CONDOMINIUM EXPLANATION: As a potential buyer, you should be knowledgeable about the uniqueness of condominium ownership. Condo documents should be reviewed with your attorney. The condo documents (docs) protect the different owners' interests when they own real estate in common with others. The concept of shared interest ownership of common areas and sole interest ownership of the condominium unit can be confusing. You should fully understand that the condition of those facilities owned in common also will influence each individual unit through maintenance assessments. Charges, special assessments and budgeted reserves should be researched subsequent to purchase. While the condition of some common areas (such as the roof) may be documented in this report, not all common areas are evaluated. The scope of the home inspection is directed towards the individual condominium unit you are purchasing.
The legal documents that govern condominium ownership include:
1. The Purchase & Sale Agreement: This document defines ownership interest in the common areas, individual ownership interest, voting rights, real estate taxes, and the amount to be assessed for maintenance of common areas.
2. The Master Deed: This document describes the entire condominium community, including each unit and every common area. It outlines the governmental operation of the property, describes ownership of common areas and specifies provisions for management.
3. The By-Laws: The by-laws outline the control of the condominium including the election, term and responsibility of the board of directors. The by-laws describe the use and maintenance of common areas, and the assessment and collection of monthly charges. Lastly, the by-laws govern the creation of an operational budget for repair and replacement of common areas.
4. The Budget: The budget is a categorical list of all of the expenses necessary to maintain all common areas for one year, plus a detailed list of reserve funds for major replacement. The budget estimates the remaining life span of major common areas and lists reserves set aside for replacement of such items as parking lots, pools, decks, roofs, fences, swimming pools etc.
Many buyers elect to purchase a condominium because the cost is lower than a single family home and because buyers are not ready to alter a lifestyle with the time needed to maintain a home. However, there are other associated costs that must be considered and may not be explained unless you ask the right questions.
When you purchase a condo or townhouse, you own everything from the walls inward. The condominium Home Owners Association (HOA) owns everything else, including the buildings, grounds and other related facilities or common areas. When you purchase the condo, you become a shareholder and mandatory dues paying member of the HOA. The HOA is responsible for the upkeep of the building and grounds. Under the guidance of a Board of Directors, one of the association's primary responsibilities if managing the dues and other money collected to fund the operating budget of hundreds of thousands of dollars. The Board may directly manage the maintenance and upkeep or have a management company do it. Budget monies are disbursed for repairs and the upkeep of common area components – the condo buildings, other structures, landscaping, lighting, walkways, paving, swimming pools, decks, etc., as well as for other operating expenses such as insurance.
To determine the health of the HOW, prospective buyers should look at some key areas:
· Responsiveness – For many buyers, this is the first contact with the HOA and is a good metric. A complaint that I frequently hear is that the buyer of realtor has requested information but the HOW hasn't responded to their request. Although most HOW Board of Directors are voluntary positions, a 42-78 hour response is reasonable.
· Current condition of the buildings – a home inspection should cover the inside of the condo or townhouse as well as surveying the condition of the exterior of the buildings. The inspector can give the buyer an assessment of the condition and needed near-term maintenance. In a perfect world, this would match the maintenance plan and budget established by the HOA.
· Maintenance Plan – the HOA should have a plan for both short term and long term maintenance. The level of detail will vary but all major components of the buildings have known life expectancy. The older the building, the more maintenance it will need. Dollar values for replacement need to be taken into consideration.
· Finances What is happening to the dues coming in and how much of the dues is delinquent? Maintenance reserves are another area of focus. This area may be broken out into designated accounts such as roof replacement or one lump sum. This amount may vary depending on the number of units in the HOA. A Board may also choose to finance this debt. This may be a wise move when a major upgrade is needed such as new windows and doors. However, this may affect the value of individual units.
· Number of owner occupied units – Basically, the greater the number of owner occupied units, the better the property will be maintained. Don't be surprised if the mortgage company requests this information, as they know that more owner occupied units decrease their risk.
· History of special assessments – If the Board doesn't have a realistic maintenance plan (with adequate cash reserves) and a major item such as the roof or sewer lines need to be replaced, they will have to go to the members for more money. This is called a special assessment. This assessment may be in a lump sum or spread over months. For buyers who are already stretching their finances to buy a home, a special assessment may be a problem.
Most buyers obtain a home inspection to determine the physical condition of the home, but fail to pay attention to the financial condition of the HOA. You need to spend equal time evaluating the health of the HOA. For most people, the financial documents can be confusing, but you are working with a team of professionals than can assist you. Don't hesitate to sit down with your attorney or mortgage broker and ask for their assistance.