Beginner Guide to Buying a Home – Week 9

This step-by-step series will take you through the entire home-buying process — from finding a buyer’s agent to settlement day, and all the details in between. Every first-time buyer will find this information-packed series easy to follow and understand. Make sure to tune in for the next few weeks!

Even though you’re buying a home when you purchase a condo unit, you’re buying into a “business.”

With a COOP you are buying shares in a corporation. The shares are associated with a specific unit, and you also get a proprietary lease for the apartment the shares are associated with.  

That’s why it’s so important for you to determine how stable and financially sound this “business venture” or corporation is before taking it on.  And that’s where reviewing condo and coop docs comes in.

Here’s what happens after you have an accepted offer and before you sign the contract.

You and your attorney will have the chance to review a stack of “condo docs” or condominium documents or the offering plan for a COOP.  These documents will give you a better idea of the financial outlook of this condo community or COOP.

Both you and your lender need to know what you are getting into with this purchase.  This is a very important step when purchasing a condo or COOP unit. You will share in the financial responsibility of this condominium community with your neighbors.  With a COOP you own shares of the Corporation that owns the building/property. Your lender won’t give you a loan if they are not comfortable with the financial health of the building. Your lender has a standard questionnaire they send out for COOPS and Condo’s.  It has questions like how many units are owner occupied, how many owners are behind on HOA or maintenance fees, etc.

Take every ounce of that time to review these important documents and show them to a lawyer:

Condo and COOP Docs 101

Condo docs include but are not limited to the following: Declaration, By-laws, Rules/Regulations, Financial Statements, Budgets, and Minutes from Meetings.

COOPS have an offering plan that includes a comprehensive overview of the property, rules/regulations etc.  The budget and financial statements are separate from the offering plan as are the board meeting minutes. You should review the house rules which includes pet policy, parking policies, use of common areas, etc.

Let’s go over some of these below and point out what you should focus on during your review.

Financial Statements and Budgets

The financials will show how well the corporation (COOP) or Condo is being run, what reserve funds are in place and being put aside each month, how much it costs to run the building, etc. Basically, these documents provide crucial information on the financial status of your building. Pay particular attention to the reserve fund and operating budget.

•Reserve Fund: These docs will tell you if there are enough reserves. A reserve fund (or savings account) is used for major repairs or improvements to the building. Projects can include new windows or a roof, for example. A condo or COOP needs to build up reserves for future repairs so a percentage of your HOA (Cond) or Maintenance (COOP) monthly fees should be deposited into this fund. Also make sure you see how that money is invested.

If your condo or COOP has a low reserve fund, it will require a special assessment (additional fees) when a major repair or renovation is needed. It’s something to consider if you’re looking at an older building, especially ones that are around 25-30 years old. Keep this in mind for older apartment buildings that have been condos or COOPS for only a few years.

A good rule of thumb is at least 10 percent of the condo/COOP budget should be going to the reserve account.  This also is also what lenders require before they will give a loan for a condo/COOP unit.

•Operating Budget: Your monthly fees are what fund most of the operating budget. Experts say about two-thirds of the operating budget should be used toward expenses.

See how your condo/COOP fees are allotted each month for employee paychecks, utilities, trash pick-up, etc. Remember, somebody must pay for those hallway light bulbs!

Plus, if your condo/COOP has a 24-hour front desk, swimming pool, elevators, full-time engineer on site … these expenses add up and so will your fees.

Keep in mind that your condo/COOP association shouldn’t be dipping into the reserve fund for basic maintenance like trash removal, recreational facilities, common-area landscaping, etc. That’s a big warning sign!

•Delinquencies: It’s important to know what percentage of unit owners are delinquent on their monthly fees. If more than 15% are more than 30 days delinquent, Fannie Mae may not approve your mortgage. Plus, if too many units go into foreclosure, the association could go into a budget shortfall, which could mean a special assessment is issued.

Rules, Regulations and By-Laws

You want to check these out to see if you will be able to live by the rules and regulations of your condo/COOP community. Remember, you’re living with many other people, and there will be certain expectations and restrictions. Do these suit your lifestyle?

These rules can vary widely from community to community. In general, these documents could specify a range of items, including its pet policy, whether you need to have carpeting, can you install hardwood floors, or if you can rent out your condo/COOP at any time. Also, review any grandfather clauses since you might not have the same “rules” as an earlier buyer.

Monthly Board Meeting Minutes

The current minutes can be a treasure trove of information about upcoming maintenance/capital improvement plans and how these will be paid for – is the reserve enough or will there be an assessment to the homeowners to cover the improvements. They also show any changes to current rules. Are they going to stop/start allowing dogs? Are they going to change to a no pet policy. Are they changing or considering a change to the management company.  Are there any surcharges (such as a fuel surcharge) and are they being adjusted?

Other Important Questions to Ask

Contact board members or the property manager to ask questions. This additional information can help round out your review of the condo/COOP docs. Here’s a “must ask” list:

•Are there any upcoming upgrades or projects planned in the building?

•How are those projects going to be paid for? Reserves? A special assessment?

•What projects are on the 5-7 year horizon? Are there adequate reserves being funded for these projects?

•What are the major issues the board is discussing at the last several board meetings? Ask to receive a copy of the board meeting minutes from over the last year or find out how you can review them.

• Is the condo/COOP experiencing any litigation? Whether it’s a small or large lawsuit, reserves can be deleted quickly to cover this.

•How much turnover occurs? This will tell you if residents are happy with the condo community.

•What percentage of the units are owner-occupied? Generally, the higher the percentage of owners, the more marketable the unit will be for resale. It’s not unusual to find some associations in financial trouble over short sales or foreclosures. A low percentage of owner-occupied units can impact a banks willingness to write mortgages for the Condo/COOP complex.

•What does the association’s master insurance policy cover? A list of coverage should be included in your condo docs. By reviewing these carefully, you can determine how much additional coverage you may need for your own unit.

Additional requirements from Fannie Mae

After the deadly Florida condo collapse in 2022. Fannie Mae is asking lenders to certify that there are no significant deferred maintenance or public repair directives related to unsafe conditions in the building.  The burden of proof will now be on the condo and coop boards to show the maintenance has been done or is planned and funded. The questionnaire form submitted to boards and their property management companies now includes questions about the building’s inspection history and action plan to address necessary repairs.  The management company and board will also have to submit copies of board-meeting minutes, which usually include discussions about repairs and maintenance and funding of these items.  

Even if you are buying with cash, it is important to make sure the condo or COOP you are buying is approved by Fannie Mae, otherwise when you go to sell you may have a hard time finding a buyer if Fannie Mae will not purchase or back a  mortgage in your complex.  

Reviewing your condo and COOP docs can be make or break when it comes to being sure you have made the right decision about your first home and aren’t hit with any financial surprises after purchasing.  I and your lawyer will help you to review them and know what to look for when we get to this step, so don’t worry too much about this right now.  I only want you to know what’s involved and to hear things more than once so you are more knowledgeable when the time comes.

Want to know whether buying a condo/COOP is a good choice for our area?  Email me and we’ll set up a time to talk more about condos and COOPS in our area so you can understand this important aspect of your purchase before you make the big decision to invest.

Stay tuned for the next installment of my Beginner Guide to Buying a Home series. Our next article is Under Contract, Lock in rate and Appraisals.  It provides a breakdown of what to expect during this stage.