Condo Buying For Dummies—An Essential 10-Point Shopping Checklist
A new Illinois law designed to educate consumers on their rights as condominium owners, and provide policies to help mediate disputes between owners and associations recently was signed by outgoing Gov. Pat Quinn.
The law calls for an ombudsman’s office to offer education materials and training to unit owners, associations and condo boards. Unfortunately, that officially won’t happen until July 1, 2018. So, with the currently vastly unregulated world of association living, where does an Illinois condo buyer go for education, guidance and protection?
According to City of Chicago consumer advocates, educating yourself is your best defense against future problems. “If you don’t understand the terms of the transaction, ask more questions. Get answers from your real estate professional, your lawyer and other people helping you in your condo purchase,” advises a free 25-point Condominium Disclosure Summary prepared by the City of Chicago Department of Business Affairs and Consumer Protection.
Unfortunately, the Condominium Disclosure Summary form is a voluntary disclosure and is not required by the city.
“To fully protect yourself in your condo purchase, make certain to ask the right questions and get answers,” said Realtor Sara E. Benson, president of Chicago-based Benson Stanley Realty. “Insist on complete and full disclosure before taking the plunge.”
Benson, co-author with this writer of “Escaping Condo Jail,” (www.escapingcondojail.com) a new 624-page book on navigating the risks and surviving the perils of the carefree community lifestyle, suggests prospective buyers rely on the following 10-point checklist to ensure a healthy purchase:
• Quality of life. Visit the community on a Saturday afternoon and get to know the neighbors. Request a brief meeting with one or more of the board directors to see how you get along—and if they will openly answer questions you may have about the association.
• Attorney review. Your purchase contract should be subject to your attorney’s review. The building’s budget, balance sheet, bylaws, special assessment history, rules and regulations, and any pending litigation should be carefully considered. Ask your attorney if he or she reviews the documents, and if not, who will be responsible for the review.
• Documents and disclosures. You are legally entitled to the association’s documents before you commit to purchasing. Upon request, your real estate broker or the seller of the property must provide you with the declaration or covenants, conditions, and restrictions (CC&Rs), bylaws and rules and regulations.
Also ask for fine and fee schedules, current budget, previous year’s budget, income and expense statement, balance statement, board minutes for the most recent 12 months, a reserve study, a reserve review analysis and/or replacement fund, a financial audit and/or review, an insurance certificate, bank balances from both the operating and reserve accounts and a disclosure of any upcoming planned capital expenditures.
• Assessments and special assessments. High-rise condos typically have higher monthly assessments than walk-up buildings or free-standing homes in a homeowners association. When comparing different properties, it’s important to consider what’s included in the monthly assessment.
Inadequate financial planning and insufficient reserves can lead to special assessments. These are fees that condo and homeowner associations charge to individual owners to cover the costs of repairs and maintenance that exceed the amount in the current budget. These fees can range from a few hundred dollars to $100,000 or more. Ask how many times the owners have been special assessed in the past seven years and the amount of each special assessment.
• Financial stability. Generally speaking, associations should be putting a minimum of 10 percent of the gross annual assessment income into a reserve account for maintenance and repair of the common areas. Keep in mind, the higher the amount of money in the reserve account, the healthier the association. Ask an advisor, such as an accountant or CPA, to look over the budget to see if it makes financial sense. If an association’s legal fees are higher than the management fees, trouble may be brewing.
• Delinquencies. What is an acceptable percentage for assessment delinquencies in a condominium or a homeowners association? The Community Associations Institute gives the following guidelines: 3 percent or less is excellent; 4 percent to 5 percent is good, and 6 percent to 10 percent is poor or average. If delinquencies are greater than 10 percent the association is in a deteriorating financial position.
• Owner-Occupancy Ratios. The higher an association’s owner-occupancy rate, the healthier the association. The best associations have owner occupancy rates of 80 percent or above. Many private mortgage insurance companies require an owner-occupancy rate greater than 75 percent. At a bare minimum, the rate should never fall below 51 percent.
• Corporate governance. Ask if board directors have signed a code of ethics and a conflict of interest policy. Transparency and ethical behavior is critical to good governance. Examine board minutes closely to determine how often the board meets and if proper business protocol is followed. Board minutes are one of the few places buyers can find out about an upcoming special assessment that they will have to pay after they close.
• Lawsuits. Proceed carefully if lawsuits are brewing. If a judgment is levied against the association, you could be on the hook for thousands of dollars in legal fees. Ask the board for a written statement as to any and all current or pending lawsuits in which the association is a defendant.
• Physical condition and environmental influences. Take a good look at the common areas. Are they well maintained and well lit or is there peeling paint and signs of neglect? Poor physical condition is most often an indicator of both poor management and underfunding.
Take special care to check previous land use in a newly constructed condo development. The land previously may have had an industrial use or served as a landfill, and may require extensive cleanup. Ask the developer for a written disclosure of previous land use.
Don DeBat is co-author of “Escaping Condo Jail,” the ultimate survival guide for condominium living. For more information, visit www.escapingcondojail.com.