Condo Association Hasn't Had Reserve Study in 14 years. Problem?

Question

Hi Bigger Pockets!

The Condo Association I'm looking to buy a single unit in hasn't had a Reserve/Useful Life Study done in 14 years. They provided me a summary of the last study (done in 2006) but it was not very detailed. The association has a little over 1 month's worth of income in total assets. I know that it's generally recommended for an association to do these studies every 3-5 years. I haven't been able to find anywhere online if not having one for so long is much of an issue in this situation.

I would love to hear the community's thoughts on this!

Thanks, John

Andrew B. · Answer

No reserve study is not a problem by itself. The real issue would be if they are not collecting enough in fees to pay expenses and appropriately reserve for capital items. Lack of a reserve study just means that it's harder to figure out if they have enough. ***If this is a condo building and their only amount in savings is one months fees you have a problem!!!*** Its impossible for us to know without knowing all the details, but generally one months fees is not enough to replace CAPEX items. For example, the association that I am on the board of has $200k in capex reserves and we are trying to build that to $1m. Of course, our complex is 20 small buildings. One month of fees for us would only be in the realm of $50k-60k for us. You should clarify 100% what's going on, because I'm having a tough time believing the association only has one month of fees in reserve, unless the building was newly built last year.

Aaron M. · Answer

@John Lynagh Thanks for the information about the reserve study legislation in MD. I'm also interested in investing in condos in MD. For reference, here is a blog by a law firm that focuses on MD condo matters. No endorsement; just sharing a resource I was able to find. https://www.marylandcondolaw.com/

John Lynagh · Answer

Thank you @Greg Scott and @Mike McDermott. Just realized I never gave helpful context that the Development has 240 Units and has been around for 30 years. I found out the the Association has no special assessments planned for the future and hasn't had one in at least the last 8 years that the property manager has worked there. In 2016 and 2019 I know they spent a good chunk of change (about 66% of yearly income, each time) on capital improvements. So that makes it seems like they have been managing, but I agree it does seem rather concerning. I'm in Maryland, so reserve studies aren't mandated, but legislation was proposed this spring to make it so. Given the position I'm in currently, I would appreciate such a law. And it just seems like it makes good business sense.Again really appreciate you both taking the time to give your input. You have helped a lot with my decision process.-John

Greg Scott · Answer

Can you say SPECIAL ASSESSMENT? See if they've done any of those recently. Most people don't realize that a condo can make for a very difficult rental property because you control so much less of the deal. Poorly run HOAs, hoarding neighbors, and onerous rules are few of the pitfalls. Kudos to you for having dug this deep into the deal before before buying.

Mike McDermott · Answer

Warning: no study in 14 years is a definite red flag particularly for a condo. A study that old means as much as no study at all. No study also indicates that BODs aren't following best practices, are potentially violating the law (depending on the state), and possibly ignoring their governing documents (many condos require themselves to have regular studies). As a potential buyer, you are working in the dark without a current study from a qualified Reserve Study provider.

Andrew B. · Answer

That changes things. Now its up to you to evaluate the needs of the association to see if they're properly saving for "rainy days." How much are they putting in savings every year? Consider this as both a percentage of fees collected, but also in dollar figures. What CAPEX items look like they will need to be replaced next, how soon, and how much will it cost to replace? Pay attention to roofs, building structure, retaining walls, parking lots, etc. Do they have enough to replace these items if they need to be replaced today? If so how much money is left in savings? What is the special assessment history? Repeated assessments can mean the board is not properly budgeting for items. None of us can tell you if 1 year of fees is enough to have in savings. But I hope I helped a little.

John Lynagh · Answer

@Aaron Marshall thank you for the recommendation! https://www.marylandcondolaw.c... looks like a great resource. I will add this to my bookmarks.

John Lynagh · Answer

@Andrew B. that's my mistake. I meant to write 1 YEARS worth of income in total assets. Sorry and thank you for catching that. I will update the original question to correct it.

John Lynagh · Answer

@Greg Scott thank you for the insight! I asked if they have any future special assessments coming up, but will definitely ask about any recent ones as well. A condo is all I can do at the moment, so I’m trying to make sure I do as much due diligence as possible. Thanks again, Greg.