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Tuesday, February 22, 2011
Real Estate News
Monday, February 7, 2011
Buying a Condo- A Financial Review
February 4th, 2011
By Ryan Southwick, Lakes Property Management and Southwick Group Real Estate
Buying a condo in today's market has a lot of risks but several rewards. Today, we will discuss what to look for in an associations financial statements. We will also be creating other blogs on: governing documents, resale value, insurance, rentals and trend analysis.
Condo Financials... Let’s start slowly here-
Item 1.
Is the property self managed or professionally managed?
A professional property manager (typically) has the knowledge base, software, and time to provide current and accurate financial data. I am a strong advocate of having a professional property manager to reduce supplier costs. A property manager can also reduce annual contracts.
Item 2.
Do they have a capital reserve budget?
A capital reserve budget is a funding account (separate account) in which the association plans replacement costs over a period of time, "similar to" a savings account. A capital reserve plan is critical to an association’s success. The point of this plan is to set aside enough funds to replace large association elements over a period of time. Such items can include: roofs, siding, chimneys, pool, pool components, monuments, signs, lighting, roadways, etc...
Some basic formulas associations use are: a complex that is 1 to 10 years old, the reserve fund should have 10% of the cost of the replaceable items. Between 10-20 years old, the repair fund should have 25-30%. At 20 years, that amount should be 50% or above.
Item 3.
Assuming they do have a capital reserve budget- Is their a Capital Reserve Study to determine what amount per year/month to fund? Also, who developed the Capital Reserve Study?
I suggest that an independent firm complete the Capital Reserve Study. This way you have a group (suggest engineers) to complete a physical review of the property and determine remaining life and costs. This data will create a financial plan of exactly what income should be set aside per year to cover these assets.
Item 4. HOA FEES.
How do the homeowner’s association fees or (HOA) assessments compare to similar nearby communities? Are they too high or too low?
Keep in mind that developments with pools, clubhouses, gyms and piers may have higher maintenance and liability insurance costs. Additionally, high-rise buildings have more complex mechanical systems (elevators, HVAC) that will require extra reserves and maintenance fees.
The HOA fees should be comparable to similar communities. If not might be cause for concern.
Okay, now that the basics are done what should you check next? Income: who is paying and who is NOT!!!
Item A.
What is the number of unit owners with aged receivables? What is the percentage of non payers? Does the association plan (in the budget) that a certain percentage won't pay their dues?
Personally, I would be concerned to a purchase into an association were over 5% are not paying their dues. Frankly, I'd like to see the max percentage at 2-3% for a larger association (50 units or more) and that's in a poor economy. Reason being the remaining owners are paying additional funds for each non-payer.
Item B.
How many foreclosures does the association have going on?
I'm a strong believer of getting the non-payers out, having the association put an owner in foreclosure and having a new owner come in and pay the HOA association dues.
However, if you find that there are several units in foreclosure, I'd be very concerned. What will happen to property values? When will the bank pay for the assessments? Will they pay the back assessments (not likely)?
Now lets look at expenses?
Item I. When looking at the budget versus actual, where are the overages? Are there any?
I'd take a little time and examine where the increase in costs come from. TYPICALLY, the costs should be consistent over a period of time. I would just plan to spend a little time and review. Questions should be brought up to the association treasurer.
Item II. Do they have a separate category for "Major Repairs and Improvements"?
It is recommended to separate these "one time" expenditures for items such as "landscape improvements, structural improvements, engineering,..." I would spend some time and review these costs.
I hope this blog has given you some financial understandings of associations and the purchase of a condominium unit. Please follow our blog to receive additional information on the purchase of condominium units and real estate.
You can also visit our websites at: www.SouthwickGroupRealEstate.com and www.LakesPropertyMgt.com
By Ryan Southwick, Lakes Property Management and Southwick Group Real Estate
Buying a condo in today's market has a lot of risks but several rewards. Today, we will discuss what to look for in an associations financial statements. We will also be creating other blogs on: governing documents, resale value, insurance, rentals and trend analysis.
Condo Financials... Let’s start slowly here-
Item 1.
Is the property self managed or professionally managed?
A professional property manager (typically) has the knowledge base, software, and time to provide current and accurate financial data. I am a strong advocate of having a professional property manager to reduce supplier costs. A property manager can also reduce annual contracts.
Item 2.
Do they have a capital reserve budget?
A capital reserve budget is a funding account (separate account) in which the association plans replacement costs over a period of time, "similar to" a savings account. A capital reserve plan is critical to an association’s success. The point of this plan is to set aside enough funds to replace large association elements over a period of time. Such items can include: roofs, siding, chimneys, pool, pool components, monuments, signs, lighting, roadways, etc...
Some basic formulas associations use are: a complex that is 1 to 10 years old, the reserve fund should have 10% of the cost of the replaceable items. Between 10-20 years old, the repair fund should have 25-30%. At 20 years, that amount should be 50% or above.
Item 3.
Assuming they do have a capital reserve budget- Is their a Capital Reserve Study to determine what amount per year/month to fund? Also, who developed the Capital Reserve Study?
I suggest that an independent firm complete the Capital Reserve Study. This way you have a group (suggest engineers) to complete a physical review of the property and determine remaining life and costs. This data will create a financial plan of exactly what income should be set aside per year to cover these assets.
Item 4. HOA FEES.
How do the homeowner’s association fees or (HOA) assessments compare to similar nearby communities? Are they too high or too low?
Keep in mind that developments with pools, clubhouses, gyms and piers may have higher maintenance and liability insurance costs. Additionally, high-rise buildings have more complex mechanical systems (elevators, HVAC) that will require extra reserves and maintenance fees.
The HOA fees should be comparable to similar communities. If not might be cause for concern.
Okay, now that the basics are done what should you check next? Income: who is paying and who is NOT!!!
Item A.
What is the number of unit owners with aged receivables? What is the percentage of non payers? Does the association plan (in the budget) that a certain percentage won't pay their dues?
Personally, I would be concerned to a purchase into an association were over 5% are not paying their dues. Frankly, I'd like to see the max percentage at 2-3% for a larger association (50 units or more) and that's in a poor economy. Reason being the remaining owners are paying additional funds for each non-payer.
Item B.
How many foreclosures does the association have going on?
I'm a strong believer of getting the non-payers out, having the association put an owner in foreclosure and having a new owner come in and pay the HOA association dues.
However, if you find that there are several units in foreclosure, I'd be very concerned. What will happen to property values? When will the bank pay for the assessments? Will they pay the back assessments (not likely)?
Now lets look at expenses?
Item I. When looking at the budget versus actual, where are the overages? Are there any?
I'd take a little time and examine where the increase in costs come from. TYPICALLY, the costs should be consistent over a period of time. I would just plan to spend a little time and review. Questions should be brought up to the association treasurer.
Item II. Do they have a separate category for "Major Repairs and Improvements"?
It is recommended to separate these "one time" expenditures for items such as "landscape improvements, structural improvements, engineering,..." I would spend some time and review these costs.
I hope this blog has given you some financial understandings of associations and the purchase of a condominium unit. Please follow our blog to receive additional information on the purchase of condominium units and real estate.
You can also visit our websites at: www.SouthwickGroupRealEstate.com and www.LakesPropertyMgt.com
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