Should I still buy if it has low condo reserves

[sbin]

Hello again,

I`m looking at this condo, the price is very good all things considered. But upon examining the condo docs and financial reports. This 71-unit condo only has about 100k in reserve. And have been losing 20k/year since it`s condo conversion in 2007 (before that it was a rental apartment).

The condo docs says it`ll be able to make up for the deficit in 2020. Everything else looks okay, no immediate repairs are needed. the condo is built in 1980.

Any input is appreciated!

 

[rforgiel]

The reserve fund study should give you an amount that should be held in reserve by year and the amount each unit holder should be paying for the condo to be self sustainable.

If those numbers are on track look at your inspection report and hopefully your inspector looked at the whole complex and not just your unit. Are there any maintainance items that look like they are coming (roofs, parking lot paving, etc.). If so are they budgeted for in the reserve fund.

If the reserve is being run down. Why is this. They must be doing some repairs and maintanence. Are they spending the money on what has been specified in the reserve fund.

Lawyers are usually good at looking at the status certificate documents and advising if the budget, rules and reserve look to be in line.

If the fund looks low you will need to determine if it is still a good price with a special assessment.

 

[EdRenkema]

Ramon is correct, keep in mind one thing - what is the monthly condo fee compared to similar units?
If it is low, expect it to rise incrementally over the next 3 to 5 years. $100K reserve is not bad depending on the updates required.
Will the unit still cashflow with a $50 per month (or more) increase in the next several years?
What is the age and condition of the unit?
Talk to other owners and members of the board to get a feel with how the board manages the complex.

 

[Sherilynn]

Greetings.

If they have only $100k in reserve and a deficit of $20k/year, they will run out of money very soon unless they hike condo fees. You are looking at an average increase of $25/unit/month just to eliminate the deficit. And they will need a further increase to build the reserve.

I am confused by the condo docs saying they will "make up for the deficit in 2020." What do they plan in the meantime?

Regards,
Sherilynn

 

[Thomas Beyer]

QUOTE (sbin @ Apr 16 2010, 05:53 PM) Hello again,

I`m looking at this condo, the price is very good all things considered. But upon examining the condo docs and financial reports. This 71-unit condo only has about 100k in reserve. And have been losing 20k/year since it`s condo conversion in 2007 (before that it was a rental apartment).

The condo docs says it`ll be able to make up for the deficit in 2020. Everything else looks okay, no immediate repairs are needed. the condo is built in 1980.

Any input is appreciated!

this may or may not be too low .. what are the conditions of the main common elements like: roof, boiler, hallways, balconies ?

many conversions are underfunded or under-upgraded .. be careful !

What is the price you`re paying ? what rent ? what city / area ?

How much is the condo fee/month and how much of it goes to reserve fund ?

 

[sbin]

QUOTE (Sherilynn @ Apr 21 2010, 10:06 AM) Greetings.

If they have only $100k in reserve and a deficit of $20k/year, they will run out of money very soon unless they hike condo fees. You are looking at an average increase of $25/unit/month just to eliminate the deficit. And they will need a further increase to build the reserve.

I am confused by the condo docs saying they will "make up for the deficit in 2020." What do they plan in the meantime?

Regards,
Sherilynn

the condo fees are 230/month right now, and in the condo docs, it says for the next assessment (2012-2017) there should be a $50/unit/month increase for reserve funds, in order to make up for the deficit.

 

[sbin]

QUOTE (ThomasBeyer @ Apr 21 2010, 10:44 AM) this may or may not be too low .. what are the conditions of the main common elements like: roof, boiler, hallways, balconies ?

many conversions are underfunded or under-upgraded .. be careful !

What is the price you`re paying ? what rent ? what city / area ?

How much is the condo fee/month and how much of it goes to reserve fund ?


thanks, the developer renovated the common places before conversion, so its done. underfunding the condo is the main concern I have, but this condo seems to be in good-okay shape considering its built in 1980.

this condo near the new century park LRT in edmonton (5min bus ride), so SW area. its currently rented out for $1000/month. and the price was 149k, with condo fee 230/month currently.
149k with 20% down, variable @ 2.0 for 25 years is around $400 + 230(condo fee) + 130(property tax) = 760/month. even if the condo fee of 100/month, i should still cashflow at least 100.

Thanks!

 

[Thomas Beyer]

QUOTE (sbin @ Apr 22 2010, 02:35 AM) thanks, the developer renovated the common places before conversion, so its done. underfunding the condo is the main concern I have, but this condo seems to be in good-okay shape considering its built in 1980.

this condo near the new century park LRT in edmonton (5min bus ride), so SW area. its currently rented out for $1000/month. and the price was 149k, with condo fee 230/month currently.
149k with 20% down, variable @ 2.0 for 25 years is around $400 + 230(condo fee) + 130(property tax) = 760/month. even if the condo fee of 100/month, i should still cashflow at least 100.

Thanks!
Question:

I assume this is a 1BR ? Is $1000 rent sustainable ? sounds high !

Or is it a 2BR .. as condo fees for a 2BR would be 280 to over 300 usually .. so if a 2BR condos fees are too low and will go up soon !

How many sq ft ? balcony ? new interior ? have you seen it ?

 

[bizaro86]

QUOTE (sbin @ Apr 22 2010, 03:35 AM) thanks, the developer renovated the common places before conversion, so its done. underfunding the condo is the main concern I have, but this condo seems to be in good-okay shape considering its built in 1980.

The developer doing a conversion always renovates the hallways, because everyone notices that before they buy. The deferred maintenance that can bite you with a condo is things like the boiler, roof, windows, siding, balconies, and parking structure/lot.

It is not always obvious whether these items have been well maintained, because some of them are out of sight. But they can be significant expenses for the condo corp if they need replacing.

Michael

 

[Demerara]

QUOTE (sbin @ Apr 22 2010, 03:35 AM) thanks, the developer renovated the common places before conversion, so its done. underfunding the condo is the main concern I have, but this condo seems to be in good-okay shape considering its built in 1980.

this condo near the new century park LRT in edmonton (5min bus ride), so SW area. its currently rented out for $1000/month. and the price was 149k, with condo fee 230/month currently.
149k with 20% down, variable @ 2.0 for 25 years is around $400 + 230(condo fee) + 130(property tax) = 760/month. even if the condo fee of 100/month, i should still cashflow at least 100.

Thanks!


Are you sure about the $400 mortgage obligation? It would be over $500 payment (P&I) with your 20% down leaving $120,000 to be mortgaged. Are you looking only at interest costs? Your cash flow projection becomes tighter with this increase in payment plus the expected increase in condo fee.

 

[Mecheng]

QUOTE (Demerara @ Apr 23 2010, 09:05 AM) Are you sure about the $400 mortgage obligation? It would be over $500 payment (P&I) with your 20% down leaving $120,000 to be mortgaged. Are you looking only at interest costs? Your cash flow projection becomes tighter with this increase in payment plus the expected increase in condo fee.

I agree, from the RBC mortgage calculator this $119K, 25yr arm, @ 2% variable will be ~$505.
If rates move up to 4% in the next few years your looking at ~$630 debt service + $230 condo fees + 130 taxes = $990.
So you have $10 bucks for insurance, vacancy, maintainance, ect., if they don`t raise the condo fees.

Quick analysis usign 50% rule at $1000 rent is $500 for expenses (all inclusive) and $500 for debt service.
With your 20% down you are already -$5 cash flow and cannot support any intrest rate increase above 2%.
As for the expected increase in condo fees, its likley all out of pocket.

 

[Sherilynn]

Have you seen other units in the building? In our building, all of the units that I saw had been renovated before conversion, but the tenanted units were completely original. Many buyers upgraded their units, but some did not. So we have an interesting mix of great tenants and the not-so-great. Next thing you know, your newly-renovated common areas look like crap.

Regards,
Sherilynn