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Small condo associations -- get your financial act together!

Posted by Rona Fischman November 8, 2010 02:00 PM

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Sam Schneiderman, broker owner of Great Boston Home Team (our Monday guy) writes today about resale problem for owners of small condo associations.

Condo associations that do not have their financial act together can cause problems for resales of individual condominiums in their building.

For those who don’t understand how condominiums deal with their financial responsibilities, here is some background:

Owning a condominium unit involves sharing responsibility with other owners for the parts of the condo property that are not individually owned by the unit owners. Usually, that shared responsibility involves providing for the upkeep and maintenance of a roof, building exterior, hallways, grounds and often, shared plumbing, electrical or heating system components.

Most condo owners pay a monthly fee into their condominium association bank account to cover those expenses, based on the projected annual budget of expenses for the building.

In the past, some smaller condominium associations (typically under four units) simply shared expenses and each unit owner wrote a check to pay their share of the expenses when due. While that worked in the past, recent changes in lending practices require condo budgets that show how condo fees will be allocated to recurring expenses (i.e insurance, water, snow plowing, etc.) and what funds will specifically be set aside as “capital reserves” or “replacement reserves” to pay for the upcoming replacement of worn building components.

Lenders are looking for the “reserve account” to be funded at with no less than ten percent of the condo fees.

The last few times that I’ve asked what a reserve account balance was, I found that I was being given the amount that was in the condo association’s “operating account”. What’s the difference?

An “operating account” is the account into which all condo fees are deposited. The recurring bills for the operation of the building are paid from the operating account.

The “reserve account” is a separate account into which capital or replacement reserve funds are deposited so that the funds will be there when needed to repair or replace a major building component. Typically, those funds are regularly transferred into the reserve account from the operating account.

A well funded reserve account and plan enhances the resale of individual condo units and reduces the likelihood that there will be a “special assessment” requiring unit owners to write large checks for building component replacements that could have been predicted and planned for ahead of time with a “reserve account”.

Condo owners, does your condo have a separate reserve account?

Does your association put at least ten percent of the condo fees toward reserves?

Would you rather pay a monthly condo fee or share expenses as the bills come in?

Buyers and agents, have you run into problems with associations that do not have separate reserve accounts?

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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Scott Van Voorhis is a freelance writer who specializes in real estate and business issues.

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