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10/04/10: Caution When Buying A Resale Condominium

Housing Counsel

By Benny L. Kass

Q. I am interested in purchasing a condominium from an owner who purchased it several years ago from the developer. The building contains 45 units and was built in the l960s.

The monthly condominium fee seems reasonable, but I am concerned that it can be increased significantly over the next few years, thereby putting an extensive drain on my monthly resources.

Are there any protections to guarantee that my fee will not jump drastically? What do you advise?

A. You are purchasing what is known as a “resale condominium.” Although you have not told me where the condominium is located, each of the three surrounding jurisdictions (Maryland, Virginia and the District of Columbia) has legal requirements putting the burden on the seller to give you certain basic information on which you can make your decision whether to buy.

If there is a real estate agent involved in the transaction, ask the agent to give you the required documents. In any event, your seller can get them from the condominium association. Regardless of the size of a condominium, there must be an association, and the books and records of the condominium must be maintained carefully.

You have the right to obtain – and review — at the very least, the following documents:

The current condominium documents. These include the condominium Declaration, the Bylaws, and the house rules. It is important to review these documents to determine whether you can abide by the rules and regulations that govern the condominium.

The current budget. This is perhaps the most important document to review. It shows the income and expenses of the condominium as well as its level of reserves. It is important to recognize that, although reserves are required for such items as future repairs to boiler, roof electrical systems, etc., all too often many condominium associations do not understand the necessity for maintaining adequate reserves. If the reserves are too low, you may want to reconsider purchasing in that building, especially if it is 50 years old. In recent years, lenders – such as FHA – as well as Fannie Mae and Freddie Mac, have started to review the amount of reserve requirements. In fact, if you are looking for an FHA loan (which is the primary source of lending now-a-days), if the condominium does not have at least 10 percent of its annual budget in a reserve account, it is possible that the loan will not be approved.

The proposed budget. Each year, the condominium association is obligated to prepare a new budget, taking into consideration the expenses from the previous year. As we all know, the cost of maintaining any building will go only up in the future. Thus, if your building has an oil burner, for example, because the cost of oil has gone up in the past, the budget will have to be revised to reflect this increased cost. It is these cost increases that will raise your individual condominium fee.

A statement in the amount of the monthly condominium fee. You want to make sure to obtain a correct statement from the condominium association showing the monthly condominium fee that is assessed on the unit you are considering. You also want to assure yourself that the present unit owner is not in arrears on the condominium fee. Although the title attorney conducting settlement should collect any arrearages from the seller, often this important item is overlooked and the delinquent condominium fee remains a lien on your unit.

How do you determine your condo fee? At the very end of the Declaration, you will find the percentage interest that relates to your unit. Divide the total budget by this percentage and that will be your annual fee. One twelfth of that number is your monthly obligation to the association.

Although in some associations, voting is determined by “one unit, one vote”, in most condominiums, voting is also based on the percentage associated with each unit.

The most recent accountant’s report. By law, associations are required to have an accountant prepare an annual review of their books and records. Many associations tend to be slow in obtaining these reports. So, for example, if the resale package contains an accountant’s report for year 2007 or even 2008, demand to get an updated report. If none is available, be careful; just because the association had a lot of money two years ago, does not mean its financial status is the same today.

You should review these documents very carefully. After you take title to your unit, you don’t want to learn that there are too many renters in the building which will impact on loans to potential purchasers or refinancers, or that you will not be able to rent. You don’t want to learn that there are a number of lawsuits against the association based on mold – which may not be covered by the condo’s master insurance policy. And you certainly do not want to learn that there is a special assessment which you will now have to pay.

You asked whether there are any guarantees to protect you against significant increases in the condominium fee. Unfortunately, the answer is no.

Of course, you may get the seller to guarantee the condominium fee at a fixed level for a period of time, one year, for example. This is all a function of negotiating when you sign a contract to purchase the unit. If the seller is very anxious to sell, you may be able to get such a guarantee.

If the condominium association has professional management, I recommend that you discuss the status of the condominium with that management company. Review the records and ask the management company about its projected expenses. Most management companies are competent and should be able to assist you.

Often the association has engaged engineers and architects to review the condition of the building. These are called “reserve analysis” reports. If such studies have been performed, look at these documents and pay particular attention to the useful-life projections of the major systems. For example, an engineer may determine that the boiler, which will cost $60,000 to replace, only has a useful life of three more years. If adequate reserves are not being built up today to compensate for this replacement, in your building of 45 units, you may find yourself hit with a special assessment of over $1,300 to pay the cost of the boiler.

I would rather pay $5 to $10 more each month to build up the reserves rather than have to come up with a large amount when an emergency arises. And, once again, be cautious if the association has not obtained a reserve analysis in over 4 or 5 years.

The condominium laws of all three surrounding jurisdictions provide that you have the right, after receiving the complete resale package, to cancel your sales contract. In the District of Columbia, you have three business days from receipt to cancel. (§42-1904.11). In Maryland, a purchaser has seven days (not business) to cancel (Real Property §11-135), and in Virginia you have only three days (Title 55, Real Property §55.79.97) These citations refer to the various condominium acts. You can obtain free access to these laws on the web merely by searching “Condominium Act” for each state.

Buying a condominium should not be considered lightly. You have to understand what condominium living is all about and how the particular condominium you are considering actually operates. Laws govern the operation of condominiums and yet, if the Board of Directors is not dedicated to the cause or if the management company is not deeply involved in the day-to-day operation of the condominium, these laws will not give you much comfort.

You also may want to consider meeting with other unit owners, perhaps by staying in the lobby on Saturday or Sunday, and just introducing yourself. You may get a good flavor of the condominium membership this way.

After all, when you buy a condominium, you are subjecting yourself to living in a democracy. Majority rule — a necessary ingredient of this democracy — may not be your cup of tea.

– Boilerplate –