Why Evaluate HOA Financial Documents?
The “Situation”
If you are purchasing a home in a community where the HOA is doing more than just maintaining some common areas and scheduling trash pick-up then you want to carefully review the financial condition of your association as a part of your contractual due-diligence. In Colorado this is included in the State mandated contract although you may want to get more questions answered than the minimum information that is required therein.
It has been my observation for many years that builder/developers grossly underestimate the dues and do so almost intentionally in order to attract buyers. With new construction I always ask to see the basis for the budget and it is usually “unavailable”. If you buy into a new community and move in less than ten years you will probably not have a problem. It is at this ten-year plus point when major components begin to wear out that the residents begin to find that the “reserve for replacement” line item in the financial is really important.
What To Look For and Ask
You can learn a lot by walking through your prospective community and looking at the condition of the buildings and landscaping. Is there peeling paint, curling roof shingles, deteriorating paving and/or dead or poorly maintained grass and shrubs? If the answer is yes to any of those questions, you may be looking at a community that has insufficient cash flow to keep up. The result will be dues increases and/or “special assessments”.
So if you are buying into an existing community it is that, or a similarly named category, that you need to review carefully. You should be able to learn from the property management company how much they are forecasting to need and how that relates to what is currently in the account. Ask if there have been recent “special assessments” and if any are anticipated. Have there been recent dues increases and/or recommended increases? The reality is that most documents are written so that the increases are limited unless approved by a super-majority of the residents so it is responsible for the board to apply the maximum every year to try to stay ahead.
Avoid Surprises
Do not allow the seller or the management company to evade your questions. If you become uncomfortable with the answers and information then exercise your right to terminate the contract. I have a questionnaire available for my clients that we have the seller submit to the management company that addresses many of the above questions plus other important issues. If you would like the assistance of an experienced broker who always and only represents the interests of his buyer/clients, please contact me.