Condos – How much should be in reserves?
ARDELL on 04 29, 2008
I have written posts in the past about this topic noting my chagrin that WA didn’t have a Law that required Condo Homeowner Association Boards to have a Reserve Study done. Well I’m pleased to announce that such a law was passed. Here’s a link to Elizabeth Rhodes of the Seattle Times article on the subject. The law has no teeth yet, and has everyone confused for a lot of reasons, but it’s a step in the right direction. Rome wasn’t built in a day.
This is a subject that is near and dear to me, because I have witnessed too many times the long-term affect not having a Reserve Study, or a requirement to have a Reserve Study, has had on Seattle Area condo buyers and sellers. I am so happy about this new law I could stand on my head and spit nickels.
If you are on a condo Board of Directors, this is a VERY important concept for you to understand and embrace. Please post any questions you may have about the importance of a Reserve Study (not the law “requiring” it) and I will be more than happy to expound on the topic to the extent of my ability. I’m a real estate agent, but I had the opportunity to manage several associations and help them with Reserve Study requirements in “a past life”. I also understand the relationship of Reserve Study to setting accurate monthly dues. And last but not least, how very important it is to buyers of condos to have a Reserve Study Summary Page in the Resale Certificate.
HOW MUCH SHOULD THERE BE IN RESERVES?
Honestly, no one can answer that question unless there is a Reserve Study done and the ability to review the Reserve Study. Here’s why. Condo Reserves are not about HAVING reserves. In fact, having too much in reserves can be just as harming to an Association and condo values, as having too little.
Putting money in reserves is not like saving X% of your money for “a rainy day”. Putting money in reserves is like saving for a new bike when you were a kid. You want a bike. It costs $100. You know if you can earn and save $20 a week, it will take you five weeks. If you buy the bike, but have the foresight to know that you want a new and better one next year, you might set the bogey at $250 for a new bike in 12 months and save $5.00 a week to that end. When you have the $250, you get a new bike, or you stop saving for that particular item at that point. Reserve Studies are THAT simple.
In a Condo Association you are like a kid saving for a new bike for every “major component” of your property. NOT ANNUAL MAINTENANCE ITEMS, but REPLACEMENT COST items. So how much is enough and how much is too much to have in reserves? If you don’t have $250 the day you are scheduled to go get the new bike…not enough. If you still have $250 in the account the day AFTER you buy the new bike, you saved too much. The danger of saving too much is that you have falsely created a monthly condo fee that is too high, and your property values may have been damaged as a result.
HOW IS A RESERVE STUDY DONE AND HOW MUCH DOES IT COST?
A FIRST TIME Reserve Study will cost a lot. About $2,500 depending on the size of your Association. A 20 unit complex with no amenities Reserve Study will cost less than a 700 unit complex with two pools, an exercise room, two lakes and 8 elevators 
After the first one is done, the updates cost much less and usually no one has to come out and the update is “a computer function” of numbers adjustment. You tell them you just replaced the mailboxes, and they do a reset of Useful Life for that item and spit out a new page and Reserve Study Summary. A simplification, but you get my drift.
Someone comes out and makes a list of Major Components. The Board of Directors normally sets the dollar amount of “Major Component”, though the Reserve Study Company will make a suggestion or have a standard you can follow. If you have 10 units and need a $2,000 item, it costs everyone $200 to get it. If the cost of those condos is $450,000, then maybe asking everyone to chip in $200 is not a big deal. But if the cost of those units was $159,000, then asking everyone for $200 IS a big deal. If you have 700 units, then everyone kicking in $2.87 is no big deal. Maybe you call that a “minor component” and save for that only if you have all Major Components covered.
THAT IS WHY the definition of Major Component is left to the discretion of the Board of Directors of each Association. Fees being too high hurts you as much as fees being too low. There is more than a $15 difference between dues of $295 a month and $310 a month, than $250 and $265 when it comes to property values. The Board has to be aware of pushing that fee beyond certain “keypoints” without GOOD reason.
New Roof, Exterior Painting, Replacement of Fences, Resurfacing the Pool, new mailboxes, are examples of Major Components for most Associations. NEW ELEVATOR is a really good example of why one Association with $500,000 in Reserves can be BETTER than another with $750,000 in Reserves. If the second has 3 elevators, or a very expensive many floor elevator, their Reserve Needs will be higher than an Association with no elevator and other similar Major Components excluding elevator.
(Kim asked about windows – no not windows or sliding glass doors or garage doors. Almost always they are “owner responsibility” items as to cost. The Association chooses the contractor to be used and type of product, but since the owner pays, these are not part of the Reserve Study. Each Association is different, but as a general rule, know that these items are not part of what an Association pays for as to replacement.)
WHAT DOES ALL THIS HAVE TO DO WITH MONTHLY DUES?
Monthly dues are a combination of two numbers.
1) Monthly amount needed for Operating and ongoing Maintenance. Landscaper (not replacement cost of trees but the cost of monthly service). Property Management Fees. Cost of electricity for lighting the common areas. Regular pool maintenance and chemicals (not resurfacing or pump costs)
Let’s say Operating Costs are $5,000 a month and there are 50 units. $5,000 divided by 50 equals $100 in dues for Operating Costs. Many Associations do not divide evenly by number of units, they do it by square footage or value of units, but I’m trying to keep this simple.
2) Reserve Needs.
A Reserve Study will spit out a final number and tell you what you need from each owner, each month, to have enough for replacement items.
Let’s say they need $30 from everyone for an eventual new roof, $20 for new siding some day, $10 to repaint the place every 10 years to increase the life expectancy of the existing siding and $40 for all other major components combined. Then the Reserve Study Summary will say you need $100 from everyone, every month, for “Reserves” and you must put that money in Reserves every month FOR THAT EARMARKED PURPOSE!
IN THE ABOVE EXAMPLE, DUES SHOULD BE $200 A MONTH, NO MORE AND NO LESS. $100 for monthly operating costs PLUS $100 to put into Reserves.
HOW DO I AS A CONDO BUYER OR OWNER KNOW IF THE AMOUNT IN RESERVES IS ADEQUATE?
There is a RESERVE STUDY SUMMARY that IMNSHO should be in every Resale Certificate and submitted to every owner once a year at the AGM (Annual General Meeting) or Budget Meeting (often the same meeting). It’s a few pages. The actual Reserve Study is a big book with photos, and so usually not distributed out to anyone who wants to have it. Though it is usually available for review and by appointment upon request. Often every Board Member gets their own copy, but other Association Members do not.
The Reserve Study Summary will list all major components, their useful life, and their Remaining Useful Life. These will be shown in columns for every Major Component. A quick glance of Remaining Useful Life Column will give you a feel for the health of the Association. If you see items with Remaining Useful Live ZERO, that’s a big red flag! That means the item should have been replaced, but wasn’t. Most reserve studies do not go into negative status like -5 years to let you know the item should have been replaced five years ago (I wish they did). Most often they will say “0″.
This is a long topic, in fact it takes a chapter of a book to really explain it well, but hopefully the above offers some practical information you can use to comply with this new law. It’s a good law. Embrace it. Don’t try to find the loophole to get around it.
If you walk around an area with a lot of old condo complexes in disrepair, know that was caused by WA not having a Reserve Study Requirement, to some extent. Know that a healthy Association is not only important to the owners of the condo units, the buyers of the condo units and the sellers of condo units, but everyone impacted by “an eyesore” in the neighborhood.
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40 Responses to “Condos – How much should be in reserves?”
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Great explanation Ardell. I believe every buyer and condo owner should grasp this concept. Thanks for taking the time to explain it so well. I am going to post a link back to it later today on my blog!
Thanks, Samuel. I really didn’t have the time to do it today…but it needed to be done. One of my great clients sent me the link to the Seattle Times article, so I wanted to get a practical “tutorial” out there ASAP as a follow up to Elizabeth Rhodes’ piece.
Glad you found it to be both understandable and useful. It’s difficult to take a massively complex topic and boil it down to a blog post. Hopefully this will be one of those posts were, over time, the comments add an FAQ component that expounds even more on this important topic.
While the impetus for the post was WA’s new law…the info is pretty much universal around the Country, except for the fact that a law was passed.
[...] browsing through various blogs this morning I came across one blog dealing with the new Washington law requiring condo associations to provide a [...]
As I mentioned somewhere, I was the president of a condo association over 15 years ago, and we had a reserve study back then. We didn’t update it every year (which IMHO is overkill), but he did have one.
The legislation is a good idea in concept. I haven’t read it yet, but I’d guess it needs some fine tuning.
Kary,
It’s not about “annual” or TIME at all. It’s about changes.
In a new complex where nothing reaches life expectancy in the first 3 years, you don’t necessarily need an update. In a year where you replace three things, you need an update that acknowledges a re-set of the clock on those three things, and an updated cost factor.
Let’s say a complex does a Reserve Study today, their first one ever, but the building is 16 years old. As a result of the Study they learn they need to replace 5 things. They replace them two weeks after the Reserve Study is completed. Well then they need to update it in two weeks, especially if these were very costly items.
If an Association is handing out a Summary saying they need $200,000 in Reserves and only have $50,000, that’s bad if the Reserves are down to $50,000 because they just spent $150,000 for items named as ZERO in the Reserve Study.
It’s a living ongoing document, and needs to be changed everytime money is spent FROM reserves for one of the Major Components.
Ideally there would be a user friendly program or online access for Boards of Directors to plug in the change on an Excel Spreadsheet, so the Reserve Study can be automatically updated everytime money is spent from reserves.
If the Property Management Company and the Reserve Study supplier were one in the same, that could be managed quite easily by the Property Manager. But most times that is not the case. Maybe with this new law, Property Management Companies will include Reserve Study as one of their services.
Yes, you would change your calculations, but that’s not that tough to do. The building I dealt with was built in the early 60s, so it was almost 20 years old when I moved in.
Just as an example, let’s say the roof has 3 years left, and costs $10,000 to do at the time you do the reserve study. You’d have to set aside $3,333 each year for the roof. Assuming it actually cost $10,000 to do at the end of three years, that $3,333 would be reduced to $1,000 if the new roof had a 10 year life.
You’d also have to adjust for where your reserves actually were, compared to where they were planned. If you overspent on operating expenses the prior year by $12,000, you’d have to set aside an extra $1,000 a month the next year to compensate.
Our condo had an accountant on as treasurer, so perhaps that helped, but we didn’t find it necessary to update every year.
[...] top-notch writing that is possible on RE.net, head on over to RCG and check out Ardell’s post on Condo Reserve Studies. I own a condo, and I have to say, that was some really good information that I intend to raise [...]
Kary, I very much appreciate the exchange as I think it will be very helpful to HOA Boards to see the further exchange of ideas in the comments. I am using a “who said what format” in my reply to add clarity, so readers don’t get unnecessarily confused on this fairly complex topic.
Kary said: “Just as an example, let’s say the roof has 3 years left, and costs $10,000 to do at the time you do the reserve study. You’d have to set aside $3,333 each year for the roof. Assuming it actually cost $10,000 to do at the end of three years, that $3,333 would be reduced to $1,000 if the new roof had a 10 year life.”
Ardell responds: Correct, except it would make more sense to project the increase in the cost of a roof 10 years from now. Adjust for inflation would be best. Maybe set it at $1,200 for a new roof and get an estimate for the cost 7 or 8 years out to double check it before you need the roof.
Kary said: “You’d also have to adjust for where your reserves actually were, compared to where they were planned. If you overspent on operating expenses the prior year by $12,000, you’d have to set aside an extra $1,000 a month the next year to compensate.”
Ardell responds: That’s more about the annual budget process of determining sufficient operating costs. Technically you should NEVER use reserves for operating. You can “borrow” from reserves IF you have a valid plan to repay in a short timeframe, usually 12 months.
Here’s how it usually works. Say you underbudgeted for operating costs in 2006 and you know in September that you are going to be short $12,000 this year. First you increase the 2007 operating budget by $12,000 and adjust the dues for 2007 accordingly. Then you add the number to replenish the $12,000 to reserves to the total reserve number in the dues.
To be off by $12,000 on operating, you would have to have a pretty big budget and lots of units. Lets say there are 100 units.
First the new budget for $12,000 would be raised by $10 a month. $10 times 100 units times 12 months equals $12,000. Maybe you increase it by $15 a month to have a “misc” category, just in case, with the extra $5 a month.
Next you would increase the “amount to reserves” for 2007 by $10 a month.
So the total dues increase from 2006 to 2007 would be $25 of which $15 is in the Operating Budget calculation and $10 is in the Reserve calculation.
Many times an HOA errs by acting like there is one pot of money, when in fact there are always two that are NOT interchangeable. The need to be “manipulated” as I explained above. Short term borrowings, then increase in operating budget, then repayment of loan from Reserves.
The biggest error is the “in between” category that doesn’t exist in the calculation. Example: Roof is in the Reserve Study (say it’s a 20 year roof). NO roof money is in operating. BAD! and all too common. No roof needs nothing during that 20 year timeframe. There should be an operating expense added to the operating budget to send a guy up to check the roof every year in the summer. Re-do flashings, re-seal around vents, etc..
This is true of many items that slip through the cracks because the Major Component item needs regular maintenance during its useful life. Yet very few operating budgets cross over these items into the Operating Budget, as if they have no cost during the lifespan of the item.
Do you remember what made the budget go $12,000 that was an “unforeseen” event? Was it a non-recurring expense that could have been foreseen?
Ardell:
Interesting stuff!
Could you me tell why it is that nearly every new condo in this state gets its siding ripped off and replaced with new siding within the first 5 years.
I remember hearing why years ago (something about class action lawsuits against the builders and attorneys needing the money), but I cannot remember enough for it to make sense to me now.
CRS, I guess.
If you know, great, or could provide a link to study…
Thanks!
yes the siding issue started with LP siding, then went onto a product called Dryvit. Both products worked well for some years then began to have moisture issues. i wrote one of the original opinions about LP siding here in the Northwest recommending back priming and dipping the butt joints. cost made that suggestion prohibitive and the builders kept using it anyway until the lawsuits started.
Dryvit was a stucco coating over polystyrene as i recall. it trapped moisture in and didn’t allow the wood products to breath. in both LP and Dryvit it was claimed improper installation caused the problem while the installers claimed product failure.
the fact is that it rains here for nine months out of the year. construction practices are shoddy everywhere but here when you have water running down and around the siding for months and months at a time it’s a problem. we also don’t have that hot summer period some climates do. all in all we are a moss, mildew, and rot kind of environment. i didn’t mention mold for a reason but that’s for another time.
LP siding started the class action cases and it snow balled from there. wet wood in the Pacific Northwest is something to watch for.
now about the finances of condos. it’s one of my favorite topics. i always say condos are structure and financials. that resale certificate should be able to tell you how solvent the home owners association is. the building is the associations biggest asset aside from income and cash on hand. when you look at the building or have an inspection you should weigh future repairs against ability to pay.
it’s about time the situation is addressed and condo associations need more scrutiny. many people have been financially devastated by bad management.
Roger,
“Could you me tell why it is that nearly every new condo in this state gets its siding ripped off and replaced with new siding within the first 5 years.”
First I need to contradict David’s answer
The LP siding issue is not the answer to your question. Nor was it the first with class action suits, as I recall. Those pressed wood products (the kind that David is talking about) had their heyday in the mid 90s. They still exist in an improved version. Georgia Pacific I believe was the first, or Georgia Pacific and Louisiana Pacific were at the same time. Weyerhauser has a similar product used around these parts and found on many homes built in the mid 90’s.
Most of the pressed wood product issues and suits are a product of the 90s, not in the last five years. Their “failure” had more to do with improper installation and lack of proper maintenance, than the product itself. But it has been improved and many use “hardiplank” versions that have a lot of concrete composition. This is all from memory, but I think it’s 98% accurate.
Back to your question regarding, “nearly every new condo in this state gets its siding ripped off and replaced with new siding within the first 5 years.”
First let’s address WHY in the first 5 years? In the State of Washington a new condo Association has a set of rights to make a claim against the builder within the first 4 years. This brings out droves of lawyers contacting Homeowner Associations, looking for anything they can claim against the builder before the 4 year limit expires. Doing it too early could result in missing a defect that appears in year three. Doing it too late would cause a failure of claim under the 4 year provision.
To a large extent, huge lists of “maybe” defects are put together to get the claim in under the deadline of four years. If you are looking for something to be wrong with a big magnifying glass, you will find stuff. Nothing’s perfect. Now the builder, under the law, has to come back and “fix stuff”. So it’s pretty much the norm under this “now or never” regulation of the building industry as it relates to condos. It’s why you almost always see the builder needing to come back in the first five years. (claim in year 4, builder tents up in year 5)
A couple of year’s back, they reduced the amount of things an Association can hold the builder liable for. At that point everyone was scrambling to get a bunch of claims in before the new law passed that would diminish their remedies. So you saw a slew all at once and lots of tents all at the same time. Downtown Kirkland looked like the circus was in town there were so many tents over buildings that year.
That is WHY “in the first 5 years”.
Usually the issue is not the siding, though it may appear so when you see the big plastic tents go up. It’s more about the windows, or more accurately the seal between the windows and the exterior product. When stucco buildings became popular, they no longer put wood frames around the windows. Used to be the wood frames would rot and get replaced, but the wood somewhat protected the building.
When they started putting stucco and other exterior products butt up against the window casings, with no wood framing, it created an issue that really needs to be sealed regularly and not once and forever. When you had wood frames, the paper behind the wood that protected the interior from moisture, did not have to be as good as it does today with stucco buildings and other no wood framed window types of structures. Often this paper is put on backwards by mistake
Whether it’s LP siding in the 90’s or the first time they made a stucco building, change comes with the need to perfect a product over time. The Pioneers of “new look” often get slammed with product deficiency suits, until the new product is tested and perfected over time.
I feel sorry for the builders at times, as often it is the lack of regular maintenance, like caulking, that creates the problems in ongoing fashion.
Another big issue is decks, often damaged by what the homeowner puts on them, but the builder gets stuck with the repair if they leak or fail in the first four years.
Most caulk products used, particularly when stucco first became popular, were not long-life caulk. It was anticipated that owners would re-caulk. But I have yet to see a condo association sending someone around to check the caulk every year around windows and under sliding class doors and every place caulk is used as a sealant.
Everyone knows caulk doesn’t last a long time, but re-caulking is rarely on an Association’s “to do “list. It’s not maintenance and it’s not a replacement item in the Reserve Study, so it just falls between the cracks (no pun intended).
David,
It’s not really “bad management” as much as it is a lack of the right tools to manage well. If a Board won’t approve the cost of a Reserve Study, the Property Manager is often flying blind, especially since Associations tend to change Property Management companies fairly often.
The new law will give both HOA Boards and Property Managers the proper tool to be long term pro-active.
I’d agree with Ardell’s criticism of Dave’s response. It isn’t LP siding. But I’m not sure her explanation is entirely correct either, because I see it most commonly on buildings with vinyl siding. It seems to be an epidemic in south Snohomish County and surrounds.
I think her response as to timing is probably largely correct. There is limited time to collect from the developer, and some of these projects can cost well into the seven figures (I recall one that I think was over $7,000,000.00).
I would disagree that much of it is due to maintenance. For the short periods involved, no maintenance should have been required, other than trying to fix issues where the defects became apparent.
Ardell, as to your comments about my comments on reserve studies, you’re correct you shouldn’t take operating expenses from reserves, but if necessary that’s what you’d do. More likely, however, you simply wouldn’t be able to make the reserve contribution for the year (or certain months). Same effect.
The unit I was involved with was in fact just over 100 units, so that’s why I was saying off by $12,000. If I had to guess, this year they probably missed their budget for heat by that amount, given what energy prices have done. So it is possible to be off by that amount.
I can’t recall where I heard this so freely shoot it down
Is it true that some builders will create luxury apartments to rent for the four+ years (until they’re out of the liability phase) and then covert to condos?
“More likely, however, you simply wouldn’t be able to make the reserve contribution for the year (or certain months). Same effect.”
Well that’s a horse of a different color! Not being able to make the reserve deposit planned for and intended in a given year, and taking money from the Reserve account to pay operating expenses, are not seen in the same light. The former being not a huge big deal and the latter being a huge big deal.
It’s the difference between the answer to these two questions:
1) What do we do if we can’t make the reserve deposit in November?
2) What do we do if we need to take money out of the Reserve account to pay a utility bill.
Question one is not as alarming as question two, though net effect could be the same.
As to the heating costs going up, usually when doing the budget, you exceed the budget vs. actual by say 5% increase on each item for the upcoming year when determining the annual dues increase.. Then when some go up more than 10% and others don’t go up at all, it often balances out. Also there should be a Misc. Expense plugged in each year that compensates for things that do not go as planned.
When an HOA runs short of operating monies in a year, it should be for an extraodinary expense that could not have been anticipated.
Often I hear owners saying, as a selling point, “We haven’t HAD to increase the dues in five years!” To me that’s a big red flag that the Reserve Account may have suffererd as a result. Often Boards and Homeowners don’t treat the “couldn’t put the full amount into Reserves this month” the same as “had to take money from Reserves this month. They view the Reserves as paying for something that will be bought when they are no longer living there.
Truth is, if every owner paid their fair share of wear and tear for the months and years they lived there, the system could work out really well. But too often owners ask “Why should I worry about a roof being replaced 8 years from now when I’m moving out in 2-3 years?
bad construction practices and an associations lack of planning to maintain. there is one nugget there. the law suits lined up while legislation to get builders off the hook was put into place. i don’t follow it. i did have a client a few years back, my attorney in fact, that owned a unit in a building on lower Queen Ann.
Found a reference:
Washington State requires that construction professionals be allowed to correct construction defects before expensive litigation can be commenced. 2004
that opened the flood gates that allowed corrections to move ahead. no pot of gold at the end of that rainbow.
Bad Management; yes home owners associations are shopping management companies like crazy. some of those companies try to manage a condo building like an apartment building. deferred maintenance is a very real problem for an association.
we have a small company that has worked for different associations over the years to maintain buildings. it’s like pulling teeth to get something done right. there is one management company, Pacific Rim, that does a good job engaging the association and getting things done.
i deliberately mentioned wood framed buildings in the Pacific Northwest because we have some fantastic concrete and steel buildings here in Seattle. there is a big builder down town who is working with concrete and steel.
no matter what, the financials of the association are what you are buying into. would you buy into a business that’s losing money? would you buy a stock in a poorly managed corporation? those are the questions you should be asking in a condo purchase.
If an Association has a little operating money left over, they shouldn’t put it in the Reserve Account with the plan to take it back later. Reserves should be treated as Sacrosanct. Better to have a carry forward balance in the Operating Account. There may be a tax consequence (that’s a big MAY; I have no clue on that), but once you make a habit of dipping into Reserves for non-earmarked purpose, it can become a bad habit.
It’s like dipping into Principal and not living off the interest of a Trust Account.
I’ve seen a few Associations keep the Reserve account like separate pockets of money. “Roof Reserve” – $50,000 Painting Reserve – $10,000. If more associations did this they would understand tht they are not taking money from “savings”. Reserves are not “savings” they are “earmarked funds”. Better to say, “we can’t put in the amount for THE ROOF REPLACEMENT this month, as it’s easier for people to understand that it IS a big deal, or will be come time to replace the roof.
Often you can stretch the replacement by a year at the end to compensate for the cost difference, and not have to Special Assess at all. So being 100% accurate is not needed. Still many are so far from being accurate in any way shape of for, without a GOOD Reserve Study to guide them, that large Special Assessments are becoming the norm WAY to oftern.
David,
Agree on your last comment.
Problem is, if the State didn’t require a Reserve Study and also doesn’t require that a copy of the Reserve Study Summary page be in the Resale Certificate, no one has the tool to make good judgment. “A LOT of money in Reserves” can be grossly inadequate and NOT a lot of money in Reserves can be enough. It just depends on the Reserve Study and timeline of needed replacemnts. Without that tool, an accurate judgment can’t be formed, especially on large complexes that are harder to eyeball.
Biggest problems I have seen have been with tile and flat roofs. Since you don’t “rip them off and throw them away” every X years, they often are not on the Replacement Cost list as a major component, NOR are they in the Operating Budget. The cost of deferred maintenance of a flat or tile roof, and resultant damage of improper ongoing maintenance, can be devastating to an Association.
That brings up a point. Often Tile roofs do not show on a Reserve Study initially, as often Reserve Studies do not show a Major component whose life expectancy is in excess of 30 years. Say an item has a 35 year life expectancy, like a 35 year to 50 shingle roof. That item may not appear in the Reserve Study at all initially. It’s supposed to be picked up later when it gets to 30 years of remaining useful life.
But with Boards hiring and firing management and Reserve Study comapnies to save a few dollars here and there, or because residents aren’t “happy”, lack of continuous record keeping wreaks havoc. NO Property Management Company is going to load in 18 years of records into their computer from the 18 years prior that the place was managed by 5 different Property Management companies.
By switching management companies, you lose a whole lot of important info! Sure, it may be in a box stored in some warehouse somewhere. But that’s not the same as it being available by a touch of a button in a computer. Then there’s a claim of “mismanagement” when in fact the culprit is “lack of continuity”.
Oh…big one. Self managed Associations. That’s a big red flag.
Five homeowners running the place without the assistance of a Property Management Company on a huge condo complex is a formula for trouble. Maybe the 5 people who thought up this cost saving master plan where capable of managing it themselves. Then they move away and five new poor people are supposed to know it all and do it all on their own.
Be wary of voting to approve “self-management” of your condo complex. Could be great today because “Leo” is a whiz at accounting. But too often a company is not brought in, when Leo resigns or moves. Better to have a system of checks and balances between Property Management Company and The Board.
Two things. Ardell, on your last post regarding self-management, here’s another reason complexes shouldn’t self-manage: do you really want to be asking your own beloved neighbor why they’re so behind in dues?
And Rhonda, I guess we’re lucky here in CA. Our builder liability lasts for 10 years.
I really don’t know whether to laugh or cry about the amount of information here. It’s a whole bunch of information.
You get a whole building inspection.
When you look at the financials you look at all the financials and go back as far as you can. You get the minutes of the last years meetings if not more, and talk to other condo owners.
Buying a condo in Seattle is risky.
No State legislation is going to fix anything concerning the financial health of an Association. You have to look at the numbers. You have to look for irregularities. This is not a buyer beware state, but you have the responsibility to look and use your own good judgement.
“No State legislation is going to fix anything concerning the financial health of an Association.”
David! There is no way in h_ll that a condo inspection includes the entire complex including the pool and every facet of a large complex, nor could a condo buyer afford such a thing!
You think a buyer is going to pay $2,500 to have a complex inspected?
Don’t badmouth the value of the Reserve Study. NO ONE can determine the financial health of a condo complex without one. They are not all “buildings” as in “a building”. Try Sixty-01 with 83 acres and 770 units! Get real! “whole building inspection” is NOT an adequate answer for a large complex of multi buildings, with 9 elevators, two lakes, etc.
Buying a condo in Seattle is risky.
As I said, over many years my little companies have done both maintenance and repair work on a variety of properties.
Condo Association or Condo Management companies, in my opinion, are less than forth coming about the health of the building, complex, or surrounding areas.
You are dealing many times with hundreds of thousands of dollars in repairs no one wants to address or pay for. My companies have refused many, many times to cover over issues that needed more intensive repair than what was required.
There are companies that will cover known defects for a fee. The larger the complex the more possibility for deception. One building that comes to mind had a President of the Board who kept the place pretty for decades until he moved to a nursing home. The repairs were in the hundreds of thousands of dollars for rot repair.
My biggest concern, and I’m sure it was the impetus of this legislation is the condo conversions that have been popular. Many of those building were built to have an economic life that once hit becomes a yearly challenge to maintain. The prevailing thought of the day was that a building could generate income while the dirt it sat on increased in value.
Yes, this is not a buyer beware state, however the buyer of a condo should be wary. Yes a whole building inspection is what I recommend to any condo buyer even if the building is new, or especially if a building is new, a comment for another time.
The good news is that Seattle has some great concrete and steel condo projects, I noticed in down town Bellevue yesterday that there was more than one concrete and steel structure being covered with a glass shell. I think this is great and far thinking of development in Bellevue.
Sorry I just noticed you are talking about the value of a Reserve Study.
let me say this; if you read the way the article is written it does mention financial hardship. there are also going to be, as sure as i’m sitting here, when i should be working, many maneuvers by Condo Associations and Management companies to circumvent the Reserve Study. There is a lot of talk on this site about attorney’s looking for lawsuits, you really never want to go there.
so yes, i think a whole condo building or complex inspection before buying into a condo project is money well spent and the only thing a Real Estate agent can recommend.
Does the new law require HOA’s to actually collect dues sufficient to cover the projected capital expenses? Or do they just have to do a study?
Our deal in Edmonds a couple of months ago failed because the HOA did not assess or collect dues to fund a capital expense account. In fact, it did not even establish such an account despite a clear requirement to do so in its own CC&R’s. We received the documents revealing this mess at 9 pm on the last day of the period the seller had for providing them, after we had already paid for the inspection and the loan appraisal.
I don’t know any state that requires an HOA to follow the recommendation of the Reserve Study regarding the $ amount to be added to the dues and held in a Reserve Account.
But if the Homeowners were getting a copy of the summary page of the Reserve Study with the Annual Budget, hopefully tere would be some pressure by the owners. If they have a Reserve Study Summary saying recommended into reserve account minimum $50, recommended $80, and the budget says $5.00, hopefuly someone would notice if those ducuments came at the same time before the new dues were passed.
I don’t know how the new law handles the study being seen by the owners. The method and laws I am referencing and familiar with are from CA. Perhaps WA will emulate the same provisions.
Here’s how it would work, David.
You said: “The repairs were in the hundreds of thousands of dollars for rot repair.”
Say that rot was in wooden partition fences between patios. Say they have to be painted every 7 years so they won’t rot. No, a Reserve Study won’t make them paint it. But at least a buyer can see that they didn’t paint it when it says “useful life remaining ZERO). When a buyer sees lots of Zeros, meaning deferred replacement or painting, at least they know not to buy there.
When no one can sell their condo and the values go down as a result, someone will do something about that. No Reserve Study, no information, equals years of no action. If buyers are buying because they can’t see those zeros, no one is going to fix the place up well enough until it gets really and too bad.
in my example the fences were painted on a regular schedule. they were really pretty.
the bids were cheap so some corners were cut. paint is cheap, prep work expensive.
buying a condo is risky in the Seattle area. there are thousands of tricks to circumvent any government requirement.
using a government requirement isn’t going to fix a building. a buyer needs to inspect, investigate, and read the financials. condos don’t need to sell. it’s not a right to sell a property. if you bought poorly then the consequences are yours alone.
It sure would be nice if listing agents would ask the seller to order the Resale Certificate when they listed the condo so it was immediately ready for the buyers review.
I think the resale certificates are only valid for 60 days, which is why they aren’t ordered on listing.
The main reason Resale Certificates are ordered when there is a buyer, and not at time of listing, is to be sure the Reserve amount is as up to date as possible. I think there could be an up front fee and then an “update fee” at time of contract, if you want to do it in advance and then have it updated at time of contract. Might cost $150 or so plus another $75 or so for the update. Depends on the Management Company’s schedule of fees for various services.
My point on Resale Certs is that they are a critical piece of information for a buyers review.
I had a buyer interested in a condo where we didn’t get a copy of the Resale Cert for 2 weeks. The buyer then rejected the condo based on the info in the Resale Cert, mainly because they had that 2 weeks to obsess over the decision, and in that 2 week wait, decided that another condo might be better, so rejected the condo based on the RC. After a week, they calmed down, came back to condo # 1, but waiting “too long” can cause problems such as this.
Some condo HOA’s get the Resale Certs out really quickly, but sometimes there are reasons that doesn’t happen: vacations, illness, etc. Usually the HOA’s with management companies are much faster. But, making a buyer wait for critical information is a risk, it’s a consumption of time that often makes a buyer really antsy.
For a seller, I’d recommend ordering the RC right away, and be willing to pay for a new one, or any updates as needed. Whether it costs you $150 or $75 extra … you’re selling a pretty expensive product, and it’s best to be prepared.
And, from the listing agents’ point of view, I’d sure like to read that RC early, so I can advise my seller of potential areas of concern.
Ardell, can you use Dustin’s new video system to show us you standing on your head spitting nickles … gotta see that one
Leanne,
I’m posting with a hard hat on this morning…long story…the whole house is in stitches. If I videoed all the time, it would be a sitcom.
The video I really want to do is the one from Saturday morning where I shopped for staging the Redmond townhome. I ran in and out of World Market, Pier 1 and Aaron Brothers. I run through the whole store quickly with Kim and say, I want THIS, THAT and THIS and THAT. Then I run into the next store while he’s checking out, and we start over again. 30 minutes to two car loads of staging “stuff” including two bar stools, that take a separate trip for pick up and drop off, while I’m staging at the townhome.
I’m so tired I had to do Sunday Night Stats on Monday Morning! At least I’m finally getting a haircut today before Broker’s Opens tomorrow and Wednesday. I’ll probably fall asleep in the chair over at Salon Bella in Bellevue. Someone can video THAT
I haven’t had a haircut in months…I’m starting to put it up in a bun Yikees! Break for haircut has become a priority today.
A video of ARDELL with client’s baby on hip while staging, would have been fun too…
I live in a 4 unit HOA, with each of it as an officer and self-managed. WIth only 4 people, anything approaching $2,500 is too much for a Study. Do you know of reserve study companies that pare down that cost for a truly small HOA like ours?
We have $12k in the account, and I feel we need higher dues ($250/month currently). I know a study will back me up on that, but to get the study done cannot cost 1/4-1/5 of our balance. Kind of guarantees the study will say we are low, eh?
So, while I like the study requirement, and we could debate the “pay me now or pay me later” of affording a $2,500 study for 4 people, I would avoid having one unless I could get a cost on it more in-line with our size and means. After all, to me, paying too much for a study is just as stupid and wasteful as paying too much for a fence.
Thoughts?
RE: Condos – How much should be in reserves?
While I applaud your attempt to clarify the reserve study and what it is, in reading your article and as a professional reserve study provider the blanket statement that most reserve studies cost $2500 is very misleading.
Our reserve specialist for HOA Services Group, LLC has done over 100 reserve studies in the last three years. It is unusual for a reserve study to cost less than $3,000 for all but a small & simple association. We do have a payment plan for small associations who do not have the resources to pay the entire cost up front.
Our reserve specialist spends an average of between 60 to 100 hours to put together a credible reserve study. That includes the time spent on site gathering data and assessing the condition of the components.
RE: Remaining Useful Live ZERO
Our specialist also has a section that addresses component items needing immediate corrective action for studies done by us.
We have done studies all over the Northwest and our goal is to give our clients a first class document which will enhance and maintain their community at a fair price. We meet with the board of directors prior to beginning our work and when we are done we deliver the finished reserve study and answer any questions the board may have. We also frequently meet with the association at large to explain the document and it’s impact on their investment and to answer questions.
Lastly, I wish people could follow our specialist around and see what kind of time and effort he puts into putting together a credible reserve study. I have and it is an exhaustive process, primarily because he feels it is incumbent on him to do the kind of study for all associations he would want done for an association he lived in.
Best Regards,
L. Law Broili
Operations Manager
HOA Services Group, LLC
Please send me literature about your organization. I belong to an HOA with 33 units. We are considering a reserves study. Thank you. Bill Hinely
Hi Bill,
I’m not “an organization”
Are the condos in the Seattle Area? I’d be happy to help with the thought process if it is in an area I am familiar with.
I believe condo reserves are mandatory in California. Needless to say, the vast majority of condo associations and HOAs a under-capitalized. Many cant even keep up with regular condo fees and assessments.