Considering buying a home or condo governed by a community association? If so, we recommend you get to know the financials of the association before you close the sale
You have been shopping for your new home for months when you finally come across the perfect one. It is located in a gated community or a luxury condominium tower with phenomenal curb appeal. The community has a beautiful pool area with great fitness amenities and the location is central to your lifestyle. Everything “appears” to be perfect, until you
review the association’s financial statements and recent annual audit report. Unless you have some sort of financial background or you are a community association manager, you probably do not know what to look for.
Here are 4 key things to look for on the association’s balance sheet in order to better protect your financial future:
- Operating Cash – Look for the association’s cash position. Ideally, the association should have operating funds equal to two to three months of operating expenses. Anything less than two months of operating expenses should be a pause for concern and you should investigate further.
- Assessments Receivable – Assessments receivable (AR) refers to money owed (past due) by homeowners. Compare the current figure to the figure reported 12 months earlier. Ideally this number should be lower. If it is higher, you should be concerned with the association’s collection policy for unit owners that do not pay their assessments. High delinquencies can be a financial drain on an association and can lead to monthly assessment increases to cover the financial shortfalls.
- Reserve Cash – It is important to understand the difference between reserve cash and operating cash. The association is responsible for the long-term maintenance and replacement of common area components as they end their useful lives. The reserve figures are based on a reserve study that gives a guideline on replacement cost of the common area components such as the pool, community roadway, roofs, landscaping and fitness equipment. It is important to find out if the association has been funding the reserve line items. Large deficits in the funding of the reserves should be a cause for concern.
- Owners’ Equity – This is normally the last item on the balance sheet. A financially healthy association will have a surplus of income. Large deficits in owner’s equity should be a pause for concern and you should investigate further.
The home buying process can be very complicated and most people turn to a Realtor to help them navigate through questions such as the one that come up when reviewing the community association’s financial statements. The Vaughn Real Estate Team is a Metro Miami, Fort Lauderdale, Florida and Metro Detroit, Michigan short sale and luxury real estate specialist. Let the experience and success of our team help you on your next home purchase. Contact us today. 305.814.9310 or visit us online at www.VaughnRealEstate.net