When buyers evaluate a condo, or when owners try to assess how well things are going, it's best to approach the situation in medical terms.
You're the doctor. The condo association is the patient. You'll need to take several vital signs in routine checkups with the association to make sure the condo is on the path to good health. After all, healthy condos only come with strong, healthy owner's associations.
Condo dues are one of these important vital signs to check. We all want a lower price on anything, from gasoline to condo fees, but buyers beware. A low condo fee might be just as much of a red flag as a very high one.
Residents pay condo dues to maintain common areas and amenities. This can include painting, roof replacement, and other items that single family home owners usually handle all on their own. It would be nice if condos associations could just roll all these costs into the price of the unit, but unfortunately it just doesn't work that way.
Condo dues may seem like a downside to buying a condo, or an extra cost but they're really just the opposite. Single family homeowners bear the full weight of these costs for their whole property. On the other hand, condo owners can defray these costs among themselves, making the financial burden relatively light.
There is a downside, however. Condo Association fees are often determined at the discretion of the condo association. Since most condo associations are made up of human beings, they can make mistakes. A condo fee too high or too low could be fatal to property values, maintenance, and the whole ownership experience.
Condo dues that are too high naturally tend to chase away new buyers. This means, however, that the association has plenty of money in the reserve fund for maintenance. The end result: the property is well maintained but the residents are disgruntled. Some people might even be trying to sell and move out, but they'll have a tough time talking a new buyer into paying exorbitant dues.
How can condo dues be too low? Since condo dues are meant to cover routine maintenance and replacement costs, dues that are too low will result in declining property values, not to mention decreased functionality of the facilities themselves (ie, leaky roofs, unusable swimming pools, etc.).
That's not to say that condos don't have other ways of covering routine maintenance and replacement costs. Condos can charge what are called special assessment fees. These are usually stand-alone fees that everyone pays. For instance, if the roof replacement costs $2,000 over and above what the association had in reserve for a 20-unit building, the association may charge each unit $100, a nasty surprise in everyone’s mailbox.
Condo associations that try to keep all the residents happy don't like to charge special assessments because tenants get disgruntled and feel gouged. All this can be prevented with good planning.
A healthy condo association will pay for what's called a reserve study. This is a professional evaluation of all the costs the property will incur on a regular basis. Reserve studies aren't free, but they help the association determine the proper amount to charge each resident in dues. This saves a lot of money and headaches in the long run, preventing the need for special assessments.
But how do you tell if an association has set the dues where they should be? It's safe to assume that any association that hasn't conducted a reserve study probably hasn't set the optimal amount for monthly dues. A healthy condo association will conduct reserve studies at least annually. A summary of this study should be available. The summary lists all the things that may need maintenance or replacement now or in the future. Check out the "Remaining Useful Life" column for each item. If the numbers are low or at zero, chances are the dues aren't high enough and, in fact, some replacements are past due.
A perfect reserve schedule will show identical income and expenses on the balance sheet for the reserve account.
These vital signs should help you correct your own condo association or avoid a dysfunctional community in the first place.
You can also compare your dues to other condos in your area.