A special assessment?
•What projects are on the 5-7 year horizon? Are there adequate reserves being funded for these projects?
•What are the major issues the board is discussing at the last several board meetings? Ask to receive a copy of the board meeting minutes from over the last year.
• Is the condo experiencing any litigation? Whether it’s a small or large lawsuit, reserves can be deleted quickly to cover this.
•How much turnover occurs? This will tell you if residents are happy with the condo community.
•What percentage of the units is owner-occupied? Generally, the higher the percentage of owners, the more marketable the unit will be for resale. It’s not unusual to find some associations in financial trouble over short sales or foreclosures.
•What does the association’s master insurance policy cover? A list of coverage should be included in your condo docs. By reviewing these carefully, you can determine how much additional coverage you may need for your own unit.
We’re heading into the final weeks of our Buying a Home 101 series and also for your final steps to buying a home. You’ll get the nitty-gritty in our next article, Almost There … Pre-Closing Details for Buyers. Here’s a breakdown of what’s next on your list so you’re ready for the big day and don’t get any surprises. It will cover hazard insurance, your home warranty, and connecting utilities for your new home.