Is this a healthy HOA financial statement?

Question

Hi guys,

We've invested in townhomes up until now, but currently have an accepted offer on a condo.

I just received financial statements for the last 2 years. I don't know exactly what to be looking for, but generally speaking it's not looking super healthy.

It's a 15 unit, older building. Converted to Condos 20 years ago.

They ended last year with $20K in the operating fund, after declines of $5K and $10K in the preceding years. They collect about $50K in fees per year.

There were no extraordinary expenses over that period. The bulk of it was management, Insurance, Fuel, etc. with maybe on average $5 to $6K in various repairs.

Obviously the decline in reserve accounts is a big red flag, and I'm wondering if it's enough to potentially walk away from this deal?

Wes Brand · Answer

@Jacob Pritchard You'll want to look at the expected upcoming expenses. If they just replaced the roof and heating system, well, it's likely to last for another 30 years (on the roof). You want to compare the surplus per year, along with the replacement schedule and make sure they're on track to have enough $ built up to replace them without a special assessment in N years (where N is the remaining useful lifetime of the component).

Think about: Roof, Siding, Furnace, Boiler, Any typical pest problems (not common, but common enough that it might happen), Foundation, Any exterior paint they cover. Also consider any typical emergency issues that might crop up (ice dams causing a leak in the roof?)

You want them to have enough in reserves to cover the typical expenses by the time the component is likely to go without doing a special assessment forcing you to pay extra for it. For example, if they just replaced the roof it's probably good for ~30 years, so you amortize the cost of a new roof over 30 years and expect reserves to build up to that amount. A furnace, let's say, 15 years, do the same thing (times the number of furnaces they're maintaining) Expect it to cost the HOA more than it'd cost you to do yourself, but not by a ton. Also keep in mind that the HOA is probably stuck replacing "like for like" unlike you would. If you're buying into a luxury building and a leak causes damage to the unit below, they're going to replace the damaged fixtures/finishings with the same quality, while if you were doing on it on your own, might decide to "deluxurize".

Russell Brazil · Answer

How many units? $20k could be direly low, or not that bad. What caused the drops, was it sudden one time expenses that dont come up all the time.  In the last 2 years, most HOA/Condos have had sudden drops the last couple years due to higher than usual snow removal, so I dont think that is a red flag.  I own a townhouse in a community of about 40 townhouses...they typically have about $25-$30k in reserves, and that is more than sufficient...but they also are only paying for landscaping and snow removal with it.

Jacob P. · Answer

That's great advice @Wes Brand. I'll see if I can get any info on when the most recent big ticket items were done.

Jacob P. · Answer

Thank you for the input!

It's a 15 unit building.

Over the 2 year period, they did have repairs totalling to about 7600 one year, and 6000 the next. So one way to look at it would be that without the repairs, they would have essentially broken even over the 2 year period.

One thing perhaps worth noting though, is that this is an apartment building (as opposed to your townhouses), so the HOA covers things like the roof and the heat system.... That's actually what all of the repair expenses were for on the financial statement.

If anyone has comparable figures for apartment buildings (vs townhouses for example) that they invest in, I'd love to hear.

Thank you!