"We'll tell you what the reserves are after you purchase"

Most owners live within their unit, but some do not and rent their unit. A few owners decide they made a purchase mistake. This realization may occur shortly after purchase, or after some years. For example, the real estate bubble that led up to the financial collapse of 2008 was a fun ride, until the bubble burst. Then the value of real estate "reset" to a much lower figure.  At that time, when the fun went away and the costs spiraled, some condo owners found themselves with a condo they could not flip as intended. A few also realized that they don't like being a landlord, and some woke up to the reality that condo flipping was no longer a path to riches.

Some who purchased during the run up in real estate, particularly at the peak, are still underwater. In fact, nationally it has been reported that 16 percent of all homeowners with a mortgage are still underwater.  If one purchased with a long term perspective, the current value of their home or condo may not be important. After all, what it is worth is really important only if one intends to sell or get a second mortgage, etc. However, some are unhappy to be in their current financial situation

Many complaints can be traced to circumstance, but some can also be traced to a buyer's failure to do due diligence prior to purchase. Here are a few examples.

Here's a true story. A friend had been looking into the real estate market in Chicago after relocating. They narrowed the search and decided a condominium would be nice.  I suggested that they check reserves as part of a short list of items I gave them. They came back and said "I was told by the realty professional that I would be given the reserve information after I purchase."

It is true that there is no requirement to release a reserve study to a non-owner. However, the financials should include the dollar amount of current reserves and potential buyer is entitled to know that information. I do wonder when I am told about these things. This is precisely why I put together a short list of things to check or to ask about when considering purchase in a HOA. It's published elsewhere in this blog. It may take the signing of a contract to get certain details, but many should be available before doing so.

Buyers can be unreasonable and can ask for information and details that are not critical to a purchase. One does need to exercise some common sense. Yet, there is no harm in asking questions and the HOA representative can comply or not. I would suggest that one also retain a real estate attorney and give them your list of questions. In my limited experience most management firms respond well to buyer questions and are familiar with them. A prospective buyer is not the first to ask these questions. Nevertheless, a prospective buyer should be prepared to do some research. You may be given a series of printouts and you'll probably have to do some work distilling the information.

My "Potential Buyers Guide" is not all inclusive. It also gives a potential buyer some things to do and read, as well as think about. No one ever held a gun to a HOA owner's head and forced the to make a purchase decision. So buyers need to do the responsible things to alleviate any concerns prior to making the purchase decision. It is common sense to read the ByLaws and the Rules and Regulations and understand them prior to a purchase. Ditto for the recent financials of the association. But one needs to be aware that the annual financials are a "snapshot" in time. For the unit under consideration it is also possible to hire an inspection firm. However, that firm will not be inspecting the common elements, so ask management questions about maintenance, who performs it and what is included as owner responsibility would also be prudent. As would questions about reserves.

But always remember that the written condominium documents take precedence over whatever you are told. There is a hierarchy to these documents. Federal. state and local laws come first. In Illinois the Illinois Condominium Act (written statute) takes precedence over the written Bylaws of the association, and the Bylaws take precedence over the Rules & Regulations.

Here's another example. A few years ago an associate asked my opinion about a condominium on the east coast. I did review the financials and I saw that this rather large building (approx 60 units) had about $180,000 in reserves. Could that be a problem? I suggested to my associate that they should be prepared for 1) fee increases, 2) possible special assessments and 3) resistance to fee increases or special assessments by other owners which could have an impact on maintenance. That potential buyer did hire an inspector and they did find some unit issues, but they proceeded with the purchase. They are happy in their unit, but the reserve situation has created problems for that HOA.

At that HOA several years later the board and management faced replacing all of the hallway carpets. It was determined that reserves were inadequate. So the carpets were removed, the concrete floors patched and then painted. No carpet was installed. You can imagine that some owners were unhappy about that; the long corridors became echo chambers. Yet others also argued that they were unwilling to shoulder the burden of a special assessment.

When there are insufficient reserves to handle capital costs, there may be differing opinions among owners on how to deal with this. Some owners may have their own idea of priority of spending of those reserve funds and it may not include fair distribution on the property. That priority may also take the perspective "If it really isn't broken then don't fix it" and the board may operate with an austerity program. That program may show up in interesting ways. The example of painting hallways in lieu of replacing carpeting is an example.

Some owners will be unhappy when  maintenance alternatives are employed to avoid special assessments or increases in reserve funding. Some will accept maintenance compromises to keep those fees where they are. Some will be unhappy with what they perceive to be a change in quality if alternative methods and materials are used. A few may complain about any common area maintenance which occurs in areas for which they derive no immediate benefit.

Here's another example. An associate lived in a townhouse complex in which the windows were defined a "common elements". They thought that was wonderful as they would never have to save for or deal with window maintenance and replacement. However, about 10 years after purchase the board of that HOA decided it was time to replace all of the windows and assessed each unit about $10,000 to do this. My associate insisted that the windows in their unit were fine and did not need to be replaced, but to no avail. The board had decided to change all windows so as to treat all owners fairly and equally. A few other owners were unhappy with this, but it is my understanding the majority were not willing to make it an issue. So the project proceeded and my associate received their $10,000 invoice.

It can go both ways. However, if there are adequate reserves, the maintenance becomes more one of establishing priorities and adhering to reasonable budgets.

This is why I argue for setting reasonable maintenance priorities, performing reserves studies on a regular basis and then taking incremental steps to accrue sufficient funds to handle the identified issues. I've concluded that many of the complaints of owners can be traced to maintenance and condition, and that in turn is directly a consequence of available funds. There will be exceptions to the rule, but I've seen enough in my 15 years to make the simplistic statement that "money is the root of most issues".

Not responsible for any errors or omissions. (c) N. Retzke 2017 All Rights Reserved.