According to a various polls, homeowners are happy with their associations. To help ensure you are one of those satisfied owners, there are risk factors you should look for before buying a condominium. You should pay particular attention to the following:
1. Maintenance. Don't assume the association takes care of everything, it doesn't. Find out what your maintenance responsibilities are so you can budget for them. Inspect the common areas. If the paint is peeling on buildings, trees are overgrown, lawns are shabby, sidewalks are tilting--roofs and plumbing are probably in bad shape as well. Poor maintenance means you can expect stagnant property values. It also means special assessments are looming as water starts infiltrating common areas through roofs, windows, water lines and drain lines--leading to mold and litigation.
2. Reserves. This is an extension of the maintenance issue. Does the association have healthy reserves so it can repair large ticket items? If not, special assessments are inevitable. Reserves in the 70% to 100% funding range are excellent. Reserves below 40% mean probable future special assessments. The lower the reserves, the more imminent the special assessment. If reserves are too low, look elsewhere to buy.
3. Insurance. How much insurance does the association have? If it's at bare minimum levels, you face a higher risk of a special assessment in the event a claim is filed against the association. Is the development in an area deemed high-risk for an earthquake? If so, does the association carry earthquake insurance? If not, are you prepared to lose your investment in the event of significant damage?
4. Litigation. Ask the seller about litigation over the past ten years. Also ask for the past two years of minutes. A slip and fall lawsuit is not a problem. If the association has had ongoing litigation with members over the past ten years, run for the exit. The association is dysfunctional. There will be no peace until the litigants all move or die.
5. Rentals. Inquire about the percentage of rentals in the development. A high rental population creates problems for rules enforcement, maintenance and oversight of the property. If the rentals are nearing or exceed 15%, you should be cautious. If they exceed 30%, it does not matter how beautiful the condo is, you're stepping into quicksand. It means property values will stagnate or decline, making it difficult to sell your unit, recover your investment and get out. At 50%, the development is in a death spiral.
6. Pets. If they don't have pet restrictions, is the property a dog patch? If so, barking dogs at all hours of the day and night plus dog doo in the common areas will be a challenge. If they have restrictions, do you have pets that violate those restrictions? If so, are you willing to give up your loved ones for the condo? If your Realtor tells you the rules don't matter because the association will never discover the violation, get a new Realtor.
7. Parking. Is there sufficient parking in the development? If not, it will create problems for you and your guests. Visit the property on a weekend when everyone is home and see what the parking looks like.
8. Noise. Ask the seller about plumbing noise, crying babies, loud stereos and TVs, etc. from surrounding units. If there is a unit above yours, ask about noise from hardwood floors. If everything can be heard through walls and floors, it indicates cheap construction--a harbinger of future maintenance problems. It also means you won't get any sleep at night.
9. Finances. Ask for a copy of the budget and annual financial statement--and read them. Ask about delinquencies. A delinquency rate above 15% means higher dues to make up the deficiency. Also ask about past dues increases. If they proudly tell you that dues have not increased for ten years, it means they kept their dues down by deferring maintenance for ten years. It also means large increases and special assessments are in your future.
10. Size Matters. While an 8-unit development is intimate and family-like, all financial burdens are carried by eight families. Every expense hits a small association harder than one with 200 units. Because small associations have tiny budgets, they cannot afford professional management, legal counsel, proper reserves, consultants, etc. If one or two owners stop paying their assessments, it will hit hard. If an owner is dysfunctional or litigious, it becomes a nightmare. There is safety in numbers, the larger the development, the better.
11. Sales Activity. If you see a lot of "For Sale" signs in the association, you better find out why. Like rats fleeing a sinking ship, they might know something your Realtor isn't telling you.
Recommendation: Although difficult, you must balance the emotional component of wanting a particular condominium with the risks described above. It does you no good to sink your last penny into a condo and then lose it the next year when you get hit with a large dues increase and special assessment to cover delinquencies, litigation, and underfunded reserves. Any Realtor can read the MLS and drive you around to look at condominiums. What you need is a Realtor who is knowledgeable of how associations work and respects them. A good Realtor with condo experience will provide invaluable guidance.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.