To put it simply: the condominium dues that are attached to your condominium purchase are in fact a complete illusion.
All buyers of condominiums naturally believe that the monthly dues assessment for their property is enough to cover the current and future costs associated with owning a unit within their condominium association. And while this is understandable and seems to make total sense, it is rarely ever the case.
The reality is that in most HOAs, owners and members of the board want to keep dues as low as possible. This keeps their monthly expenses down and is often a more attractive point for those looking to sell their property. It’s easier to convince a buyer of a low HOA fee than it is to convince them of a high one. It also increases the number of people who can quality for a loan or the purchase of one of the condos.
Most state laws require the condominium association to order a reserve study every few years. A reserve study is an analysis of a property and its continuing maintenance costs, taking into consideration economic life, property updates, and the current costs of construction. The reserve study examines the probable costs and future needs for an HOA. Then the report suggests a monthly contribution to the reserves to cover the current and planned costs. It is designed to encourage good financial planning and budgeting, and is referred to as reserve funding.
Now, while the ordering of the study is required in some states, there is no requirement that an association actually follow the findings of the reserve study! In our experience, we can say firsthand that among thousands of condominium associations we’ve worked with, only one association actually followed the reserve study findings.
To make matters worse, many associations ignore their state laws and fail to order a reserve study. This often happens because of the concern for a report showing a need to raise HOA fees or that a report may bring to light poor financial management among an HOA board. Once a board is made aware of being in poor financial condition, they’re required to disclose this to potential buyers which can make selling a bigger challenge.
For this reason, many simply avoid getting an essential reserve study in the first place. Without this state mandated study, a buyer fails to have a singular idea as to what his dues both should be today and will be in the future. It’s like building a house without plans.
In addition, some state laws allow the members of the association to waive reserve funding all together. Florida, for example, the condominium capital of the world, allows the membership to vote to eliminate a monthly reserve contribution completely. When this is done, the owners are expected to come up with large lump sums (often through high-interest rate loans) to fund the maintenance and replacement of roofs, plumbing, electrical, siding, painting, parking lots, pools, and all common elements. This is called a special assessment
Special assessments are incredibly common for HOAs in need to extensive repairs or maintenance costs in the future. Often, it is a financial punch to the gut for buyers, especially when they weren’t made aware of the issues prior to purchasing in the first place.
Another egregious example of state law lapses for condominiums is in Illinois, which has around twenty thousand condominium associations. Illinois state law permits an annual inspection by a board member to substitute for a reserve study. Board members, who have no training, education, or background in properties or associations, are simply individuals within a community who have been elected to serve on the HOA board.
Think about this for a moment – instead of having construction and property experts prepare a study, Illinois allows random board member Mrs. Johnson to go out and conduct her own visual inspection and decide the association is fine and the community has no need for a raise in dues. Lack of industry knowledge and expertise is how tragedies like the Champlain Towers happen.
Buyers need to be counseled and made aware of this endemic problem with condominium purchases, and that’s what our Condofax report does. It examines all of the documents and state law requirements so that a buyer has full disclosure and knows exactly what the dues should be and gives him an opportunity to negotiate with the seller based upon the deficiencies discovered.