Author Topic: Interpreting Condo Financial information  (Read 1286 times)

dragonwalker

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Interpreting Condo Financial information
« on: February 03, 2021, 09:52:17 AM »
Ok, so I'm looking at a 2B2B condo in southern CA area going for $350K with HOA of $405.05/month. I was just able to gather some information that hopefully some people on here could help me understand. Unit was built in 1971 and has 264 units.

I did think the HOA was high and ask about what that was made up of. Apparently about $275 is the normal assessment, $30.03 is an ongoing special one to go to the reserve fund, and $101.37 is due to payback a loan for plumbing expenses done about 7 years ago and is expected to be paid back in 2029.

They have income from HOAs of about $1.4 million and about $1.35 million in expenditure. They put about 10% into the reserve and they have "just under $500K" in reserve. The on site manager even described this as low and some of the sources I read seem to lead to that conclusion as well and I suppose why the extra assessment to HOA reserve. The property did have some major remodeling about 5 years ago so I suspect some of that was due to that.

About 56% is rental which seems high...

I was told that the financial statements, reserve study and board meeting minutes would not be released until about escrow. 

lhamo

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Re: Interpreting Condo Financial information
« Reply #1 on: February 03, 2021, 10:44:09 AM »
Some red flags:

1)  I don't understand why they can't provide you with the board minutes, reserve study and financials before escrow.  If they don't have them, that is a pretty major red flag already --shows poor management (those things should be available in e-form almost immediately from any competent management company).   If they are HIDING them, for me that is a walk-away condition.   You have a right to understand the underlying financials of any property you are about to invest in.  They can ask you to sign a non-disclosure agreement, but they should not be hiding these important documents.

2)  Why did they have to take out a 15 year loan to fund that plumbing work?  The special assessment for that is fairly low, but the fact that they didn't have or weren't willing to pay for that out of the reserve is concerning.  If it is a matter that they had already spent down the reserves for other remodeling, I would ask what the nature of the plumbing repairs were and why the entire systems in the building were not assessed/properly maintained BEFORE cosmetic remodeling was done.   Owners and management companies should ALWAYS address the core functionality and stability of the structures of the buildings before doing other work.  Roof, plumbing, electrical, and elevators if they have them. 

Basically get more details on the sequencing and amounts of the repairs and their funding.  If the loan for the plumbing was taken out 9 years ago and the major remodel was 5 years ago the story is not adding up.

3.   I am not a property investment expert, but as a potential buyer I would be very nervous about how low that reserve is compared to the size and running costs of the building.  The rate they are adding to the reserve is less than 2% a year -- that's not even keeping up with inflation.

4.  The high rental occupancy is also a warning sign.  I think over 50% rental means units will not qualify for FHA financing.  That cuts out a big chunk of potential buyers right there. Buildings with high rental percentages can also have more management problems + issues with tight-fisted investors not being willing to put cash in the building.  This can also happen with under-resourced owners but you are more likely to be willing to fund repairs and improvements as an owner living on site than as an off-site investor, especially if you are more the slum lord type.   Anyway, the property summary should tell you if it is FHA eligible. It isn't a total make or break issue, but something to dig into.

The good aspect of high rental occupancy is that it probably means there are no rental caps.  So as long as that remains the rule you could potentially rent this unit out in the future if you move, etc.

I would push them to get the reserve study and financials, at a minimum or at least a better explanation of

1)  why they needed the loan for plumbing and what was the nature of the expense/repair/cost,

2) what was the nature/cost of the remodeling work that was done 5 years ago

3)  What is the breakdown of units in the building (1br, 2br, etc.) and what the rough total monthly assessment is for each.  You want to make sure that this # x 12 actually adds up to the 1.4mill in annual income.

Tell them you are willing to sign a non-disclosure form if necessary, but would prefer to have the original documents.

If you are working with an agent push them HARD to get these documents.  If they are lazy THEY may be the ones resisting.  A good agent should be able to get you these things or explain why they are not available.  A good agent should also be raising the same red flags, or at least most of them, that I am raising here. 



mozar

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Re: Interpreting Condo Financial information
« Reply #2 on: February 03, 2021, 01:24:43 PM »
Personally I wouldn't join a hoa that had debt. Fees are high and they can't afford to pay maintenance in cash is a concern for me.

You should be able to at least get the financials from the previous year.

dragonwalker

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Re: Interpreting Condo Financial information
« Reply #3 on: February 05, 2021, 09:02:07 PM »
Some red flags:

1)  I don't understand why they can't provide you with the board minutes, reserve study and financials before escrow.  If they don't have them, that is a pretty major red flag already --shows poor management (those things should be available in e-form almost immediately from any competent management company).   If they are HIDING them, for me that is a walk-away condition.   You have a right to understand the underlying financials of any property you are about to invest in.  They can ask you to sign a non-disclosure agreement, but they should not be hiding these important documents.

2)  Why did they have to take out a 15 year loan to fund that plumbing work?  The special assessment for that is fairly low, but the fact that they didn't have or weren't willing to pay for that out of the reserve is concerning.  If it is a matter that they had already spent down the reserves for other remodeling, I would ask what the nature of the plumbing repairs were and why the entire systems in the building were not assessed/properly maintained BEFORE cosmetic remodeling was done.   Owners and management companies should ALWAYS address the core functionality and stability of the structures of the buildings before doing other work.  Roof, plumbing, electrical, and elevators if they have them. 

Basically get more details on the sequencing and amounts of the repairs and their funding.  If the loan for the plumbing was taken out 9 years ago and the major remodel was 5 years ago the story is not adding up.

3.   I am not a property investment expert, but as a potential buyer I would be very nervous about how low that reserve is compared to the size and running costs of the building.  The rate they are adding to the reserve is less than 2% a year -- that's not even keeping up with inflation.

4.  The high rental occupancy is also a warning sign.  I think over 50% rental means units will not qualify for FHA financing.  That cuts out a big chunk of potential buyers right there. Buildings with high rental percentages can also have more management problems + issues with tight-fisted investors not being willing to put cash in the building.  This can also happen with under-resourced owners but you are more likely to be willing to fund repairs and improvements as an owner living on site than as an off-site investor, especially if you are more the slum lord type.   Anyway, the property summary should tell you if it is FHA eligible. It isn't a total make or break issue, but something to dig into.

The good aspect of high rental occupancy is that it probably means there are no rental caps.  So as long as that remains the rule you could potentially rent this unit out in the future if you move, etc.

I would push them to get the reserve study and financials, at a minimum or at least a better explanation of

1)  why they needed the loan for plumbing and what was the nature of the expense/repair/cost,

2) what was the nature/cost of the remodeling work that was done 5 years ago

3)  What is the breakdown of units in the building (1br, 2br, etc.) and what the rough total monthly assessment is for each.  You want to make sure that this # x 12 actually adds up to the 1.4mill in annual income.

Tell them you are willing to sign a non-disclosure form if necessary, but would prefer to have the original documents.

If you are working with an agent push them HARD to get these documents.  If they are lazy THEY may be the ones resisting.  A good agent should be able to get you these things or explain why they are not available.  A good agent should also be raising the same red flags, or at least most of them, that I am raising here.

Very good information I'm going to be looking at the property this weekend and seeing how much I even like it.

cool7hand

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Re: Interpreting Condo Financial information
« Reply #4 on: February 06, 2021, 10:13:00 AM »
Despite all of the red flags, many associations have similar problems. They run their business like many households and governments. They kick cans down the road and borrow from tomorrow to pay for today.

A condo is a good way to buy a piece of property and have others take care of a lot of the headaches of property ownership. If you're ok paying a bit of a premium for not having to be bothered with whatever the HOA is responsible for, maybe its a good fit. If you're not ok with that, maybe you should own your own place? That's another way of thinking about it.

MilesTeg

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Re: Interpreting Condo Financial information
« Reply #5 on: February 06, 2021, 11:52:36 AM »
Ok, so I'm looking at a 2B2B condo in southern CA area going for $350K with HOA of $405.05/month. I was just able to gather some information that hopefully some people on here could help me understand. Unit was built in 1971 and has 264 units.

I did think the HOA was high and ask about what that was made up of. Apparently about $275 is the normal assessment, $30.03 is an ongoing special one to go to the reserve fund, and $101.37 is due to payback a loan for plumbing expenses done about 7 years ago and is expected to be paid back in 2029.

They have income from HOAs of about $1.4 million and about $1.35 million in expenditure. They put about 10% into the reserve and they have "just under $500K" in reserve. The on site manager even described this as low and some of the sources I read seem to lead to that conclusion as well and I suppose why the extra assessment to HOA reserve. The property did have some major remodeling about 5 years ago so I suspect some of that was due to that.

About 56% is rental which seems high...

I was told that the financial statements, reserve study and board meeting minutes would not be released until about escrow.

You just described an HOA that is exceptionally poorly run and is asking you to pay for its past failures.

Don't walk away. RUN!!!!!!!

dragonwalker

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Re: Interpreting Condo Financial information
« Reply #6 on: February 06, 2021, 04:05:37 PM »
Ok, so I'm looking at a 2B2B condo in southern CA area going for $350K with HOA of $405.05/month. I was just able to gather some information that hopefully some people on here could help me understand. Unit was built in 1971 and has 264 units.

I did think the HOA was high and ask about what that was made up of. Apparently about $275 is the normal assessment, $30.03 is an ongoing special one to go to the reserve fund, and $101.37 is due to payback a loan for plumbing expenses done about 7 years ago and is expected to be paid back in 2029.

They have income from HOAs of about $1.4 million and about $1.35 million in expenditure. They put about 10% into the reserve and they have "just under $500K" in reserve. The on site manager even described this as low and some of the sources I read seem to lead to that conclusion as well and I suppose why the extra assessment to HOA reserve. The property did have some major remodeling about 5 years ago so I suspect some of that was due to that.

About 56% is rental which seems high...

I was told that the financial statements, reserve study and board meeting minutes would not be released until about escrow.

You just described an HOA that is exceptionally poorly run and is asking you to pay for its past failures.

Don't walk away. RUN!!!!!!!

Well looks like I won't even have a say in the matter. Last night I saw the home was in pending status. I reached out to my agent who told me this morning the sellers had accepted an offer the previous day. The house went on the market on Tuesday and Thursday/Friday it was out. Freaking insane...not sure why the sellers could not wait 1 weekend I guess the offer was that good and people have that much money to throw at this. I was having some doubts considering the complex financials however yes it would be ideal if everything about the unit and HOA was in order but I don't think I can rely on that consistently. I'll keep looking.

As far as someone mentioning a single family home, sure, that would me my ideal but it's just to expensive. Duplexes in ok shape are going for about 500K and up. Single family homes $550K in ok condition. With a modest single income I can't compete unless I fork over a massive downpayment. I've thought about it but I think financially I am sacrificing to much opportunity cost with the down and the market does seem just crazy hot for all buyers. I am willing to pay some premium but it seems to be to much for a single family home.

If rates continue to stay low how exactly do prices go down? It's like the federal government won't allow people to fail or be forclosed on leading to artificially higher prices for those of us who are looking for a way in.   
« Last Edit: February 06, 2021, 04:07:58 PM by dragonwalker »

iris lily

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Re: Interpreting Condo Financial information
« Reply #7 on: February 11, 2021, 08:43:29 AM »
Recently I bought a condo  and it took many weeks to get the official documents of the condo association. It wasn’t stonewalling, it was just bureaucratic Management. I was told these official documents which are the official bylaws, budget reports, and any other legal documents have to come from the management company dor liability reasons.

Legally I had five days from the time I got the documents to get out of the deal if I found anything unacceptable. I got the whole set of digital documents 24 hours before closing. Because I’m old and retired I was able to dedicate a couple hours to looking them over and approving them.

The listing agent had already sent over “unofficial” bylaws, and when I got the official document it was not different.

There was really only one item that was a dealbreaker for me, and that was their pet policy. It was expressed the same way in the official document as it was in the unofficial copies I received from the listing agent.

I was curious about how this old building had financed two new elevators over the past few years, but it wasn’t a dealbreaker. I was curious about rental policy, but it was not a dealbreaker.

When I got into the building I saw that one of the elevators had an outstanding loan on it, and that makes sense and I’m not worried about that. The rental policy was what I had hoped it would be which is no rentals. No long-term rentals, no short term rentals although some units are grandfathered in for long term rentals.

I love my tiny condo in a 1927 building and I have had more lovely surprises than unhappy surprises. Granted when we tore apart the kitchen and found the plumbing behind the wall was not acceptable, I had to pay $1500 for my side of the wall and the condo association had work to do as well. This is an old building. I’m used to old buildings with surprises behind the walls.
« Last Edit: February 11, 2021, 08:50:11 AM by iris lily »

iris lily

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Re: Interpreting Condo Financial information
« Reply #8 on: February 11, 2021, 08:47:49 AM »
Ok, so I'm looking at a 2B2B condo in southern CA area going for $350K with HOA of $405.05/month. I was just able to gather some information that hopefully some people on here could help me understand. Unit was built in 1971 and has 264 units.

I did think the HOA was high and ask about what that was made up of. Apparently about $275 is the normal assessment, $30.03 is an ongoing special one to go to the reserve fund, and $101.37 is due to payback a loan for plumbing expenses done about 7 years ago and is expected to be paid back in 2029.

They have income from HOAs of about $1.4 million and about $1.35 million in expenditure. They put about 10% into the reserve and they have "just under $500K" in reserve. The on site manager even described this as low and some of the sources I read seem to lead to that conclusion as well and I suppose why the extra assessment to HOA reserve. The property did have some major remodeling about 5 years ago so I suspect some of that was due to that.

About 56% is rental which seems high...

I was told that the financial statements, reserve study and board meeting minutes would not be released until about escrow.

You just described an HOA that is exceptionally poorly run and is asking you to pay for its past failures.

Don't walk away. RUN!!!!!!!

I’m not saying you are wrong. For years and years I told myself I will never buy a condo, I will never ever buy a condo! Nope not me! I’m not going to own real estate with other people because other people make stupid decisions about maintaining real estate.

But my life situation changed and now I want a pied a terre  in the city because we’re moving to the country. So my bottom line is that as long as I don’t have a big investment in condo real estate, I’ll buy. I spent $65,000 on my condo  which is peanuts. If I had to dump it quickly, it’s no problem it wouldn’t hurt my net worth much. We’re also sinking $25,000 into it and will never get that much money out of it. And that’s fine.
« Last Edit: February 11, 2021, 08:49:37 AM by iris lily »

 

Wow, a phone plan for fifteen bucks!