The number of condominium and homeowners associations continues to grow in across the country, with over 8,000 currently in Ohio. If you have clients who are considering purchasing property in a condominium or a homeowners association, there are several factors to research and review with them before they submit an offer. Associations are legal business entities, typically set up during a property’s development, that manage the operations of common or shared elements of the property. These business entities are eventually run by an elected board of individual unit owners.
“Associations are a fantastic way to gain economies of scale on property upkeep, minimize unit owner’s responsibilities, and live in a well-kept community,” says Adam Rich, P.E., president of Criterium-Liszkay Engineers. “But it is important to review the details of the business that is behind the scenes.”
Just as you would research a plumbing or roofing company before hiring, be sure to do your due diligence on the business of an association before your client considers purchasing a property located within that association. They should understand the current and anticipated future financial conditions, the current physical conditions, and the rules and regulations of the property as part of their inspection process.
An association has financial responsibility for the shared physical “components” of the property as a whole. These may include things such as a clubhouse, a pool, the roads, roofs, and siding. Additionally, the association manages and pays for the day-to-day operations, including maintenance activities like lawn care, snow removal and painting. Each unit within an association pays a monthly assessment, which funds these short-term and long-term expenses. Sometimes owners fail to pay these monthly assessments, forcing an association to take collections action.
- Request the current delinquency rate of the association’s assessments to get a sense of the health of the association’s income.
- Request the current assessment amounts, including a breakdown of how much goes towards annual operating costs and how much towards the reserve fund.
- Make sure that the unit or home being purchased is up to date on assessment payments.
Costs to replace long-lived components, such as roofs, are saved for in what is called a “reserve fund”. A portion of each monthly assessment is allotted to this fund. A reserve study, typically conducted every 3 to 5 years, provides an estimate of future costs and helps to ensure that enough funds are being saved. This study will also provide an estimate of anticipated future reserve fund balances.
- Find out what the current reserve fund balance is and request a copy of the most recent reserve study to compare this balance to the projected balance.
- If no reserve study is available or if the one provided is more than 5 years old, inquire with the association’s community manager or the association’s board president as to why that is the case.
One-time, special assessments are sometimes collected when association funds fall short of current expenses. Often, these can be sudden, large expenses that individual unit owners are responsible for.
- Inquire about the history of special assessments at the property, as well as any pending or special assessments in discussion. The reserve study report should also provide insight into the potential for special assessments.
How the property looks overall can tell a lot about how well an association is funded and how well it is operated. An association’s board of directors and the community’s manager typically manage these things.
- Take a visual inventory. Does the landscaping look well kept? Are the sidewalks and asphalt in good condition? Is the trim painted well? Does everything look orderly?
Every association has a set of rules and regulations. These should be readily available for review upon request. While necessary, the rules and regulations are also the cruxes of most associations. It’s crucial that all association members understand and fully accept the association’s rules and regulations; these can include parking, landscaping, exterior maintenance and storage, pool usage, rentals, pets, and individual unit insurance requirements. It is best to assume that these will be enforced rigorously.
- These rules and regulations will usually outline what items need to be conveyed to your buyer client upon closing. These may include keys, key fobs, key cards, remotes, etc. You should verify that these items will be available at closing.
- Inquire with the manager of the association if there have been discussions within the recent past to make any changes to the association declarations or rules and regulations. If no one can provide this information, you may try asking for the past years’ worth of board meeting minutes to review discussion topics.
By now, you should have a better understanding of what all is involved in buying property within a condominium or homeowners association. A thorough review of the association’s finances, the property’s physical condition and the association’s rules and regulations will help ensure that everyone involved understands all aspects of an association before submitting a written offer. The operations of associations is a serious matter, and taking the steps outlined here will help ensure your clients have a great experience in their new community.
FAQ – Purchasing Property in an Association
- What is the current association assessment delinquency rate?
- What is the current assessment and what is the breakdown between operating expenses and reserve fund contribution?
- What is the current reserve fund balance?
- Is the most recent reserve study report available for review?
- What is the history of special assessments at the property and are any anticipated in the future?
- Does the overall community property look well kept?
- What are the current rules and regulations?
- Are there any pending association rule or declaration changes?
- Are there any items such as keys, key fobs, key cards, remotes, etc. that must convey to the new owner at closing?