Friday, December 22, 2006

Funding your Condo Association

I wrote the other day about this piece posted by Peter at Closing Real Estate in Chicago. He gives quick blog posts that send you in the right direction and posits questions to get you thinking.

This is a conversation I'll have with you... that's you the client. Yes, when I start in about condo associations I've seen you're eyes glaze over and even seen you nod off in the car with me. But, I'll still make sure you have the skinny, like it or not.

Peter wrote:
Here's a pretty good piece from the Sun-Times regarding the risks associated with buying into a condo conversion. It's actually a decent piece, I usually think their real estate industry coverage is lacking. My $.02, the first WORST type of real estate to buy is an old property condo conversion. The second WORST type of real estate to buy is a brand new development. That's where 90% of the problems with underfunded associations lie. Your clients might love all the new appliances or whatever, but they're going to pay for them at closing and AFTER closing for years to come (and I don't just mean their monthly mortgage payment).

Here's the little conversation that ensued:

The Tribune also ran a story last weekend focused on condo associations/developer turnover. Much, much more comprehensive and offers a couple resources for associations and board members to check out. Meant to post on it... but the week from hell.

Anyway, I'm a board president for our 12 unit building. It was a conversion of an existing building 60-70 yrs old and we (my wife and I) were the first to buy in. We definately had to check things out with an inspector... and that inspector needs to be good or you're screwed. As an agent, I'm no inspector but can spot most of the tell-tale signs of a dog for my clients on most properties. You make the "worst properties to buy" statement... are the conversions of old buildings and new developments.

Did you mean if things go wrong, these are the worst properties to buy? These developments can have issues, but most are easy to spot for a trained eye (unless purchasing totally pre-construction). This is no way argumentative, but which properties should the consumer buy?

My opinion on the "worst properties" is really based on the fact that you can't see the health of the association pursuant to the 22.1 disclosure required by the IL Condo Property Act. This only applies to "resale" of condo by a private seller. When I work with a Buyer in the conversion/new developer categories I certainly look through the various property reports ect. required by the city/village but I think there's more potential for an under-funded association than what you can get under the 22.1 disclosures.

I agree at the potential for an underfunded association starts at turn-over. If fact, I just viewed an east Lakeview property that was recently converted and turned-over earlier this year. The assessment was only $135 on the listing sheet for this 24+ unit building. I pointed out to my client that this was low and should be raised to at least $175 or so. The showing agent then, to his credit, told us that the board just voted to raise the assessment to $210 (well, for this unit it would be $210 anyway). My client asked why such a large increase and I flatly told him they are doing the right thing. This should provide an adequate operational budget and reserve.

I also added to my client, that, from now on the Board may authorize up to a 20% increase in any year. Anything over that would take a vote by the owners. Consult the condo by-laws for this very important rule.

What Peter is talking about is, an established building will have a financial history- and it's easier to tell if its funded properly or not due to legal disclosure requirements of the seller concerning special assessments, budgets etc...

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