Condo Reserves: Buyer Beware

Read the first part of this story, Condo Reserves: A Growing Issue.

A few weeks ago, we wrote about condo and co-op reserves and the new Florida State law. This new law, passed in the wake of the Surfside collapse in 2021, mandates condo and co-op buildings that are at least 30 years old do milestone structural inspections by December 31, 2024. They must do additional milestone structural inspections every 10 years thereafter. Also, these condo and co-op properties must have enough cash on hand to match the repairs required by the milestone inspections.

And, there’s the rub: Condos and co-ops that have pushed off repairs for years are now sending owners bills for tens of thousands of dollars. In some cases, owners have received invoices for more than $100,000. That’s a lot of cash to come up with in a short period of time.

What is a Good Amount of Condo Reserves?

Sellers are motivated, not only by the large invoices for cash to beef up reserves, but also by rising insurance rates. As we write this, some 20 to 30 inches of rain is falling across the southern half of the state. And, it’s not even a hurricane or named storm.

As a result, housing inventory is rising in parts of Florida, mostly in buildings at least 30 years old, according to Resiclub. Prices for some older condos and coops seem to be falling, even as overall prices rise in Florida.

So what is a buyer to do with this information? How should you think about a condo or co-op’s finances? And, what should you consider before making an offer to purchase for a unit in an older building?

First, although the statute has been widely interpreted to mean that condos and co-ops’ reserves must be fully funded by January 1, 2025, that may not be true. According to Robert Nordlund, CEO of Association Reserves, the “fully funded” mandate actually means that the HOA must collect enough cash to fully fund the required updates, fixes, and maintenance projects when they are scheduled to occur.

Reserve Funds for Condos | What Are the Requirements?

Nordlund believes that the homeowners that have received a massive invoice are few and far between. According to the company’s website FAQs, “Reserve Funding nationwide is typically 15-40 percent of an association’s total budget. For Florida associations in steep “catch-up” mode because of years of waiving Reserve Funding, they may temporarily be at or above the high end of this range.”

Nordland believes many associations that charge $300 per month in assessments will move to $400 to $500 per month. Those with assessments at $750 per month might start charging $1,000. “But this will happen everywhere in Florida,” he adds.

While the Florida statute only applies to condos and co-ops located there, older properties across the country may have similar structural issues and weak reserves. The only way to know what’s coming down the line is to ask.

Condo Owner Questions HOA Fees

Buyers should ask for HOA minutes and budgets for at least the last two years. They should also ask for the next year’s estimated budget, a copy of the milestone structural report, and a list of maintenance projects on tap for the coming year.

Many buildings have hired companies to provide them with a reserve study to determine the amount of money they should have on hand for the estimated repairs that may be needed over the next ten or twenty years. Nordlund suggests buyers ask for the HOA’s reserve study. If the reserve is 70 percent or better funded, the reserves are probably strong. If the reserves are 30 to 70 percent funded, Nordlund considers that fair. Under 30 percent is weak, and buyers can expect a hefty special assessment or assessments in the coming years. He reminds buyers that reserve studies that are more than three years old don’t count.

Condo Reserve Issues Cause Concerns for Buyers

While Florida isn’t a state that necessarily leads the pack when it comes to real estate innovation, the Surfside collapse provided a window into a growing issue. As our housing stock ages, it needs to be maintained. Don’t think Surfside can’t happen to you.