Buyer minimum due diligence

My child is looking at purchasing a condominium. The market is such that some agents are requesting waivers for appraisals, inspections and basically any real due diligence in buying a residence. What sort of things should we be looking at before the deal is done to make sure that there is nothing that could come back to haunt us later?

William B. Vancouver, WA

That first purchase is always difficult and a condo can be even more so. What makes me especially nervous is the requests to waive normal practices simply because they believe this to be a hot market. If your child has to give up something, I suggest the inspection as most of what they find is probably outside the direct control of the unit owner anyways.  All that common element is really not anything the unit owner can touch.  The appraisal is lender specific and probably can’t be waived by the buyer but, with enough money down, the risk is reduced and the lender may play along.  Any waiver of due diligence really puts a big risk on any buyer though and should be avoided if at all possible.

As a condo buyer in a heated market, here are some things you may wish to consider when purchasing a condo.  Given the requests to waive, the minimum due diligence, looking at these items will hopefully serve to protect a buyer from the most outrageous risks.

  1. Get the reserve study and the most recent financial statement.  Is it recent, like within the past 24 months?  If not, it means they are either complacent or don’t want to know what the true financial cost is for the project.
  2. Look to see how old the projects elements are and how soon they are scheduled for replacement.  A 30 year old condo building which hasn’t had its roofs done yet is likely to need them done in the next 3-7 years.
  3. Look to see how much money needs to be spent over the next 3-7 years.  Then compare the anticipated costs for the reserve spending to how much money the association has collected and set aside in the reserves.  Is it at least 1:1?  If the association has only set aside $0.50 in reserves for every dollar they need to spend over the next 3-7 years, there is likely a special assessment coming.
  4. Is there a substantial bank loan on the books?  If so, it means that the association already underwent a special assessment.  The good news is that a major project has already been addressed, the bad news is that this association will do most of its major repairs and renovations via special assessment in the future.
  5. Get the budget.  Is any part of the budgeted assessments (dues) going towards a bank loan?  This means that there is no requirement to pay off the special assessment when units are sold and the buyer is on the hook for the payments.

The reserve is important.  If the association isn’t funding it, there will be special assessments.  Those need to be factored into the purchase price.  Granted in a seller’s market it isn’t so easy to do as buyers suspend logic, but the charge is coming, nonetheless. Let someone else take the risk if the reserves are unfunded.

As to rules, the major rules are in the declaration.  The critical thing to understand is what the declaration define as limited common elements (LCE), also known as common elements assigned to fewer than all the units, and how they are maintained and paid for.  These are somewhat standardized but can vary by state and can even be modified by the owners.  Some of the more obvious LCE are decks/patios, windows/doors, plumbing servicing only the unit, garages and maybe even uncovered parking spaces.  The general rule is that the maintenance, repair and replacement of LCE is the association’s responsibility but paying for it is the responsibility of the unit owner.  This is a huge gotcha for the unwary.  This is also a potential headache as the board, thinking they are being kind, leaves the repair and maintenance to the unit owners and unit owners being human, don’t want to spend money so try and do the work themselves.  Hopefully the work was done well, but if not, the buyer could be on the hook for having to bring the LCE up to expected community standards.

Board’s and owners also get to create House Rules which control the daily living within the property.  Technically, these can’t exceed the limits established in the CC&R’s but some of the language in the Declaration is vague to say the least.  Take nuisance as an example; The Declaration typically states that owners shall not cause a nuisance from their unit.  What is a nuisance?  One person’s quiet Friday night party with friends ends up with a violation notice because a neighbor complained.   Board’s often create parking rules which can get vehicles towed if care is not taken.

Read the last 12 minutes of board meetings.  Look for the kind of stuff the board votes on.  Are they voting to defer maintenance?  Do they spend hours discussing fines against owners?  Do they spend time chattering about granting owners the right to plant Fuchsias in the common landscaping?  You are looking to see if the board likes meddling or it takes its responsibility of caring for the common elements seriously.  If there are lots of minutes about “Volunteers” taking care of property and elements, beware.  That is a sign of a dysfunction as people think they are doing everyone a favor by having unpaid non-professionals doing work about a property owned in common by all.

On that note, it is important to be aware that condominium property is owned in undivided interest.  So every blade of grass is owned proportionately by all the unit owners.  No space outside the face of the studs on the perimeter of the structure is technically the unit owner’s property.  Owners have dominion only over the airspace between the walls. If a buyer can appreciate that, they can easily enjoy the condo lifestyle.  The problem, of course, is that many longer-term owners begin to believe that property becomes deeded in fee simple after some length of ownership.  So, you will see owners who have taken over part of the landscaping and started planting their own vegetable garden… and the board never intervenes.  But, as a new owner, hang a sign in your window and it’s a $50 fine.  Very arbitrary but happens all the time.

Bottom line is that the buyer should have a strong grasp of the reserves and feel confident that enough money is set aside to take care of them. If the association hasn’t collected enough to fund what is coming due in the next few years then there is a very real risk that a special assessment is coming. Be wary of items which don’t have realistic time horizons. Components never last as long as expected and always cost more than planned in the study.

At the end of the day though, the most important thing is to go in with your eyes wide open. If the property seems ideal and the association has good reserves with a realistic reserve study, the risk of a surprise financial risk is substantially reduced. This won’t speak to whether or not the neighbors are a nightmare or the board can’t go crazy and make up new rules, but at least there won’t be the shock of a $25,000 special assessment the day after move-in.

C.O.R.E. Services, LLC is here to help board’s successfully manage the association and care for the common elements. If you have questions you would like answered, feel free email us and we will be happy to respond. We are here to be of service to you and your condominium project.

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