Home Buying in Minneapolis>Question Details

Mark, Home Buyer in Minneapolis, MN

What is a reasonable reserve for a 4 unit condo building in Mpls. Each unit is 1100 sq feet, no additional ammenities such as pool, tennis courts, etc

Asked by Mark, Minneapolis, MN Mon Mar 29, 2010

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Hi Mark. I think you have to look at the overall financial situation of the association as well as the condition and age of the building and parking lot/parking garage. You want the reserves to be large enough to make necessary repairs or upgrades to the 4-unit condo. Perhaps the reserves don't need to be more than $2000 if it is a brand new unit. If it's over ten years, perhaps there should be a reserve of $10,000 to cover costs. If it's 20 years old or older, you might want to make sure there is $15,000 or more in reserves. Think about what the biggest costs are going to be. I would think it would be roof replacement and parking lot replacement. So when you are looking at properties, look at the roof. When was it last replaced? Is it a flat roof or an angled roof? The life span of a roof will determine when it needs to be replaced. Read all of the association documents you receive from your agent.

Let me know how else I might be able to help you.

Sincerely,
Gina Schedivy
Re/Max Results
Web Reference: http://www.gowithgina.com
0 votes Thank Flag Link Wed Mar 31, 2010
Hello Mark and thanks for your post.

Unfortunately, there is no such thing as a "reasonable" reserve amount for any condominium, planned development, community apartment or coop. Reserves are determined by:

1. The amount, type and condition of the Common Area Components, which includes the type of exterior materials on the building, the square footage of the exteriors, the type of roof, balconies, decks, stairs, railing, etc.
2. The age of the building
3. The date when the repairs, refurbishment, or replacement were last done and when they are expected to be replaced again in the near or distant future
4. The amount of money overspent in the past, and any plans to "refund" those payments to the reserves.

So, for example, let's just take one (1) component on the building and pretend that's the only thing the Association must pay for. For this example, we're going to choose the roof, and let's pretend that a new roof will cost our example homeowners association $30,000 to replace, and that the roof has an estimated life of 30 years. Let's also say that the building is 15 years old. Given this information, how much money should be in the reserves today.

Here's how we figure this out...

$30,000 (cost of roof) / 30 years (the life of roof) = $1000 (the amount that should be put aside every year for the roof)
$1000 (the annual allocation for roof) x 15 years (the current age of building) = $15,000 or the amount of money that should be in the reserves today.

So, for our example, there should be $15000 in the reserves now--that's the target figure. However, let's pretend that the developer who built our complex hired a contractor that used deficient roofing materials, and the condo complex had to replace the roof two months ago. The economy being what it is, the Board of Directors found a great roofer who put in a 20 year life roof for $15,000 (the amount that was in the reserves). Now what is the reasonable amount of money that should be in the reserves??

In this case, the answer is "zero"--there should be no money in the reserves, since the condo complex spent every bit of their current reserves for the new roof.

But, if you were a buyer looking in on the homeowners association and without knowledge of what the condo complex had just done, a community with no money in their reserves would be a huge "red flag" when, in fact, it is not a problem at all.

Thus, there is no "reasonable reserve" amount for any community because, as mentioned above, the facts change and are unique for each community. If you have any questions about how much should or should not be in the reserves, the questions that need to be asked are: 1) how much is in the reserves accounts now? 2) What repairs are upcoming in the next five years? and 3) how much are those repairs expected to cost? Given the answer to these three questions, one might quickly deduce whether or not there is enough money in the reserves for the short-term, expected repairs and approximately how much the reserves are over or short for those expenses.

Good luck!!

Sincerely,
Grace Morioka, SRES, CID Expert
Co-Author of "Homeowners Associations: A Guide to Leadership and Participation"
Area Pro Realty
San Jose, CA
Email: GraceAreaProRealty@att.net
0 votes Thank Flag Link Tue Mar 30, 2010
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