Written by Benny L. Kass
Question. I plan to purchase a condominium apartment within the next month or so. I am a cautious (and nervous) first-time home buyer, and would like to start planning now. I will probably buy from an owner and not a new unit from a builder. I am concerned about a number of issues. Are there any lawsuits pending against the Association? Are the reserves adequate to pay for any emergency or long-range repairs or replacements? How can I guarantee that my condominium fee will not be increased dramatically in the years to come? In general, how can I best protect myself?
Answer. The purchase you are considering is referred to in the trade as a “resale condominium.” To my knowledge, every state has legislation dealing with buying a condominium — whether new from a developer or from a current owner.
When you purchase a condominium unit from the developer, you will be given a large book, called a Public Offering Statement. This contains all of the legal documents, a copy of the proposed sales contract, a proposed budget, and information about warranties.
When you purchase a resale, you are entitled to receive what is known as a “resale package” (or resale certificate). The material contained in this document should give you some — but not all — of the answers to many of your questions.
When you purchase a condominium — whether a new one from a developer or a resale — you should carefully review at least the following documents:
- The Condominium instruments. These include the Declaration, the Bylaws, the Plats and Plans, and the Rules and Regulations. If your Condominium Association is incorporated, you should also obtain and review the Articles of Incorporation. These documents will spell out the operating procedures under which the Condominium functions. One of the most important aspects of condominium living deals with “use restrictions.” For example, can you rent your unit, and if so for how long? Can you have pets? If there are amenities — such as a tennis court or a tot lot — are these included in your condominium fee, or do you have to pay extra?
The Condominium Bylaws will also advise you whether there are any architectural control requirements which have to be met if, for example, you want to make external changes to your unit. In many community associations, architectural controls are spelled out in the Association documents, and they must be followed by all unit owners.
- A statement of the monthly condominium fee allocated to your unit. At the end of the Condominium Declaration, there should be an Exhibit listing the percentage interest for every unit in the building. The simplistic way of determining your monthly condominium fee is to multiply your percentage interest in the Association times the total budget, and that number should be your annual fee. Divide that number by 12 to get your monthly payment. For example, if the total annual budget is $100,000, and you have a five percent interest in the Association, your annual fee will be $5,000, and your monthly fee will be $416.66. It is important to find out whether utility charges are included in the monthly fee. Often, purchasers are of the mistaken belief that the monthly condo fee includes heat, electricity and gas, and then are clearly distressed when they find out otherwise.
You also want to make sure that the seller of your unit is not delinquent in his or her condominium fees, since outstanding fees are generally a lien on the property. However, the title attorney conducting your settlement should make sure that all of these outstanding obligations are paid off at settlement. If you purchase in the middle of the month, you will have to prorate the monthly condominium fee between the buyer and seller.
- The current budget. This is a very important document, and you should review it carefully. If you do not understand accounting, make sure that someone knowledgeable assists you.
This document should list the actual yearly budget, on a line by line basis, and show how the budget is being followed on a month to month breakdown. For example, if the Condominium Association has budgeted $15,000 per year for the water bill, and at the end of March they have already spent $10,000, something is drastically wrong, and the budget planners obviously made a mistake. Keep in mind that these planners are unit owners just like yourself; although they are often guided by professional managers, mistakes can — and do — happen.
Furthermore, the budget — or perhaps the annual auditor’s report — should include the amount of money that the Condominium has in reserves. There really is no magic formula to assist you in determining how much money an association should keep in its reserve account. Obviously, if the Association has not made any capital expenditures nor improvements in a number of years and the reserves are low, you may want to consider finding another building in which to buy. You must obtain a current status of reserves; do not rely on old accounting reports. Keep in mind that lenders — such as FHA — will typically require a reserve of at least 10 percent of the annual budget.
- The proposed budget. Every year, a condominium association — usually through its management company — assists the Board of Directors in preparing a proposed budget. It is this proposed budget on which your condominium fees will be calculated for the next year. Again, this should be carefully and methodically reviewed.
No one can guarantee that the condominium fees will stay the same. If you were to buy a single family house, your real estate taxes, utility bills, or other maintenance costs may fluctuate on a year to year basis. The same is true in a community association. You may want to talk to the seller and try to convince him or her to guarantee the level of condominium fees for a period of years, but obviously all of this requires negotiation between buyer and seller. If the seller agrees, it must be made part of your purchase contract.
Furthermore, you want to make sure that there are no special assessments pending against the unit. If there are, the payment of these outstanding assessments is something that should be negotiated between the parties. Perhaps your seller will be able to assist you by paying all — or at least a portion — of any such special assessment. Presumably, the resale certificate that you get should disclose any outstanding assessments. That certificate should also disclose the existence of any pending lawsuits.
In addition to looking at the various documents, I strongly recommend that if the Condominium Association has a management company, you contact the property (site) manager to discuss the condition of the building. You may also want to visit the complex on a Saturday or Sunday, introduce yourself to people who walk in, and also discuss any concerns they may have as unit owners.
Buying a condominium is not for everyone. I have often written that it is democracy at its best and at its worst. However, if you are so inclined, you must do your homework — before you sign a contract.
The laws most states give you the right to terminate your sales contract within a set period of time based on your review of the resale package — often three to five days. It is your responsibility to obtain that package, review the documents carefully, and then make your decision based on all of these factors.