Editor’s note: This is Part 2 of a three-part series. Read Part 1:"Condo rules a deal-breaker for some."
Meet Bernice Ross at the upcoming Real Estate Connect conference in San Francisco, which runs from Aug. 5-7, 2009. She will be available to meet with conference attendees from 12:30 p.m. to 1:30 p.m. on Thursday, Aug. 6, in the Palace Hotel’s Ralston Room. Click here to send Bernice a message.
Before buying a condominium, one of the most important areas to investigate is the financial health of the Homeowners Association (HOA). It’s important to know the financial health of the HOA.
Part 1 of this series looked at two important questions to ask if you are purchasing a condominium: "What type of ownership are you purchasing?" and "What obligations and restrictions do the CC&Rs (covenants, codes and restrictions) place on you?" A third equally important issue deals with your HOA Dues.
Is the HOA healthy financially?
All condominium associations assess a homeowner’s association fee. I live in a planned-unit development (PUD) where we have title to our land and improvements. The city maintains the streets. Our HOA fees go for the maintenance of the tennis courts, pool, recreation room, and the landscaping of the common areas. Our fees are low since the HOA doesn’t maintain the streets or the structures.
I also have lived in a guard-gated PUD in California. The HOA was responsible for maintaining the streets, the common areas, plus paying for the 24-7 guard service. That meant that we had to maintain the guard shack plus two patrol cars. The fees were substantially higher.
The budget included "reserves" for car maintenance, guard shack facility maintenance (electric, air-conditioning, water, etc.), plus money for brush clearance. We also had to maintain the electric gates. This was an ongoing problem that resulted in a special assessment.
A special assessment is a fee voted by the HOA over and above the monthly maintenance fee that each homeowner pays. Once the HOA approves a special assessment, each homeowner is sent a bill to cover the additional expense.
If the HOA has done a good job on planning and managing its money, then special assessments should be rare. For example, my former HOA voted to provide earthquake survival kits for every one of our residents.
Our accountant analyzed our budget and determined that we did not need to raise our association dues to cover the additional expense. The HOA did add this as an additional budget item for the following year.
HOA fees increase substantially when your association is responsible for maintaining the exterior of all condo structures. In most states, the HOA is required to put money aside to pay for repairs ahead of time. As you look through the association budget, make sure there are funds for items such as roof replacement, pest control, painting and other maintenance.
Difficulties arise when some homeowners default on their fees. This is one of the most important items to investigate prior to purchasing a condominium or PUD.
The HOA I belonged to in California was aggressive about pursuing people who were delinquent on their dues.
Our CC&Rs granted us the right to institute a foreclosure proceeding against the delinquent homeowner. Since our area was still being built out, we had several builders who decided they weren’t going to pay their dues. …CONTINUED
After numerous requests and attorney letters without any result, placing a lien on their properties worked. This meant that in order for the builders to sell the property, they had to pay the HOA fees.
This system worked when the market was in an upswing. Today, it’s a different story since so many owners have "negative equity" (i.e. the condominium or house is worth less than the liens against it).
If an owner is going bankrupt, facing a foreclosure sale, or the property is bank-owned, there’s a high probability that the association dues are not being paid. The HOA could place a lien on the property, but if there’s no equity there’s no money to collect.
Besides, Internal Revenue Service, state, and local property tax liens normally have priority over association liens. The existing loans on the property may have priority as well.
If you are purchasing a condominium or PUD, ask for a copy of the budget and the reserves, as well as how many owners are delinquent. It would also be smart to investigate how many foreclosure or bank-owned properties are for sale in the local multiple listing service.
Also, check other online resources such as real estate company Web sites, Realtor.com, Foreclosure.com, RealtyTrac.com, Trulia.com and Zillow.com.
If you find a number of owners are delinquent, the HOA may be in trouble. If this is the case, it could translate into higher costs for you. For example, most HOAs are required to have a certain amount of cash in reserve.
If the reserve level dips due to nonpayment of fees then the HOA may have to do a special assessment to cover the shortfall. This translates into more money out of your pocket.
It could also mean that the HOA elects an insurance policy that provides less coverage for owners or that it cuts back on the maintenance of the property. Both of these decisions can negatively impact your property value.
Need more questions to ask prior to buying a condominium or PUD? If so, see Part 3 of this series.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author of "Real Estate Dough: Your Recipe for Real Estate Success" and other books. You can reach her at Bernice@RealEstateCoach.com and find her on Twitter: @bross.
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