Review those Condo Docs or Else!

Buying a Home 101 – Week 10

This step-by-step series will take you through the entire home-buying process — from finding a buyer’s broker to closing day, and all the details in between. Every buyer will find this information-packed series easy to follow and understand. Make sure to tune in for the next few weeks!

Even though you’re buying a home when you purchase a condo unit, you’re actually buying into a “business.”

That’s why it’s so important for you to determine how stable and financially sound this “business venture” is before taking it on.  And that’s where reviewing condo docs comes in.

What Happens When You’re Under Contract

You’ll have the chance to review the resale certificate and HOA documents once you’re under contract to purchase a unit.  These documents will give you a better idea of the financial outlook of this particular condo community.

And yes, it does seem backwards to review these docs after your offer has been accepted, but that’s how the process works!

Both you and your lender need to know what you are getting into with this purchase.  You will share in the financial responsibility of this condominium community with your neighbors.  And your lender won’t loan you funds to purchase if there’s something amiss.

• In Washington by statute you have five business days to review your POS or resale cerfificate. This period cannot be shortened or waived. You can void the contract for any reason with written notice within that period.
• The additional HOA document review requested by addendum is typically 5 days as well, but can be negotiated to something else.
• Take every minute of that time to review these important documents and have an expert review them.

Condo Docs 101

There are Statutorily Required Documents

1. If the condo is new, a Public Offering Statement is required
2. If it is being resold, a Resale Certificate is required

The elements of a Public Offering Statement (POS) and Resale Certificate are prescribed by Washington State statute. They include:

• Financial reports – the current budget and financial statements 
• Assessments and fees – The amount of assessments, dues, and fees that must be paid by owners, including any special assessments 
• Delinquencies – Any delinquencies in assessments or HOA dues, including the percentage of units delinquent 
• Governing documents – Copies of the community’s governing documents, including the declaration (CC&Rs) and bylaws 
• Restrictions – Any restrictions on the sale of units or right of first refusal 
• Litigation – A list of any pending or existing litigation involving the condominium association 
• Liens – A list of any liens against the condominium unit 
• Repairs in excess of 5% the annual budget – Any anticipated repairs to the building and if there are funds to cover such repairs 
• EV charging station information
• Reserve study – Provide the study, or let the buyer know there is not a current study. Proceed with caution.

Additional contractually requested HOA Documents. There are additional HOA documents over and above the legally required documents that can be very helpful. You can include an addendum to request these documents which includes a review period contingency.

• 2^nd year of financial statements (only the current year is legally required)
• 2 years of HOA meeting minutes
• 6 months of HOA Board of Directors minutes
• HOA Rules and Regulations, Bylaws and Covenants and architectural guidelines

The seller is required to provide the resale certificate to the prospective purchaser, and the HOA has up to 10 days to deliver it after it is requested. Some of the financial information must be no more than 45 days old as of the date the certificate is given to the buyer. 

Let’s go over some of these below and point out what you should focus on during your review.

Financial Statements and Budgets

Basically, these documents provide crucial information on the financial status of your building. Most importantly, take a look at the condo’s reserve funds and operating budget.

•Reserve Fund: These docs will tell you if there are enough reserves. A reserve fund (or savings account) is used for major repairs or improvements to the building. Projects can include new windows or a roof, for example. A condo needs to build up reserves for future repairs so a percentage of your monthly fees should be deposited into this fund. Also make sure you see how that money is invested.

If your condo has a low reserve fund, it will require a special assessment (additional fees) when a major repair or renovation is needed. It’s something to consider if you’re looking at an older building, especially ones that are around 25-30 years old. Keep this in mind for older apartment buildings that have been condos for only a few years.

A good rule of thumb is at least 10 percent of the condo budget should be going to the reserve account.  This also is also what lenders require before they will give a loan for a condo unit.

•Operating Budget: Your monthly fees are what fund most of the operating budget. Experts say about two-thirds of the operating budget should be used toward expenses.

See how your condo fees are allotted each month for employee paychecks, utilities, trash pick-up, etc. Remember, somebody has to pay for those hallway light bulbs!

Plus, if your condo has a 24-hour front desk, swimming pool, elevators, full-time engineer on site … these expenses add up and so will your fees.

Keep in mind that your condo association shouldn’t be dipping into the reserve fund for basic maintenance like trash removal, recreational facilities, common-area landscaping, etc. That’s a big warning sign!

•Delinquencies: It’s important to know what percentage of unit owners are delinquent on their monthly fees. If more than 15% are more than 30 days delinquent, Fannie Mae may not approve your mortgage. Plus, if too many units go into foreclosure, the association could go into a budget shortfall, which could mean a special assessment is issued.

Rules, Regulations and By-Laws

You want to check these out to see if you will be able to live by the rules and regulations of your condo community. Remember, you’re living with many other people, and there will be certain expectations and restrictions. Do these suit your lifestyle?

These rules can vary widely from community to community. In general, these documents could specify a range of items, including its pet policy, whether you need to have carpeting, can you install hardwood floors, or if you can rent out your condo at any time. Also, review any grandfather clauses since you might not have the same “rules” as an earlier buyer.

Other Important Questions to Ask

Definitely contact board members or the property manager to ask questions. This additional information can help round out your review of the condo docs. Here’s a “must ask” list:

•Are there any upcoming upgrades or projects planned in the building?

•How are those projects going to be paid for? Reserves? A special assessment?

•What projects are on the 5-7 year horizon? Are there adequate reserves being funded for these projects?

•What are the major issues the board is discussing at the last several board meetings? Read the board meeting minutes from over the last year.

• Is the condo experiencing any litigation? Whether it’s a small or large lawsuit, reserves can be deleted quickly to cover this.

•How much turnover occurs? This will tell you if residents are happy with the condo community.

•What percentage of the units is owner-occupied? Generally, the higher the percentage of owners, the more marketable the unit will be for resale. It’s not unusual to find some associations in financial trouble over short sales or foreclosures.

•Are there rental restrictions? This can be good and bad. If you would like to keep this as a future investment property, you’ll want to make sure rentals are allowed. However, if owner occupancy is too low (below 80%) some lenders won’t lend on the property, which will make it harder to sell (and harder for you to get a loan now).

•What does the association’s master insurance policy cover? A list of coverage should be included in your condo docs. By reviewing these carefully, you can determine how much additional coverage you may need for your own unit.

I have a great resource for my clients. I know a resale certificate review expert. It’s sort of like getting a home inspection for the HOA. My resource has reviewed thousands of resale certificates and can compare the HOA you are considering with dozens of HOAs of similar size and age. They can tell you if the HOA finances are within normal ranges. They can also warn you if it looks like the HOA is heading for financial ruin. When you work with me, I can refer you to an expert who help you understand the resale certificate because it can be confusing!

Reviewing your condo docs can be make or break when it comes to being sure you aren’t hit with any financial surprises after purchasing.  I’ll connect you with an expert to review them and know what to look for when we get to this step, so don’t worry too much about this right now.  I only want you to know what’s involved and to hear things more than once so you are more knowledgeable when the time comes.

Want to know whether buying a condo is a good choice for our area?  And, which condos are good and which to skip?  Email me gretchen@metropolist.com and we’ll set up a time to talk more about condos in our area so you can understand this important aspect of your purchase before you make the big decision to invest.

We’re heading into the final weeks of this Buying a Home 101 series and also for your final steps to buying a home. You’ll get the nitty-gritty in the next article, Almost There … Pre-Closing Details for Buyers.  It provides a breakdown of what to expect so you’re ready for the big day.