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Read Those Condo Docs!

stack of papersIf you plan to buy a condo be prepared to review a stack of “condo docs“ or condominium documents.  Since you will share in the financial responsibility of this condominium community with your neighbors, you need to know what you are getting into (and so does your lender)!

Purchasing a condo is like buying into a business. And wouldn’t you want know how stable and financially sound a business venture is before taking it on? Well, it’s the same with a condominium.

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!

What Are Condo Docs?

Condo documents include but are not limited to the following: Declaration; By-laws; Rules/Regulations; Financial Statements; Budgets; and Minutes from Meetings.

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 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 on 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.