Reserve Fund Too Low ... Time to Jump Ship?
Need some advice … I’ve been on the market since early summer and finally landed on a condo unit I fell for. Everything I wanted, good location, prewar limestone, perfect size, and the price was right. Had an inspection done which showed that the building was in above average condition, roof, boiler and water heater…
Need some advice … I’ve been on the market since early summer and finally landed on a condo unit I fell for. Everything I wanted, good location, prewar limestone, perfect size, and the price was right. Had an inspection done which showed that the building was in above average condition, roof, boiler and water heater all seem to have another 10+ years in them. Then saw a leak in the ceiling of the stairwell which make me suspicious. We checked it out and found that the source of the leak had been repaired, which was a relief. But while the leak was no longer active, the damage hadn’t been taken care of. Plus the board was very slow in producing the building’s financials (had to chase it for several weeks … ) They finally came through and lo and behold … nothing in reserve. Nothing. Nada. (Well, OK, 2K … which for an 8-unit building is basically nothing). Plus the ‘bookkeeping’ was just piles of bank statements, receipts and bills … in other words, whoever’s doing the books is not an accountant and has no clue how to organize. The seller couldn’t tell me about any major work that had been done recently, so why else would the reserves be so low unless owners in the building aren’t paying their common charges? In short, is it time to let the dream die and look elsewhere? I really love the place, but am terrified of getting trapped in a building full of people who can’t sort out their business responsibly.
I don’t know about percentages, but I’ve heard that three months’ common charges should be in any building’s reserve.
Thanks for your thoughts, everyone — extremely helpful so far.
What percentage of maintenance should be going into a reserve fund? Is it 15% or 20%?
By buying into a multi-unit building, you are proposing to become business partners with all the other co-owners (this is more true in coops, but still true in a condo). Is this how you’d be comfortable running a business you were part of? If not, don’t buy into the building. Doesn’t matter how much you love the apartment. If this sounds fine to you, go for it.
A multi-family residential building should be run as a business, whether owned by one person or company as a rental, or multiple owners as a co-op or condo. This means that the financial records for the building should be kept in good order, if it’s a condo, the financial requirements of Fannie and Freddie should be addressed, and the building should be well maintained. I think that any building should have the equivalent of three months maintenance as a minimum reserve, but that putting 10% of revenue into a reserve fund to repair or replace major systems is prudent. Assessments should be kept to a minimum, and should really be used to make improvements to the building, not to maintain the fabric of the building.
I would be concerned about how the board of the condo you are considering is operating. It sounds like they are a self-managed condo. That’s fine if someone on the board has the time and skills to become the building’s volunteer manager, but if not, they should pony up and hire a professional manager, who will do the books and supervise the service providers. Managing any building is a tough job, and no one should underestimate the amount of time or skill involved.
There are pros and cons to the issue of a low reserve fund.
The only main pro is that it keeps the maintenance costs pretty low. If a repair comes up the building will most likely fund it with an temp assessment. That could be a con if some of the unit owners can’t afford the assessment.
The more important con in my opinion is potential issue when obtaining a mortgage. These days Fannie Mae wants to see 10% of the annual budget in the reserve fund. You would be surprised by how many buildings in Manhattan and Brooklyn don’t have this. There are ways around this if your mortgage scenario triggers a Fannie Mae “Limited Review” but that is not always guaranteed when applying for a loan.
-Adam Dahill
WCS Lending
Yes, mine is also 7 units. I don’t think it makes a dif if it is condo or co-op in what we’re discussing. have they just recently gone condo and need time to get things straightened out? Maybe they don’t have a treasurer. Ours doesn’t. You could always offer to be one. You don’t need an accountant to track incoming and outgoing, but you should definitely have a conversation with the members or at least the board and find out what the story is on their laid-back approach to things and what are their thoughts on getting things more organized. They could either think you are a godsend because nobody wanted to track finances, or they could think you are a troublemaker for wanting to rock the boat. Face to face is best so you can read their responses. Sometimes your gut can tell you a lot, don’t discount that.
Thanks for all the comments so far. Just to back up a little, this is a condo building I’m looking at, not a coop (if that makes any difference — probably little as far as reserves go). It is a small-ish building (8 units).
Thanks!!
As far as I am concerned, weigh the pros and cons. Don’t assume the worst. Like I said, if you can get access to the minutes for the past few years, it will reveal a lot. In my case, if anyone were to look at the meeting minutes in my building, they would see that there are a few thousands of dollars in repairs that we have been putting off for a few years now. At meetings they discuss things in need of repair and if they have enough to pay for them, they discuss if anyone is owing in back maintenance. You could also ask to check out the finances of the other owners. Yes I know this is unusual and they don’t have to show you, but it doesn’t hurt to ask. Even though you have to prepare a package for them to approve you, I don’t think it’s crazy for you to ask for your own package to approve them!
In my building as frustrated as I get at times with the way things are, I have never regretted buying this place.
I cannot stress to you enough to read those minutes.
I lived in a coop for 15 years. I would not buy the apartment you are describing because of the finances and the lax bookkeeping.
I do think it’s true as another poster said that many buildings do operate this way. We looked at a few coops like this when we were buying and the realtors would say, “it’s fine, they just do an assessment when they need to.” Not fine with me.
The problem with assessments is not only do you need to have access to the cash for your share of the repair, but you’re counting on the fact that everyone else in the building will be able to and to do it right on time too. I would not want to wait until the furnace is broken or the roof is leaking or whatever else is going wrong to figure that out. Repairs in a small self-managed building are stressful enough.
Frankly, the bookkeeping or lack thereof sounds at least as worrisome. Not only does it tell you that the group is not worried about getting a given job done right, but if you move there and you do care about getting jobs done properly, you could possibly be the one doing a large portion of shared work. We must have shoveled 8 out of 10 snowfalls in our old building because it was easier than making a stink about it. Over time, even that kind of small stuff gets annoying too.
It comes down to a question of style. But I would walk away.