A condo is like a cross between an apartment and a house. The home owners association owns the property and is responsible for some of the maintenance, but you’re working towards building equity with your monthly payment — not just throwing it away on rent. Many people, especially those in the middle to upper income brackets, see a lot of value in buying condos. But before buying a condo, there’s some very important analysis you have to do. And no, we’re not just talking about your own personal finances. Buying a condo essentially means joining a club. It’s part social club and part investor’s club really, and depending on what “club” you join, the advantages of owning a condo can change considerably.
Namely, the question “when to buy a condo” or “can I afford to buy a condo” is less important than where you’re buying condos. And to figure out if a condo homeowners association is legit, you’ll need to take a look at the association’s financial statements.
Now, this isn’t exactly a request most home owners associations get when people are looking into buying condos, so they might refuse at first. But insist. Make sure to ask in particular for their income statement, their balance sheet, and their statement of cash flows. Then, have someone with ahead for figures help you investigate the following things:
1. What is the association’s debt to income ratio?
Basically, this ratio will tell you how much the association owes versus how much they bring in in dues, etc. If this ratio is too high (usually 43% or above), then that means the association isn’t bringing in enough revenue to cover its debts long term, and therefore they are in a bad position.
2. Do people in the complex pay their dues on time?
You can find this in the accounts receivables section of the cash flow statement and the balance sheet. (You can also get a sense of it by investigating how much the association writes off in “bad debts.”) This is important because the more delinquencies an association has, the less likely a bank will grant you a mortgage and the less stable the condo complex is financially.
3. Does the association have a rainy day fund?
Generally, a condo association is considered solvent and in good shape if it has 10% of its annual revenue stored away in cash reserves. If any place where you’re looking into buying condos has less than that, then you could be charged a higher than normal condo fee because the association will try to pass on Fannie, Freddie, and FHA’s special assessment fee onto you.
4. Is the building/complex well insured?
This one is most commonly overlooked by the casual shopper, but all it would take is one Sandy or Katrina to wash your condo investment away if the complex doesn’t have the right kind of storm or flood insurance. In addition to asking for the financial statements, don’t be afraid to be a real pain in the butt and ask what kind of insurance coverage the condos have. You can never be too prepared.