First Time Boston Condo Buyer Concerned Over Lack of Reserve Fund

B.K. from Boston, MA writes:

Dear Mister Condo,

My wife and I are considering buying our first home just outside of Boston. The market is red hot so we have to move quickly if we are to purchase this unit. We found a condo we can afford in a small (12 unit) association. I was just provided with a copy of the 2014 / 2015 budget and I am a bit concerned that the association doesn’t seem to have a Reserve Fund. There is a line item from the 2014 budget showing a very small contribution. The 2015 budget shows an increase to common fees and that 10% of the common fees collected are budgeted to go into the Reserve Fund but I am worried that since this is an older condominium, won’t there likely be a special assessment for any repairs that the association has to make? We really like this unit but I don’t want to buy into a potential money pit. Do you have any thoughts on whether or not we should buy this unit?

Mister Condo replies:

B.K., welcome to the world of greater Boston real estate in 2015. I am hearing reports of properties selling for 10% to 20% ABOVE their asking prices! That is amazing but not real good news for new buyers like you and your wife. You are wise to ask about the financial status of the association you are buying into because you are not just buying a condo unit; you are buying your portion of this real estate association’s liabilities, which include aging buildings and common elements.

The lack of a Reserve Fund is a real concern. Even in small associations, there are going to be capital improvements and repairs that will cost real money. It could be a roof. It could be a siding or painting project. It could be a fence. It could be roadways or sidewalks. Whatever the expense, if there is no Reserve Fund to tap into, the money will need to come from the unit owners and it will do so in either a special assessment or increased common fees to service a loan to handle the repairs.

The 2015 increase in common fees is interesting to me. FHA-backed mortgages granted by banks to those who wish to finance their condos are subject the entire condo complex being approved by FHA. FHA requires associations to contribute not less than 10% of their common fees to their Reserve Fund as one of the requirements for FHA certification. My guess is that this association is just now taking that requirement seriously. If you are seeking an FHA-backed mortgage to make your purchase, you may find the property is not yet eligible for such a loan if the property is not already FHA certified. I hope that is not the case but be prepared to hear that from your mortgage loan officer. It has nothing to do with your ability to qualify for the mortgage. It is a function of the condo being eligible for FHA backed funding of mortgages.

Back to your original question: Do I have any thoughts on whether or not you should purchase a unit in this association? If you and your wife are happy with the condominium and you are aware that you may incur a special assessment for any capital repairs, I have no problem advising you to proceed. However, if you do buy into this unit and find out a new roof or other project is in order, do not be surprised when the special assessment is levied and keep in mind that it could be for several thousand dollars. In a hot market like Boston, that may not deter a buyer as they might have to pay more than the unit is asking for to begin with. Just make sure you have easy access to that extra cash in case the special assessment hits. At the very least, I would expect the common fees to escalate so the association can catch up to building their Reserve Fund to the level it should be funded at. All the best!