Monday, June 02, 2014

Evil Condo Fees [updated]

Thanks to Jon for suggesting a post about condo fees. Contrary to popular opinion, condo fees are not a bad thing. They are not even unfair. Regularly collected fees from multiple owners of common property insure that adequate funds for common expenses are available when needed.

How much is fair? That depends on what those fees are intended to cover. At the same selling price, is condo unit A with $350 a month fees a better deal than than an identical unit, B, with $450 a month fees? Depends entirely on what those fees cover.

In most condos the monthly fees cover insurance for the buildings (usually the biggest single item), maintenance, water and sewer, basic cable, grounds care, trash pickup, common area electric, salaries for employees (if any) and other common expenses. There may also be money going into reserves for future expenses. More on that later. Some condo fees also cover hot water and WiFi and some even cover AC units. At the other end of the scale, some associations do a special assessment every year when the insurance bill arrives and a few complexes with artificially low monthlies seem to assess every time the Marlins lose a game.

So, back to the question; is the unit with low monthly fees better than the one with higher fees? Probably not if the lower fee unit is not funding reserves. If the unit with $450 fees is contributing 20% of the annual budget towards reserves ($90 per month per unit) then the units appear to be close to equal value at the same selling price. That is until the roof needs replacing or the building waterproofed and painted. In the building without reserves, the owners get a special assessment to pay their share of those items which can run into seven figures on some buildings. The buyer of the unit with the higher fees and a roof needing replacement next year has his share of the cost safely socked away in the reserve account (thanks to the previous owner's share of reserves) while the buyer of the lower fee unit may find himself writing a five figure check for his share of the replacement. 

There is another danger to the seemingly attractive low-fee unit. It may not be mortgage worthy. Unless a buyer is paying cash or making a substantial down payment, lenders may not loan on any unit in the complex. At the very least, most lender reviews of a condo are going to want to see 10% of the annual budget going into reserves and an amount equal to to the insurance deductible in the bank. It is normal for some owners to want to keep monthly fees as low as possible. Why fund reserves or keep unused money in the account if it means higher monthly fees? What they may not realize is that lower condo fees with no reserves means that the future sale of their and their neighbor's units will be more difficult. Funding the reserves at a rate of less than 10% of the total budget or not keeping the amount of the hurricane deductible in the bank might keep monthly fees low but it might also push your unit into the cash-buyers-only category.

[update] Another important factor to consider when reviewing condo reserve accounts. The amount of money in the reserve accounts is not a good measure by which to compare associations. For instance; If the amount of reserves designated for replacement roofs is $500,000 then the reserve account should contain $500,000 the month before the new roofs were paid for. However, the month after those roofs were paid for that reserve account would be depleted. A quick glance at a tiny reserve balance might lead an uninformed buyer to assume that the association was not adequately funding reserves. Don't assume, ask.

One last thought on the whole condo fee thing: Single family homes have the same expenses. They are just funded differently. The monthly costs for insurance, water/sewer, pest control, lawn and pool care for a Cocoa Beach home can easily run more than our example condo fees. Then there is the cost of the roof, painting, driveway, etc. when it's time to address those. It's a rare homeowner who has a designated reserve account. As they say, there is no free ride.

"Some people call me obsessive or driven or lucky or whatever. I'm all of those things. Shouldn't we all be?"  ___Kelly Slater


  1. Larry, I'm curious to hear your take on the 10% "rule". I own one unit and property manage 2 others in a small 6-unit complex in Indialantic, right across the street from the beach on A1A. As the former Treasurer of the association, I had trouble with a potential lender (for a unit buyer) who complained that our annual reserve collection was only 6% of budget. I tried to explain that we are socked with huge property and wind insurance bills which cause our budget to be extremely high, yet we do collect enough dollar reserves. I also went on to say that theoretically the unit owners could, by choice, agree to put tons of money in the budget for lawn and tree care, etc., thus upping the budget, yet still not having an impact on the reserves collection. In those cases, reserves will never come close to 10%, yet that causes lenders to decline financing. I think this is blatantly unfair. What's your take?

  2. I've run into exactly the same situation you describe, more than 10% of the annual budget somehow makes it's way into the reserve account but there is not a line item on the budget equal to at least 10% of the budget specifically going into reserves. The lender denied based on that.

    It's not unfair. The lenders decide what criteria best quantifies their risk and make guidelines based on their risk tolerance. It's their money after all and they are being prudent to have guidelines. It would be likewise prudent for condo associations to allocate at least 10% for reserves in their budget. Complaining to the lenders about their guidelines will not change anything. This is not a fight that can be won. Owners in condos that think they may want to sell in the future would be wise to insist on that 10% budget line item. It is also wise to make sure your property manager has all the documents handy that a lender might want and is not bitchy to the person who asks for them.

    1. Larry, I'm completely on board with having sufficient reserves, and I understand the lender is using that as a basis for getting involved. However, if they are worried about risk, then I'd like to see them put their guidelines where they belong, on the reserve accounts. Check the balances, check the amounts collected based on replacement period, etc., not on an arbitrary percentage. You could be quite comfortable having 10% of your budget go to reserves, but what happens when nothing needs to change on the reserve collections yet your insurance premium all of a sudden doubles one year to the next, and now reserves only show as being around 7% of the total? What do you do, increase amounts going to reserves just to meet the 10% figure? That's the part that makes no sense if you're still collecting enough for your replacement funds. That's the explanation I'd like to hear from somebody.

  3. I agree with you, Len. I suppose it would be better if they gave the underwriter some leeway depending on the big picture but they are unwavering in their rules. Trying to appeal to logic with a bank is like herding cats. There are probably some creative ways for pinched associations to keep at the 10% threshold without undo hardship that we haven't considered. Buyers can also do higher down payments to push the loan into a "limited review" status that might not look at line item reserve percentages.