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Dave Ralston (206) 375-9191's Blog

By Dave Ralston (206) 375-9191 | Agent in Seattle, WA

How to read HOA Financials


When you are in the market to buy a condo there are some things you need to know about Home Owners Associations (HOA).  The HOA is responsible for building amenities, maintenance and, in some cases, utilities.  As an owner, you may have some voting rights for the management of the budget, but the majority vote has the final say.  I like to make sure that my homebuyers review the building’s finances to know whether or not the HOA is financially strong or as useless as a Deutsche mark in todays market.   

Here are some important factors for your condo buyers — or to have reviewed by your professional advisor or attorney. Typically, I will make sure the seller is contractually obligated to supply these documents in the purchase and sale agreement during your inspection period:

  1. Examine the last 2 years of financial statements to make sure spending is consistent. 
  2. Examine the HOA’s money reserves to make sure there is enough to maintenance and operating expenses.  If an emergency cost arises this could cause a drastic increase in HOA dues
  3. Examine the assets & liabilities statements to see if there are funds to balance the expenses.
  4. Find out if the building is regularly spending money on repairs and upgrades. You may find this in a reserve study or capital impotents/maintenance budget.  Allowing all kinds of maintenance to pile up can lead to a huge assessment or HOA lawsuit to pay for the bills later on.
  5. Examine the last year’s condo board meeting minutes for any suggestion of contingent liabilities, which suggests there may be a lawsuit in the wings. While lawsuits usually are covered by insurance, you’ll want to know whether or not it’s a litigious board.

All these are great starting places to look at the financial strength of a condo HOA.  However, you should be prepared to discover additional questions to answer during your investigation.  I believe it is better to be forewarned when it comes to making one of you largest investments and working with a knowledgable real estate broker can help you to navigate these around the pitfalls.

Comments

By Mary Devino,  Fri Aug 6 2010, 12:35
Thanks Dave for this great article, as a listing broker for a seller, I think all 5 points are crucial to review with your buyer. The Reserve Study is a valuable budget planning tool to control the future spending for the HOA and to understand the current and future Reserve obligations.

It is the art and science of anticipating, and preparing for, a HOA's major common area repair and replacement expenses. Partially art, because in this field, the Study is making projections about the future and partially science because the study is a work in process of research and analysis.

Working with a knowledgable real estate broker is the way to go!! Thanks again.
Mary
By Bella,  Tue Apr 26 2011, 23:15
Thanks Dave. This is an old article with an awesome reminder for first time buyers. As an agent, I have found major problems with financial reserves for HOA's that will keep conventional and fha loans from being approved. Escrow is then not possible to close. BTW, I have found an investor that will finance condos even with an owner occupancy as low as 10%.
By Dave Ralston (206) 375-9191,  Wed Apr 27 2011, 15:09
Thanks Mary and Bella! I'm glad you found this post and it's so very helpful to see fellow brokers like you updating information like this!
Recently a buyer I was working with were interested in a condo where the reserve study showed a huge amount of work needing to be done. No assessments according to the HOA. It was all dependant on the condos developer paying out in a huge lawsuit settlement. We discovered the developer was going bankrupt and the HOA insisted that there were no assessments, but also no plan for how to pay for the repairs. Makes me quote “Jerry Mcguire – show me the money” It’s important to be working with a professional who can help buyers make those decision with the whole picture in mind.

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