Condo Assoc. Regularly Operating at a Loss?

Question

Hi BP community,

I'm finally purchasing my first property (to start house hacking). I'm trying to do my due diligence in examining the Condo Association's finances and would greatly appreciate your take on my situation.

For the 3 years for which I have Budget data, the Condo Assoc. has been, or is projected to be, over budget (an Operating Fund Deficit) of 6% (2016), 0.5% (2019), and 1.2% (2020). Each of those years, ~ 35% of income is allocated towards funding the Reserve Fund.

For the 2 years (2016 & 2019) of Balance Sheet data that I have, the Reserve Fund was used to pay off large net losses (I'm assuming capital expenditures?) from the previous year, if that even makes sense. The Reserve Fund currently stands at a little over 1 months worth of expenses.

To try and preemptively answer some questions from the community, I haven't been given any record of capital expenditures/special assessments and the Useful Life study I have is from 2006, but I've asked for a more recent one.

Thank you so much for any advice, experience, etc. that you can offer. Please let me know if more/other info is needed or if there is a better source to go to for this question.

-John

Mike McDermott · Answer

There is no "typical" reserve fund contribution percentage, so 35% in and of itself means little. But to answer your question as to whether not having a reserve study since 2006 is a red flag, the answer is a yes. A study that old is hardly better than no study at all. What you really need to see is a current and competent reserve study where you can judge how quickly reserve contributions are projected to grow and whether special reserve assessments are anticipated.

Basit Siddiqi · Answer

@John LynaghI am confused with some of your posts - I am reading that they have saved or come close to saving 35% in the past 3 years but then I read they only have a budget for 1 month of activities.I think you need to present the financials of the coop/condo to a professional and get their judgement. No one here on BP can see the financials(unless you can screenshot them for us). without that - we can't provide much support.

John Lynagh · Answer

I jut heard back from Property Management which said there hasn't been a Reserve Study since 2006. They seem to be doing okay, by all other accounts. Is this a significant red flag or a sign that I should walk away?

John Lynagh · Answer

@Russell Brazil that’s a good way to think about it. I just wanted to make sure I wasn’t missing something because of not knowing what I don’t know.

Thanks for replying! Have read many of your myriad replies to other posts, so it’s cool to have you reply to one of mine.

Russell Brazil · Answer

Think about in terms of your own finances. If you made $100k per year and If you budget 35% to emegency savings, but instead you missed that goal the last 3 yeara by 6%, 0.5% and 1.2%...were you over budget....or did you really just slightly miss your savings goal?

John Lynagh · Answer

@Ray Johnson thank you. That would definitely help explain things. I have asked for it, but last I talked to the main property manager she seemed a bit overwhelmed (understandably) by a potential COVID-19 case in one of her units and slightly annoyed by my questions. Will keep on it though. Thanks again 👍🏼

John Lynagh · Answer

@Theresa Harris thank you for responding! It seems the Association is going over budget because they are allocating so much (~35% of income) to their reserve fund. If it weren't for that, then they wouldn't be operating at a loss. I'm just trying to figure out if this is a healthy financial practice or maybe an indication of something gone wrong. In the 2 years (2016 & 2019) for which I have balance sheet data, the Association has used a significant amount of the Reserve Fund to pay off a large Operating Deficit (I'm assuming b/c of some capital expenditure(s) in the previous year, but I wasn't given any documentation about capital expenditures, so I can't be certain.

Thanks again Theresa :) I'm thinking of contacting a real estate lawyer or CPA just b/c I've heard the agent is not always fit to give this kind of advice and they might not be the most unbiased.

Theresa Harris · Answer

@John Lynagh  Your realtor should go through the condo docs with you.  It sounds like whoever is running the place is not doing a good job budgeting for repairs and maintenance.  You may have the odd year where it is slightly over budget, but it shouldn't be repeated over and over again.  How much depends on the numbers.  Is there one area where they are continually going over budget?