How can potential buyers determine the financial health of a COA/HOA?

Purchasing a condominium (or a home within a development that has a Home Owners Association) isn’t the same as buying an individual home without an association. Owners within the jurisdiction of a COA or HOA are bound by a formal contract or agreement with the association which allows for the collection of fees for maintenance, routine upkeep and special assessments.

While the process and timing may vary by state, prospective buyers are given access to an association’s financials. Sometimes the buyer gets them directly from the HOA, or they can also come from the seller. Additionally, as the prospective seller, every owner has the right to access the official records of the Association.

Typically, the information that is furnished will include yearly revenue from association dues/fees, the balance sheet, the reserve fund balance, notice of any pending lawsuits and information on recent assessments. It will also include the percentage of units are behind on their dues.

In some cases, a Condo Certification (also known as a Condo Questionnaire or Condo Cert) may be required by the buyer’s lender. Lenders and banks use them to assess the health and financial status of the association, to minimize their risk on the loan.

While it may not be easy for the average buyer to understand and gauge the association’s financial health, there are some warning signs and areas that bear attention.

1. Look for a steady financial picture. Large spikes and dips in spending are signs of instability.

2. Emergency borrowing and frequent special assessments are also red flags.

3. Buildings with a high percentage of renters can be a problem because non-occupying owners may not have the same incentives to maintain their property live-in owners.

4. Does the association have an adequate reserve fund? Well-run associations pay for a reserve study by outside specialists to determine if the association has enough money to cover long-term needs.

5. Delinquent dues/fees. What is the association’s delinquency rate? Delinquent amounts will show up in the association’s accounts receivable and are key to understanding the financial status.

Association experts use the following Delinquencies to Total Annual Assessments percentages as guidelines:
3% or less (Excellent)
4% percent (Very Good)
5% percent (Good)
5–10% percent (Serious)
11% or greater (Dangerous)

Note that many banks will not loan an association money for capital improvements when 8% of their units fall behind on payments.

When delinquency reaches 15%, buyers can no longer attain federally backed mortgages, which has been shown to cause property values to drop.

LM Funding provides funding solutions to condo and homeowner associations (COAs & HOAs) to recover delinquent association dues and guaranty future association budgets using proprietary technology.