Sunday, June 14, 2009

How are Condo Fees Determined?

How are Condo Fees Determined?

Monthly fees are calculated by creating a budget for the condo association. The amount each unit has to contribute to the budget is determined by multiplying the amount of the budget by the percent interest that the unit has in the association (usually found on the unit deed), then divide the result by 12 to get condo fee due each month.

The budget is made up of all the costs associated with running the association and the property. This could include master insurance, water & sewer charges, common electric, landscaping, snow removal, cleaning of the common areas, payment to a property management company, etc. What is included is really determined by the type of building, numbers of units, and by the trustees of the condo association. Smaller condo buildings such as 2-4 family conversions may not budget any funds for landscaping, cleaning or management, preferring to save money and take care of those items themselves. In larger complexes there may also be costs associated with fire systems, elevators, swimming pool maintenance, etc. There is also a portion of the budget that is given towards the reserves of the association. The reserves cover any high cost, long term maintenance items such as painting, roof replacement, re-pointing a brick exterior, etc., and also to cover any unexpected repairs/costs.

When you place an offer on a condominium there are some things that you should request from the listing agent or condo trustee. These are copies of the Master Deed, Declaration of Trust, Rules & Regulations, Budget, and the minutes from the most recent association meeting. Condo associations are required by Massachusetts law to meet at least once a year, but many smaller associations do not take notes or minutes of their meetings, so this may not be available.

The reason for reviewing the minutes of their meeting is to make sure there are no pending issues with the association, or any upcoming special assessments. Special assessment are fees charged to each unit for items not covered by the budget. This can happen if the association does not budget enough funds towards the reserve each year, or something unexpected needs to be repaired/replaced. A special assessment can be a small amount such as a couple hundred dollars, or can run into thousands of dollars. Payments on large special assessment are typically broken down over a period of months or years, but again depends on the association. If an association is well run, there should never be any large special assessments.

While on this subject, you should also ask a couple other questions.
Is the condo association involved in any pending litigation?
What is the percentage of owner/occupants in the condo complex?

Both of these could affect your chance of getting a mortgage approved for the condo. The bank usually does not want any large lawsuits pending because it could result in the association having to pay for any settlement not covered by insurance. In regard to the owner/occupancy, most mortgage companies will not finance any condo in a complex that has less than a 51% owner occupancy rate. That is, no more than 49% of the unit can be rented out. Many banks have even more strict requirements. It just make for a better condominium environment when a complex has a high number of owners actually living in their units.

Do not let any of the aforementioned issues sway you away from buying a condominium (which includes townhouses and lofts). The majority of condo associations are well run, even when self-managed. Condos are perfect for the home buyer who does not want the responsibility, or have the time to maintain the building, cut the grass, etc. They are also typically priced lower than a single family for the same amount of living area.

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