real estate

Check out HOA finances before buying condo

Another good indicator is whether the HOA has done a study to determine if its reserve fund is adequate, says Brendon DeSimone, a Realtor Associate at Paragon Real Estate Group in San Francisco. Such surveys are a hallmark of well-run associations, he says.

But whether you're an expert or a novice, reading financial documents can only get you so far. Winston advises that buyers take time to talk to as many people in the building to get a sense of how well the HOA is run.

Delinquent neighbors

HOAs dealing with foreclosed units, a bank-owned building and owner bankruptcies face an uncertain cash flow, placing a huge burden on other owners. Depending on state law, banks may or may not be required to pay dues on foreclosed units. But even if they do, the payments are frequently delayed, says attorney Martin Bearg of Livingston, N.J. So it's a good idea to familiarize yourself with the building's delinquency rate and the HOA's accounts receivable -- mainly the dues it is owed -- to understand a building's financial status.

Unfortunately, while a financial disclosure will tell you how many units are in arrears, it can't predict the future. So buyers will want to ask the seller and other residents questions that will give them a sense of the financial stability of those living in the condo. They might include: Are bankruptcies in the building on the rise? Are more foreclosures likely? These aren't easy questions to answer, and at best, it's only going to be a snapshot, says Winston. But if a buyer believes that several owners are in financial trouble, it would be a good idea to walk away, no matter how low the asking price is.

To be sure, buyers may not be the only parties to walk away from a building with a high delinquency rate. Potential lenders may steer clear of a building with a delinquency rate above 15 percent, says DeSimone. In some cases, buyers may have to increase their down payment or pay a higher interest rate. More likely, they'll simply lose the loan because it doesn't conform with the guidelines of Fannie Mae and Freddie Mac, the government-sponsored enterprises.

Who's responsible?

In practical terms, the disclosure should be the same whether you're buying from a developer, a private party or a bank. But full disclosure isn't the same as full accountability, and to avoid getting stuck with a larger share of the HOA's liabilities, Winston says that buyers should be wary of bank-owned buildings and failing developers.

Typically, buyers will get some protection because lenders won't fund loans until more than 70 percent of the building is sold. But it's not the total number of units sold that matters so much as the assurance that you won't be the last buyer for the foreseeable future.

"What you're looking for isn't all that concrete," Winston says. "But what you want to see (when the bank or developer is selling the unit) is a financial commitment to attracting other qualified buyers and to standing behind the construction of the condo should the need arise."

In the case of a distressed building, Winston says that commitment is actually more important than getting the highest price because the long-term success of the HOA depends on a building populated by owners who can maintain it.

Buyers should also be wary of a bank-owned building or a struggling developer, says Winston, because banks and developers may lowball the cost of major repairs or improvements. When a building is in trouble, banks and developers will work quickly to minimize their financial obligations, meaning their estimates for major repairs may come in low and their strategy may be to avoid dealing with the building in the long term. When that happens, individual owners may find themselves being asked to pay special assessments to cover those costs.

"If a bank has foreclosed or a developer is overextended, they typically want to get out in a hurry," Winston says. "That means buyers shouldn't have a lot of faith in the bank (or a cash-strapped developer) to aggressively market the building, make improvements or fix defects in the construction."

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