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Some Fiscal Warning Signs

November 01, 1998|KATHY M. KRISTOF

Are you among the 42 million Americans who live in a condominium, townhome or urban subdivision that's governed by a homeowners association, or among the millions more who plan to eventually buy one? Then you ought to get familiar with community association fiscal basics.

That's because your homeowners or community association can have a bigger impact on the continuing value of your investment than virtually anything other than a natural disaster. The association repairs and maintains common areas, ranging from pools and patios to roofs, parks and landscaping, and it has the right to levy monthly and "special" financial assessments against you and all other homeowners in the community it oversees.

If the group is poorly managed, underfinanced or prone to passing onerous regulations, your home can become an ever-increasing financial burden. If the association's rules or finances become bad enough, getting out can become virtually impossible.

What are some of the signs that current and prospective homeowners can watch for to determine an association's fiscal health?

* Reserves: Every homeowners association needs to have money to handle future large expenditures. Those expenditures will vary based on the complex and the number and character of the common areas. Consequently, there is no specific dollar amount an association should hold in reserve. However, what all associations do need is something called a "reserve study," says Donna Reichle, spokeswoman for the Community Assn. Institute, an Alexandria, Va.-based group that represents the nation's homeowners associations. What this reserve study does is spell out what the common grounds consist of, what repairs and replacements are likely to cost, when they're likely to be needed and how much the board needs to set aside today to take care of these future obligations.

The existence of a reserve study--and consistent funding of reserves according to plan--should be considered a good sign, Reichle says. If the complex has no reserve study or a consistent plan to handle long-term obligations, be wary.

* Monthly dues: Nearly all complexes charge monthly dues, which are used to handle regular maintenance of common grounds. Dues can vary from a few dollars a month to several thousand.

Watch for any major changes in the dues structure. Have dues jumped or dropped sharply lately? Generally, it's a good sign when dues are stable or falling. It's a warning sign if they are rising briskly--substantially faster than the rate of inflation.

* Special assessments: When a complex has inadequate reserves and dues to handle the repair or replacement of common areas, community boards often impose a special assessment. These commonly amount to thousands of dollars per unit. It's not uncommon to have a rare special assessment to handle unexpected damages caused by a natural disaster, if an association has had several special assessments in the course of a few years, it's a sign that reserves are inadequate.

* Master regulations: There also are social obligations involved with community living. These are spelled out in documents called the articles of incorporation; the bylaws; and the covenants, conditions and restrictions (CC&Rs for short). These documents say how your community association is organized, who can run it, how the association can invest its reserves, and what rules and regulations govern its operation. The CC&Rs go on to explain what residents may and may not do. In some cases, that includes spelling out where you may park; what colors you may paint your home; and whether you may have a pet or a satellite dish.

If these rules don't suit your lifestyle, don't buy. What do you do if many of these warning signs exist? If you haven't yet bought the unit, investigate thoroughly. Get the association's financial statements and copies of the minutes of the last several board meetings. The minutes can signal problems that have not yet surfaced in the financial reports. If the problems are serious, you may want to look for another home.

If you already own a unit there, you would be wise to get involved with the association's board. Go to meetings. Read the financial reports. Volunteer to help.

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