Question About Condo Finances (Budget,Reserves,Expenses,etc.)

richardlyon33August 22, 2014

Just received the financials on the condo complex where I am hoping to buy a unit, and what I received was fairly simple but not sure what to make of it. The "Profit & Loss Budget Overview" for 2014 states that the Operating and Reserve Funds (Income) is around $367K, and the expenses are $413K, for net of negative (-) $46K. Is that good? I assume that there are lots of expenses to paid in a year and that for a property of around 150 units that is normal. Then there are the "Reserves for Capital Expenditures" that is $82.5K. To me 82 thousand seemed low for a property that large. Then there was the last "special assessment", the third in the 30 year history of the place. The first two were for $500, but this last one in 2012 was for $2,000, payable over 36 months. So an additional 55 dollars a year for three years.

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That negative $46K is not a good sign - as the budget should be balanced. That negative $46K will reduce reserve down to $36K (82-46), so not a good sign.

    Bookmark   August 22, 2014 at 2:33PM
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You need to find out why they are in the negative for the year. Generally, you don't want to be operating on credit (which is what they have done this year). Just like your household budget shouldn't be operating with expenses more than your income, it isn't a good sign to have the HOA operating with expenses greater than income.

    Bookmark   August 22, 2014 at 3:14PM
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Spoke to the manager of the complex and she assured me that 2014 budget is just "on paper" and that the last few years have seen a surplus, not a deficit. Also that should I ask to see the "Balance Sheet" it would show a very healthy state of affairs. Further, that no mortgage company would finance a purchase there, if there was a problem with the finances.

    Bookmark   August 22, 2014 at 4:18PM
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I don't know for sure, but the Reserves fund seems rather low for the size of the overall budget. The deficit is more than half of the entire reserve fund. In my area the association is required to have a reserve fund that is equal to a certain percentage of the overall budget.

The other thing you will want to know is the percentage of owner occupied vs. absentee landlord rental units.

I lived in an association that was chronically underfunded and in the 17 years I owned there, I paid about $10,000 in special assessments. Some people had to take out second mortgages to pay their assesments. One very large unit had about $20,000 in assessments.

If you are not paying into a reserve fund you could suddenly be asked to cough up X amount of money if something needs to be replaced. In my building the entire air conditioning system failed to the tune of $250K or something.

Another association had to do a window replacement program, and the special assessments in that associate went all the way up to $40,000 in some unit. That was enough for a number of owners to go into mortgage default.

If I buy into a condo association ever again, it will be one that is very financially sound, large enough that individual unit owners don't take a huge hit if there is an unexpected expense, and new enough that some major systems failure isn't on the horizon.

    Bookmark   August 22, 2014 at 4:28PM
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It is a relatively large complex consisting of 22 individual buildings. Each building has around 8 units. There are a few buildings with only 6 units. Expenses are therefore shared between approximately 150 people. Monthly assessments are in the $200+ range. Here in San Antonio TX, there is so much area that housing is spread out. Usually people buy detached homes once they are ready to buy their first house. All of the condos are at least 30 years old, some 40 or 50. And they are all concentrated around the "Medical Center" area, or in the ritzy part of town where property values, taxes, and monthly assessments increase. Presently I live in the smallest unit available at the condo complex where I'm moving out of, and pay only $114 monthly. But after 20 years felt it was time for a change.

    Bookmark   August 22, 2014 at 6:12PM
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My worry in a complex that old is that they are putting aside enough for the long-term maintenance and replacement.
I bought a condo after they had just re-roofed with new gutters and re-painted, and re-finished the pool and spa to meet new safety standards - I believe that was an assessment in the $8K per unit range for 80 units.
The biggest expense to come up since then (5 years ago) was re-paving all the streets and parking spaces. They also are slowly replacing all the docks. No special assessment was necessary.
So I think the important thing is to check on the status of the big expensive things and see how the board is going to address those things (read through the minutes of the meetings for the past few years).
Good luck!

    Bookmark   August 22, 2014 at 6:59PM
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I don't know where you are located, but CA requires a periodic reserve study. It provides an analysis of the estimated remaining life of various capital items, their projected cost, the current reserve balance to determine a "% funded" or how much the association has now in comparison to what it can expect to spend over the projected period. It should also calculate what kind of payment would be required to fully fund the reserve fund. Ask if they have had a reserve study done. Also, the negative balance is troubling - you'd want to know why and compare actual expenses to budget. The "balance sheet" is a snapshot of assets and liabilities at a moment in time - good to know, but subject to change. Are they sitting on a pile of $$ in their operating (not reserve) account? Did they use that to fund the deficit?

    Bookmark   August 22, 2014 at 8:48PM
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I am in Texas, and the person that I spoke to, who is the HOA representative and appears to be manning the phone lines as well said --- and I quote "We are sitting on a chunk of cash". One would assume that she is referring to the 2012 special assessment that brought in $240,000. There are 120 units with an average monthly assessment of $220 dollars; that comes to a yearly input of $317,000. As far as reserves are concerned, one opinion on that is that there should be "just enough" to cover expenses. In a perfect world all necessary repairs would be performed at once and the reserves would be used up. The one troubling thing for me is that there are two units in foreclosure. Likely that means no dues are being being paid on those units, and the prospective buyer of those two units certainly will not be responsible so that leaves the remaining members to foot the bill.

    Bookmark   August 22, 2014 at 10:12PM
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Reserves need to be continually replenished because things wear out over various time frames; it's like a sinking fund for replacement. By the time you need to replace it, there should be enough collected to do so - that's "100% funded." If they collected a chunk of $ in 2012, on what did they intend to spend it? I'm just thinking about the planning part of budgeting...

    Bookmark   August 22, 2014 at 11:20PM
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In the condo I lived in a long-term board officer and owner of the unit with the highest fees pressed for low reserves because "adults should be mature enough to save their own fund and write a check for $1000 or $5000 if we call an assessment."
That described the financial stability of very few owners and that got us into trouble.

    Bookmark   August 23, 2014 at 7:04AM
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In a condo that old, it's extremely concerning. Lots of things are at their lifespan and will need to be addressed.

    Bookmark   August 23, 2014 at 11:11PM
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1. Regarding the minus 46K. Is this the total budget for 2014, or is it the current balance sheet as of August 2014? They may have high cooling costs over the summer and therefore be in the minus at this time but will make up the negative balance by the end of the year. In other words, they may have collected 367K and spent 416K during the period from January until July/August.
You are not allowed to "finance" a loss by dipping into the separate capital reserve fund. That's reserved for capital improvements.

2. Reserves
It does seem kind of low, unless they just did a large capital improvement project and are now filling up the fund again. There should be something like a 10- or 20-year capital assessment plan, e.g. how long will the roof still last, HVAC, whatever may come up in the future.

3. I'd ask what the delinquency rate is in the complex. There may be more than the two foreclosed properties but also potential short sales or other owners who are delinquent.

This post was edited by nosoccermom on Wed, Aug 27, 14 at 18:26

    Bookmark   August 27, 2014 at 2:09PM
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