All Forum Posts by: Mike McDermott

There is no "typical" reserve fund contribution percentage, so 35% in and of itself means little. But to answer your question as to whether not having a reserve study since 2006 is a red flag, the answer is a yes. A study that old is hardly better than no study at all. What you really need to see is a current and competent reserve study where you can judge how quickly reserve contributions are projected to grow and whether special reserve assessments are anticipated. 

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.

@Sinead Norenius, difficult to say what the HOA will disclose, but I believe your transaction is with the seller anyhow, so you'll have to deal the seller's knowledge or lack of knowledge.

Florida has condominium reserve requirements but even lacking those requirements, Reserve Studies and adequately funded reserve accounts are considered a best practice. You don’t want to move in to a building that hasn’t been maintained and immediately start paying for prior owners’ lack of maintenance. Since this is a condo which means that essentially all exterior maintenance is a shared expense, it is critical to know how many years life remain for big ticket items such as the roofs, paint and pavement. Depending on the building, also be aware of significant mechanical items such as elevators, boilers, life/safety systems, etc. An older building may have growing infrastructure maintenance and replacement needs for systems such as sanitary sewer lines, water, electric, etc. If the exterior has wood elements such as siding, stairs, balconies, and railings, these all can be expensive propositions if there has been poor maintenance which has allowed moisture intrusion that resulted in dry rot.

@ Mehgan Moore

If the HOA has a current Reserve Study, review the Reserve Study carefully and particularly the 30-year funding plan. Look specifically at the year-over-year Reserve Contribution percentage increase rate which should be near or slightly above inflation (i.e. 3-5% per year). Make sure that the increase percentages don't grow larger over time (shrinking increase percentages over time are a good sign). Also check that there are no future Special Assessments or Bank Loans. A solid reserve funding plan will survive on the regular Reserve Contributions without loans or Special Assessments. The Reserve Study will also detail what major components are HOA replacement/repair responsibly. While Condo Paint and Roofing are typical HOA responsibilities, they are not always HOA responsibilities. Besides researching the Reserve Study, also determine whether the condo is an Apartment Conversion. Conversions carry extra baggage which you should be very aware of. Condo construction is typically superior to apartment construction, and some apartment buildings may have more shared systems such as plumbing and HVAC as compared to condos. Also be cautious of small condos (few units) since there is little room to spread out financial challenges such as delinquencies and lawsuits. 

@ Terry Lao,

If the $695 assessment is per building which are 4-plexes, that is only $173.73 PUPM, and $1,400 per building equates to $350 PUPM. On a per unit basis, the $173.73 assessment seems low.

@ Terry Lao,

Is the HOA monthly assessment per 4-plex or per unit? If the assessment is per 4-plex, $695 is low and $1,411/month isn't alarming. If $1,411 is per unit per month (PUPM) then I'm not sure what is happening in your community. Nevada has strict Reserve Study laws which require a Reserve Study every 5 years. I'm sure that the Real Estate Division has the power to fine for non-compliance. Nevada allows the HOA membership the power to reject the budget. However, I don't believe that the membership can reject the reserve contribution that is based on a current Reserve Study. Obviously this is a problem since the community doesn't have a current Reserve Study. While it is easy to try to place blame on the Management Company, the ultimate responsibility lies with the Board, and as you have described, the situation sounds like a faulty Board. No Reserve Study and no assessment increases is a telltale sign of a faulty Board.

@Diane Tycangco, all things are possible. However, buy-in by most owners (and mortgage holders) would make tearing down and rebuilding a challenging and probably unlikely proposition. The whole process would be messy and leave owners in limbo for years. Large scale reconstruction is another, and more likely, scenario. Here again, owners will be in for a challenging and expensive couple years as the reconstruction project moves from concept, through funding, and finally to completion. Funding will either come from large special assessments (perhaps many $10's-of-thousands per owner) or through an association bank loan with hefty repayments. The way some association loans are structured, owners might have to make good on their outstanding balance if they sell. Many associations avoid the loan by special assessing their owners and letting the owners draw their own loans if needed.

@Diane Tycangco, there really is no reserve "supposed to be amount", but I'd suspect that the reserve contribution needs to be north of $125/month (hard to say lacking adequate knowledge of the project). Providing that the Reserve Study was competently produced and is current (should be current in California since that is the law), take a look at the 30-year funding plan paying close attention to the direction of the annual reserve contribution and whether there are any surprises such as future special assessments, bank loans, or large contribution jumps. A "well behaved" reserve funding plan will grow by a smooth percentage rate year over year which should be near inflation. Assuming a 2.5% long term inflation rate, a reserve funding plan that grows at no more than approximately 5% annually is probably okay if there aren't additional special assessments or bank loans. Don't fixate on the current "Percent Funded" level which means very little, but here again, look to see what the Percent Funded trend line is over the study's 30-year span. I wouldn't be surprised if the current Percent Funded level is low but, hopefully, on an upwards trajectory in a relatively short time span such as 5 to 10 years. To recap - know what the Reserve Study projects for the future and don't just analyze today's figures.

Even ignoring regional differences, there is no magic rule of thumb percentage for reserves. If your new acquisition needs re-roofing soon, the roof alone could consume much of the rental income. The project needs to be broken down into components with cost and remaining life assigned to each component. After the component inventory is established, a reserve funding plan can be generated. Your risk tolerance and financial resource depth will determine how much should be reserved. It is also possible that financing may also play into the reserve funding equation. The best answer is a Reserve Study.