One of the attractions of living in a condominium is the freedom from exterior maintenance, such as mowing lawns and cleaning pools. Community amenities like clubhouses and tennis courts offer additional recreation and entertaining options not always possible in a single-family home.
If the homeowner's association (HOA) fees seem reasonable, a prospective homebuyer might stop researching right there; however, additional due diligence could avoid headaches. It's essential to understand how the association manages unexpected and significant costs on top of monthly HOA fees, more often and accurately referred to as condo fees. A special assessment for a condo can be a frustrating surprise for Massachusetts home buyers.
Understanding a Special Assessment for a Condo?
Monthly condo fees pay for regular maintenance of the property. Occasionally, large projects come up, such as replacing roofs or paving parking lots or dealing with catastrophic weather damage not covered by master insurance. To finance large projects, the condominium association will assess a portion of the expense to each unit owner. The homeowner may easily absorb smaller special assessments, but extraordinary expenses can be a financial nightmare.
HOA vs. Condo Association
It's important to note the difference between a condominium association and a homeowner's association in Massachusetts. Each homeowner owns their unit with a condominium, and they have a shared ownership interest in common areas. For example, a condo owner has joint ownership in the lobby of the building. Roofs and vinyl siding, for example, typically are maintained, repaired, and replaced using condo fees.
With an HOA, each member owns their individual property and their lot. The common areas are owned by the homeowners' association itself, meaning there is not any joint ownership interest in the common areas. A homeowners association might maintain a road, septic system, pool, and handle garbage disposal. Generally, a homeowners association in Massachusetts must file Articles of Incorporation with the Secretary of State to form an incorporated nonprofit, according to Pulgoni & Norton, LLP. A declaration and bylaws are written and used to manage the HOA and property. Nonprofit corporation laws apply to a homeowners' association, but the state Condominium Act does not apply.
How are Condo Fees Managed?
Typically, condominium fees are higher than necessary to cover regular maintenance so the association can build up a reserve fund. The reserve fund is a pool of money created to cover emergency repairs and future projects. A well-run association will generally have a healthy amount of cash from condo fees set aside for unforeseen situations and cost overruns on planned improvements. On the other hand, condo unit owners cannot take their share of reserve funds when they sell their units, so most don't want too much money sitting in a reserve fund.
Unit owners run some condo associations, and professional property managers manage others. Regardless of who manages the association, sometimes the property and condo fees are mismanaged, causing financial woes.
Related: How to Buy a Condo in Massachusetts
How Does a Homeowner Pay Assessments?
The condominium trustees will meet to determine the total cost of the special assessment. Unit owners will pay an amount based on their percentage share of ownership. As part of the trustees' decision, they will establish a payment plan. The association might issue a single bill for smaller assessments. More significant assessments will likely be split into monthly payments and paid over a specific period. Trustees will consider several factors before making a final decision about how to assess additional fees.
- What will be the total amount required?;
- How long will it take to complete the project?
- How much is needed immediately to start a project?; and
- How much money is necessary to keep the work moving along?
It's important to understand that there are no limits to the cost.
Can a Homeowner Challenge an Assessment?
While it is possible to challenge the fairness of the assessment, the chances are that you are contractually obliged to pay it. You will find the legal information in the declaration of trust, master deed, and any other condominium association rules and regulations that govern the property. These are declarations designed to protect property values and the quality of life for all residents in the community. When you close on your condo, you may be required to sign a document agreeing to abide by the association rules. You may challenge assessments in a court of law. If you lose, though, you might be paying substantial legal fees in addition to the original assessment.
How Can a Homeowner Prepare for Special Assessments?
The best way to prepare for the unexpected is to build your cash reserves. You can build up cash reserves by contributing to a savings account monthly and tap into it only when needed. Your funds will take care of the smaller assessments that crop up periodically. You may want to consider loss assessment coverage as an addition to your homeowner's insurance policy for a small additional cost to your premium.
Loss assessment coverage is an optional endorsement that you can add to your homeowner's or condo insurance policy. It helps protect you if you live in a shared community, like a condo or HOA, where you're responsible for a portion of damage or loss in a common area. Loss assessment coverage can help pay for liability costs (visitor sustains an injury in a common area), medical expenses, and property damage (fire at the clubhouse). The condo association will have master insurance, but, for example, damage to property or medical bills might exceed coverage limits. Loss assessment coverage doesn't help pay for property improvements, such as paving roads or putting a new roof on a clubhouse.
It's also essential to maintain your community involvement by attending condo trustee meetings and reading newsletters and announcements. Remember that special assessments are part of the ongoing governance of the trustees elected by the community. As a community member, you should carefully consider those running for office and for whom you will vote. If you feel qualified, you may want to consider running for a position with the condominium association.
How do Condominium Special Assessments Affect Property Sales?
First, your real estate buyer agent should ask the listing agent who represents the seller whether there are any outstanding special assessments or any under consideration. Of course, there are additional questions to ask when buying a condominium. Unless there are agreed-upon terms in the offer to purchase or the purchase and sale agreement, a seller might expect a homebuyer to take over monthly special assessment payments. Whether the seller disclosed the assessment in a listing sheet or otherwise might be a factor when considering responsibility. On the other hand, the seller should be responsible if a single payment assessment is levied and due before closing, regardless of whether work has started. Special assessments issued after the closing date are the new owner's liability. Homebuyers and their real estate agents should not make assumptions but ask questions to avoid surprises.
Related: The Ultimate Massachusetts Homebuyer Checklist
How Can You Know if the Association is Fiscally Prudent?
Before you purchase a condominium or any property managed by an association, it's essential to review the organization's financial statements. The first thing to look for is the reserve fund. Suppose there isn't a reserve fund or it's inadequately funded. In that case, you might be in store for a special assessment or an increase in condo fees. Sometimes an outside management company or the trustees, with the help of an accountant, will determine the appropriate amount held in a reserve fund. A comprehensive financial report might have recommendations based on cost projections for meaningful projects over several years.
Reviewing the financial statements for the last few years may also reveal whether the association has a history of frequent special assessments. If so, that's an indication of poor financial management, which should cause a potential homebuyer to pause. A special assessment should be a last resort, not the usual method of operation. Mortgage lenders typically want to see at least 10 percent of the annual expenses held in reserve.
What About Catastrophic Damages?
The reserve fund may be sufficient to cover anticipated repairs, but not catastrophic damages caused by a storm or significant claims from a personal injury. If that's the case, condominium owners should consider whether the master insurance policy is adequate to cover extraordinary damage to common areas or severe injury to one or more people. A unit owner might need additional personal coverage too. (See loss assessment coverage above). The condo association or HOA may have selected insurance with a low premium but a high deductible to save money in the short term. Without enough money in the reserve fund to pay for catastrophic damages or claims, homeowners can expect a special assessment down the road.
Are There Other Red Flags Homebuyers Should Investigate?
Take a careful look at the condition of common areas. You may not be interested in using a clubhouse, playground, or tennis court. Notwithstanding, you're still paying your share of upkeep as a community member. Are the clubhouse furnishings worn, or does the carpet need replacing? Is the roof leaking, or does the pool show signs of poor maintenance? Lack of attention to common area issues can indicate that the condo association is running low on funds.
Are There Other Records Homebuyers Should Inspect?
Condo associations are required to hold regular meetings and record minutes. A review of those documents will reveal the topics discussed. These topics will include maintenance issues and community problems. The minutes should indicate how trustees resolved issues and determined special assessments. Homebuyers should ask if association or management newsletters are available for review. Sometimes bulletin boards in common areas, such as a clubhouse or laundry area, might contain notices about maintenance or safety issues.
It's impossible to guess what issues might arise in the future that will require special assessments; however, homebuyers can protect themselves with a little bit of research. Then some careful planning can limit how unexpected costs will impact your personal finances.