Buying a Condo – Part 2 / Document Review
Buying a home in a condominium differs in a number of significant ways from buying one in an independent “neighborhood.” Condominiums (in fact all community associations) have by-laws, covenants, and budgets, to which you will be bound as an owner.
An examination of the associations’ documents (especially the budget) is essential. Operations are obviously funded by unit owners and your share could be considerable. Monthly assessments can approach, or even exceed mortgage payments.
A reserve study should have been performed within the last three to five years and they should have been provided as part of the sale packet given by the seller. If not, be wary. In some jurisdictions (such as The Commonwealth of Virginia) they are mandated for specific intervals. The Federal Housing Administration (FHA) requires reserve studies every two years for certification and they won’t underwrite loans for first-time buyers in uncertified associations.
Reserve studies can be difficult to interpret for the uninitiated. Nonetheless, there are things to look for.
- Reserve studies should be performed by qualified organizations, based on engineering or architectural criteria. Reports with discussion of the involved elements are preferred over simple tables.
- Most community associations fund by the “cash-flow” method, which should cover a minimum of twenty years.
- There’s no simple formula for funding reserves, but lenders have tightened requirements and may deny a loan if annual funding is less than ten percent of the total operating budget. There should be some discussion from the author regarding the adequacy of reserves funding.
There may also have been engineering studies performed to evaluate specific systems and/or investigate problems. Disclosure laws usually require that they be provided to potential buyers.
There are differences, beyond the obvious, between older and new condominiums. In Part 3 to follow, we’ll go over some that should be considered.