Watch For Condo Risks

by Broderick Perkins DeadlineNews.Com A condo home offers affordability you often can't find in a single-family home, but buying one demands a radically different approach to the American Dream. "It's a lot like buying a share in a closely held, publicly-traded real estate holding company," says says Frederick L. Pilot, president of the Sacramento, CA-based Common Interest Consumer Project, a non-profit education and research group. And it's all run by volunteers. When you buy a condominiums or townhome, you own everything in your unit, at least everything on your side of the walls. You are a shareholder in the remainder of the buildings, grounds and other facilities. As a shareholder you also are a mandatory, dues-paying member of the development's home owners association (HOA), the organization responsible for the upkeep and care of buildings and grounds. The HOA is steered by a volunteer board of directors, elected by other homeowners to manage the association and its operating budget of perhaps hundreds of thousands of dollars. The directors operate under the HOA's rules and regulations, by-laws, articles of incorporation and reams of other documents that must comply with government-imposed regulations. To buy a condo you must learn about the HOA's financial status, rules and regulations, you must get to know who holds the purse strings and who your neighbors will be. In many states, laws mandate HOAs disclosure much of this information, but it's up to you to be sure you have ample time to check through the documents and check out the existing home owners. "There is more useful information presented to the consumer on the back of a candy bar, than what is presented to a consumer contemplating the purchase of a $100,000 condo," says Robert M. Nordlund, president of Association Reserves a Calabasas, CA-based firm that studies home owner associations' reserves in 37 states. Consider hiring a condo-savvy real estate attorney to help you decipher the documents and to look for construction defect litigation. Rampant in the condo industry, defect litigation can affect both the value of your condo and your chances at obtaining a mortgage to finance it. Nordlund also says three key elements can give you a quick snap shot of how well a community is doing. • Percent of units occupied by owners. If more than 70 percent of the condos are occupied by their owners, there are more association members about to be sure the association is being run properly. If more than half the units are vacant or rented, fewer residents have a vested interest in the well-being of the community. • Percent of 90-day delinquencies. If less than 5 percent of the HOA's members are 90-days or more late paying their dues, that's a sign of a steady flow of cash and a well-managed budget. If more than 10 percent of the home owners are 90-days or more late paying their dues that's a red flag that could warn of poor management and an under funded association. • Percent of the reserves funded. A portion of the budget called the reserve fund reveals how much cash is available for upcoming obligations. If the HOA has less than 30 percent of the reserves needed to meet those needs it is "poor" and will be hard fought to meet its obligations without levying assessments, borrowing the money or otherwise coming up with the difference. If the HOA has more than 70 percent of its necessary reserves it is in a relatively sound economic position to take care of itself. "Other things being equal, or in combination with other observed characteristics of the association, these three parameters quickly and conclusively tell you who lives there, if everyone is pulling their own weight, and if the board has established a strong financial platform for the future of the association," said Nordlund. Copyright © 2005 DeadlineNews.Com -- Broderick Perkins, is executive editor of San Jose, CA-based DeadlineNews.Com, an editorial content and consulting firm. Perkins has been a consumer and real estate journalist for more than 25 years.