If you’re buying a condo, you’ve probably reviewed the rules and regulations of the condominium association to confirm they don’t conflict with your planned use of the property. But did you check out the association itself? Failing to ensure that the association’s finances are healthy can lead to huge bills for unsuspecting unit owners.
“The worst-case scenario is that a buyer could have a special assessment in the thousands of dollars,’’ said Linda Barrett, vice president of Douglas Elliman Real Estate in Boston. “Should the building’s roof need to be replaced, you could end up with a very high special assessment if the association does not have good reserves.’’
Owners of condominiums pay regular assessments, usually monthly or quarterly, to cover the operating expenses of the association, as well as reserves — funds stashed away for future capital projects. But condo associations also can charge unit owners special assessments for emergencies or unusual circumstances, such as damage to the building caused by a winter storm.
That’s why Barrett always prepares her condo buyers beforehand. “It’s my job to make sure buyers not only review the condominium documents, but two years of the budget as well,’’ she said. When she writes an offer, she also includes a contingency allowing the buyer to review the minutes of association board meetings for the past two years. “You could read in the minutes from a year ago that there’s a problem with the roof,’’ she said. That could signal that a special assessment is in your future.
Prior to closing on a one-bedroom condominium in Boston’s Seaport District two years ago, Anne Stemlar, a legal administrator in Boston, reviewed the association’s financial statements. “I was looking at the health of the organization and what kind of financial reserves they had,’’ Stemlar said.
Stemlar concluded that the association was well run, with healthy reserves, a capital budget, and a plan for improvements. But she had an advantage since she had owned two units previously and served on a condo association board of directors. First-time buyers should rely on their real estate agent and lawyer for help reviewing these documents. “Ask a lot of questions, and make sure you come to a comfort level,’’ Stemlar said.
In addition to reviewing the rules and regulations of the association to ensure you won’t be in violation if you own a large dog, drive a truck, or want to rent your unit, be sure to conduct the following due diligence on the financial stability of the association:
■ Review the past two operating budgets, as well as two years’ worth of board and annual meeting minutes. Be wary if assessments haven’t increased over time; since the cost of goods and services have gone up, maintenance fees should have followed.
■ Review the reserve study of the major capital components of the building, and make sure there are adequate funds to replace them on schedule.
■ Ask questions. Dawn Bauman, senior vice president for government and public affairs at the Community Associations Institute, an industry group, said condo buyers should inquire about routine maintenance of the building, whether the board expects to increase assessments, and whether there is a current special assessment or one pending or imminent. Try to talk to the seller, the property manager, and board members.
■ Be skeptical about the operating budget for new construction. Developers often subsidize the expenses of the association by paying costs such as landscaping or snow removal, so it’s common for assessments to increase once the unit owners take control of the association.
■ Don’t ignore insurance. Spencer M. Houldin, president of Ericson Insurance Advisors in Boston, suggested that condo buyers determine the insurance obligations of both the association and the unit owners. Typically, Houldin said, the association insures the building, while owners are responsible for everything inside their units. Have your insurance agent or lawyer review the association’s insurance to make sure it’s sufficient to rebuild the structure. All unit owners should carry an HO-6 policy that covers the interior of their units and liability.
■ Don’t waive your right to review association financials. “It’s a seller’s market, and buyers are willing to overlook things like reserves because they’re just happy they found a place and their offer was accepted,’’ said Michael Merrill, a real estate and condominium law attorney in Boston. But even if you waive mortgage and inspection contingencies, be wary of waiving a budget review.
“That way, when you do become an owner, you’re not surprised by the amount of money you may have to put in to solve a problem,’’ Merrill said.
Robyn A. Friedman is a freelance journalist who has been covering the real estate and housing markets for two decades. Send comments to [email protected]. Follow us on Twitter @GlobeHomes and Boston.com on Facebook.