I often hear buyers proclaim that a condo fee is “too high” yet these same buyers seem not to know exactly what determines a condo fee. It is impossible to assess if the fee is “too high” without knowing the history of any “special assessments.” A community that defers maintenance and keeps the fee artificially low will eventually have a large special assessment.
The condominium budget is planned annually to cover both operational expenses and payment to a reserve fund for future capital projects.
Think of the condo fee as going into a nonprofit organization. Should there ever be too much money in reserve, the trustees may elect to reduce the condo fee or return some of it to the unit owners. Healthy reserves are good for both unit owners as well as the condominium overall.
The operating part of the budget goes to run the property on a day-to-day basis so based on the current year (projecting the balance of the year) the next year’s operating budget is determined.
The operating budget includes such items as mowing grass, trimming hedges, snow plowing, trash removal, painting, general repairs, etc.
The second part of the budget is what goes into reserve for the future.
The planned future capital projects can include such items as roofing, sidewalks, vinyl siding, upgrades to landscaping, additional parking, new curbing, replacement decks and patios, pool liners, clubhouse renovations, and virtually anything that affects the condominium as a whole.
Large associations generally hire professionals every few years to perform a reserve study so that when it is time to have these capital projects done there are adequate funds to cover them. Should a shortfall occur, it is the unit owners that will then be assessed the difference to cover the costs.
Therefore, it is good to purchase a unit in a complex that has had a good track record of managing their money well and collecting adequate monthly condo fees so that you won’t all of a sudden need to “kick in” the shortfall, otherwise known as a “special assessment.”
It is extremely tempting to purchase new construction where there is always a low condo fee. However, there is a limited track record for items that need repair and sometimes it takes years for issues to develop that need attention. The builders want to attract buyers to their new communities so they may keep the condo fee artificially low, but once the development is completed the unit owners are on their own as the community ages and the repairs needed come to light. A somewhat higher condo fee would have enabled more money to go into reserve so that those items would not result in a “special assessment” to those unit owners.
Finally, each unit has a predetermined “percentage of common interest” that is in the condo documents and it is from that percentage each unit owners’ monthly fee is determined. In some communities it is the floor plan that determines the percentage of common interest, in others it may be location, square footage, number of garages, or whatever the builder determined when he set up the community initially. The percentage of common interest must add up to 100 percent.
Prospective condominium buyers should be able to review current budgets to see what is in reserve as well as where the money is being spent.
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