The home of your dreams seems perfect, but how do you evaluate the monthly fees or carrying costs for the community to determine whether it's the right fiscal match? After all, monthly homeowners association, condo or co-op charges, combined with a mortgage payment, can add up to a significant number which only gets bigger over time.
Before signing a contract, a real estate attorney, a knowledgeable real estate agent and a smart homebuyer can uncover a lot of valuable information about a building, its financial health and physical condition, which will help explain and validate the monthly fees. Though the dream home may be at hand, the overall health and day-to-day running of the community is a critical part of the equation.
You may see regular dues whether you live under a homeowners association, condominium association or co-op. If you're part of an HOA or condo association, you own your house or apartment outright, and agree to follow bylaws established for the neighborhood or building. A co-op, on the other hand, means you own shares in a corporation and assume a monthly maintenance, which encompasses the following:
- Salaries for the staff, doorman, superintendent and others who help manage and take care of the building.
- Building maintenance or upkeep on items such as the elevator, plumbing and landscaping.
- Insurance policy for the building.
- Building mortgage and mortgage interest payment (the interest portion is deductible to the extent of the law).
In a condo and HOA, the monthly fees are called “common charges.” Like a co-op, this fee covers items such as salaries and building maintenance. Unlike a co-op, there is no underlying mortgage on the building or subdivision. A separate tax bill is sent directly to the homeowner who pays his or her individual tax bill.
“There are several key areas that are closely examined to determine the financial health of the building prior to contract signing,” says Steven Matz, founding partner of real estate law firm Katz & Matz P.C. in New York City.
This due diligence process pays careful attention to certain areas, some of which are obvious to the naked eye but most require the professional review of a real estate attorney.
Here are some common HOA, condo and co-op fees you should review before purchasing a home:
- Lobby and common spaces.
- Size of the building or community.
- Age of the building.
- Siding and roof.
- History of assessments.
- History of maintenance cost increases.
- Green certifications.
Lobby and Common Spaces
Do these areas look outdated and in need of a redo? If so, when did the community last decorate or renovate the common spaces and how do they typically pay for these types of expenditures?
Size of the Building or Community
Smaller condo or co-op buildings usually have larger monthly costs as they are shared with fewer people. More elaborate amenities that may be included in an HOA, such as a pool, concierge service or even country club access, can also increase the total cost of regular dues.
Age of the Building
Older buildings will naturally have more maintenance issues. The elevator, plumbing and general infrastructure will require more repairs. New developments presumably need less repair and maintenance as they have not suffered the wear and tear of the last century.
Siding and Roof
Local laws in New York City require that building facades and brick work be inspected every five years. When was it last done by the building, what were the findings and how was it paid for? This also applies to any common buildings in an HOA – a clubhouse or common building will need the same exterior maintenance as your own house to keep it looking nice.
Many large cities require buildings to convert to clean oil or natural gas to cut down on negative environmental impact, which is an expensive process. Has it been done, how was it paid for and if not, what is the plan? If a building or community is using older heating systems, the cost of operation is also likely higher than a newer, more efficient system.
History of Assessments
How often is the building or community assessed? If properties are being reassessed, expect property taxes to increase, either for the general community, which will require a larger portion of your dues, or even for your individual home.
History of Maintenance Cost Increases
How does the building or community typically fund repairs? How often do they raise the maintenance fee, and by what percentage?
Does the building have a large staff, onsite property manager and many amenities? High-end living is luxurious, but it comes at a price. There is a premium for extras such as an elevator attendant, a swimming pool, a theater or a fancy gym.
LEED-certified buildings and use of Energy Star-rated appliances typically have lower energy costs.
The Financial Bottom Line
An examination of the current reserves and operating income are critical and the best indicator of the true fiscal picture of a building or homeowners association. According to Matz, a three-month reserve of the total operating income is the common formula or rule of thumb used by most real estate attorneys when evaluating reserve funds.
For example, if the building has $1 million in annual income, which is approximately $84,000 a month, there would be an expectation of $252,000 in reserve. It is important to note that many buildings have flip taxes which help to fund expenditures, but this only comes into play when there is a sale in the building, which cannot be relied upon.
In new development condos, buyers have made a contribution to the working capital with their purchase to build up the capital reserve. Because the building is new, fewer repairs are more likely. Often, there is more stability in newer buildings.
In the end, understanding the monthly charges for the building or community is critical and under the guidance of a real estate attorney, most potential red flags can be uncovered. After all, the home may be perfect, but if the community’s finances are not strong, it may be time to move on.
After earning a degree in Economics from the University of Pennsylvania, Arriz worked in wholesale sales for several top fashion designers in New York City. While her business sense, tireless work ethic and integrity fuel her success, most importantly, she believes wholeheartedly that one’s living space should be not only an investment but also a home and sanctuary.
Arriz has resided on the Upper East Side for over 30 years and currently lives in Carnegie Hill with her husband, three children and her miniature schnauzer, Lucy.