When buying a condo or house in a planned community, youre not just buying the property, youre also buying into the larger community,
including all of the common areas. But thats not allyoure agreeing to abide by the rules
established by the community, and to take fiscal responsibility for the areas shared
with your neighbors. Thats quite a lot to take ownership of.
How can you make sure youre not buying into a huge problem? To protect your interests,
a careful review of the homeowners association (HOA) documents is necessary before you buy. Heres a look at what you should probe in order to be fully protected.
SEE ALSO: 7 Questions You Must Ask Neighbors Before You Buy
1. HOA Finances
Work with an expert
to examine the HOAs financial statements and budgets. Is everything in order? Is the HOA receiving enough money in dues to cover their expenses? How do their reserves look? Each state has different rules about whats considered adequate reserve funding but, in general, a reserve thats at least 60 percent funded
is a good sign of financial health.
2. Reserve Study
How is the HOA preparing for long-term repairs?
Do they collect enough fees to cover their operating expenses, and save for the inevitable repairs to the roof, streets and the buildings exterior? A reserve study will show you how much the HOA should be saving,
and how much theyve actually saved. If theres a huge discrepancy
between those two numbers, expect a future special assessment that will thrust the cost of these big-ticket items onto the owners.
Also, look at what percentage of the HOA fees are set aside
to shore up the reserve. While there is no set percentage required, the older the community, the higher the percentage they should reserve for future repairs, which could be just around the corner.
3. HOA By-Laws And Communications
Before agreeing to purchase the condo, take a look at the HOAs bylaws to discover any rules that may impact your enjoyment
of the unit. Examine your needs
against the existing rules. Do they prohibit pets? Do you plan to rent out your unit? If so, what are the restrictions on rentals? Do you want to change your homes exterior? Find out if there is a color palette restriction.
Take a look at board meeting minutes and community newsletters.
Has there been recent chatter about building issues or owner/occupant complaints? What about special assessments and neglected repairs? Is there a problem with fee delinquency, foreclosures and abandoned properties?
4. Demand Statement
The demand statement will let you know if there are any unpaid fees or unit violations
that need to be rectified by the buyer (or seller). Examine this statement carefully
to determine what you will need to pay the HOA at closing. Depending on your situation, you may be able to negotiate with the seller to pay all, or a portion, of the dollar amount on this statement for him.
SEE ALSO: 5 Questions You Need To Ask At An Open House
5. HOA Insurance Policy
Find out what the HOAs insurance policy covers.
Work with an insurance professional to supplement this coverage,
so that your unit and personal property is protected.
Prepare to pay a fee of at least $300
to get all of these documents before closing. Consider going through the escrow company, and paying a little extra to get rush delivery. Dont try to decipher these documents alone. You may be proud of the American flag thats hung on the property, but work with an experienced professional to make sure there are no red flags
in the HOA.