CHECK FINANCES OF HOA BEFORE BUYING by Neal Chazin

Q:   As a first-time home buyer, how can I evaluate a homeowner association's financial condition? 

A:  Most home buyers are concerned with the amount they must pay in monthly association fees, the possibility those fees will be increased and whether a special assessment will be deemed necessary. 

It is not helpful to compare the amount of one association's monthly assessment with another. 

Factors such as the number of units, types of amenities, size of common areas, type and quality of services, and level of reserve funding contribute to the amount of monthly assessment. 

Let's say, for example, the cost to maintain a pool is $200 per month.  The cost per unit to maintain this pool in a 20-unit complex would be $10 per unit.  But the same pool in a 100-unit complex would be only $1 per unit. 

The location of an association usually has no bearing on the amount of the monthly assessment.  

For example, the cost would be the same to maintain an elevator in La Jolla or in El Cajon and the cost for refuse removal is based wholly on the number of bins and frequency of pick-ups rather that the location. 

To evaluate the financial health of an association, anyone considering buying into a homeowner association should request a copy of the operating budget, the latest reserve study, a current financial statement, meeting minutes covering at least one complete year, and a copy of the insurance declaration page.  It would be advisable to obtain copies of previous year-end financial statements, as well.  The operating budget projects the costs of all expenses that are incurred during the course of one year.  These expenses usually include: administrative costs, such as, management and accounting, office expenses, legal costs and insurance; operational expenses, such as repairs and maintenance; and utilities, including gas and electric for the common areas and water and sewer for the entire complex. 

The operating budget also includes the amount to be allocated to the reserve fund.  This figure should be equal to the reserve requirement stated in the reserve study.  The reserve study is a projection of costs for long term replacements; items that are replaced every two years or more. 

This report includes the amount required to be set aside each year, the amount that should be held in reserve, and the total amount in reserve at the time the report was prepared. 

Examples of items included in the reserve study are roofing, painting, water heaters, floor coverings and pool resurfacing.  Compare the amount that should be in reserve with the amount that is currently in reserve. 

A current financial statement will include a balance sheet and operating statement.  The balance sheet will identify the current cash balances in the operating and reserve accounts, and the operating statement will reflect the actual income and expenses as well as the amount that has been allocated to the reserves.  Some operating statements include a budget analysis, which is helpful in determining whether the actual expenses are close to the budget projection. 

The meeting minutes are a summary of what was discussed and voted on during a board meeting or annual meeting of the homeowners.  Meeting minutes should be reviewed for any new projects, delinquency problems, lawsuits, projected special assessments, approval of earthquake insurance or other issues that could affect the association's financial future. 

The insurance declaration page summarizes the types and amount of coverage for the association.  Associations with less than 100 units should have liability coverage in the amount of $2 million; those with 100 units or more should be insured for $3 million.  Associations that carry earthquake coverage will be paying much higher insurance premiums.  Associations that are financially healthy are those that have reserves close to 100 percent funded and budgets that sufficiently meet annual operating and reserve funding requirements. 

By reviewing the operating budget, reserve study, financial statements and meeting minutes, buyers can be well informed of the financial condition of the association prior to the purchase of their new home.

NEAL CHAZIN is the owner of Associated Professional Services and a member of the Community Associations Institute.  Readers can visit the CAI Website at www.cai-sd.org and get their condominium questions answered by calling the Community Associations Institute at (619) 299-1376, by e-mailing sdcai@aol.com or by sending questions to Condominiums, Homes, San Diego Union-Tribune, P.O. Box 120191, San Diego, CA 92112-0191 

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