This is the tenth article in my series called Buying a Home 101. This step-by-step series will take you through the entire home-buying process — from finding a buyer’s agent to settlement day, and even maintaining your home after you’re all moved in.
Even though you’re buying a home when you purchase a condo unit, you’re actually buying into a “business.”
That’s why it’s so important for you to determine how stable and financially sound this “business venture” is before taking it on. And that’s where reviewing condo docs comes in.
What Happens When You’re Under Contract
You’ll have the chance to review a stack of “condo docs” or condominium documents once you’re under contract to purchase a unit. These documents will give you a better idea of the financial outlook of this particular condo community.
And yes, it does seem backward to review these docs after your offer has been accepted, but that’s how the process works.
However, if you have specific questions that are “deal-breakers” — like whether the association allows pets of a certain size (you can’t move without Fido!) or allows rentals, you should ask those questions of the management company before going under contract. But, either way, you will get an official review period after going under contract.
This document review process is a very important step when purchasing a condo unit. You will share in the financial responsibility of this condominium community with your neighbors. And your lender won’t give you a loan if there’s something amiss.
Take every ounce of that time to review these documents. If you want another set of eyes on them, you can hire an attorney to review them. Keep in mind that the review periods are relatively short, as little as three days in the DC metro area.
Condo Docs 101
Condo docs include but are not limited to the following parts:
- By-laws; Rules/Regulations;
- Financial Statements;
- Budgets; and
- Minutes from Meetings.
Let’s go over some of these below and point out what you should focus on during your review.
Financial Statements and Budgets
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.
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 budget should be going to the reserve account. This is also what lenders require before they will give a loan for a purchase in a building.
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 for 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, a full-time engineer on site … these expenses add up and so will your fees.
Keep in mind that your condo association shouldn’t be dipping into the reserve fund for basic maintenance like trash removal, recreational facilities, common-area landscaping, etc. That’s a big warning sign!
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, the documents could specify a range of items, including its pet policy, whether you need to have carpet, if can you install hardwood floors, or if you can rent out 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 for 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 are 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.
We’re heading into the final weeks of my Buying a Home 101 series and also for your final steps to buying a home. You’ll get the nitty-gritty in my next article, Almost There … Pre-Closing Details for Buyers. It’s a breakdown of what to expect so you’re ready for the big day.