Due Diligence When Buying a Condo or HOA home

Kevin Lisota wrote an informative posting Friday (5/1) on the Smart Real Estate Blog Site regarding due diligence a prospective condominium purchaser should conduct prior to purchasing a unit.  Click here to view the article.

Lisota lists the following steps:

  • Conduct a visual inspection;
  • Review meeting minutes;
  • Review the operating budget;
  • Review the current reserve study;
  • Review the association’s rules and regulations;
  • Review the association’s insurance policy.

I have provided similar suggestions in seminars and presentations.  First, though, I’d like to add a couple of comments to the foregoing list.  It is not enough to ‘review” the operating budget.  I recommend scrutinizing each line item of the current budget, and comparing it with the previous two years’ budgets to identify trends and accuracy.  With respect to reserve study, if you do not have any construction or building maintenance experience, pass the report to a friend or family member who may have knowledge and can provide valuable assessment.  Also, make sure to review the reserve account, in addition to the actual reserve study.  Regarding rules and regulations, I would also highly recommend reviewing the association’s declaration and bylaws.  You do not have to be a lawyer to identify gaps and potential problems.  When reviewing insurance, make sure to look at policy limits, deductibles, Directors and Officers coverage and endorsements specific to multi-family residences, such as sewer back-up, code compliance and demolition coverage, to name just a few.  There is no substitute for review by a professional insurance agent or consultant.

I would also add the following to the due diligence list:

  • When conducting the visual inspection, stop and speak with a few homeowners and ask them the strengths and weaknesses of the community.  You may be surprised at what you uncover, both positively and adversely.
  • Call the association manager and ask them the same question.  They do not get paid for such calls, but may provide you with a quick summary of the community.
  • In these times of economic crisis, make sure to scrutinize not only the operating budget, but also the bad debt and collections/foreclosure rates.

Lastly, I believe the foregoing steps are not limited to condominiums; rather, apply to Planned Unit Developments (“PUDs”), as well.

Buying a condo can be more complex than buying a single-family home.  For a successful purchase, make sure to perform your proper due diligence.

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