Buyers Blog Update 02/01/2022
This article assumes that you will be obtaining a mortgage to purchase your condo or house in an association. The Project Information Form, known in Hawaii real estate lingo as the RR105c, and the Association’s Financial Statements include the condo and/or neighborhood associations’ financials.
The Project Information Form includes the following information:
- Managing agent name.
- The number of units and types of ownership.
- The number of owners delinquent on their maintenance fees.
- The total amount of delinquent maintenance fees.
- Leasehold and Fee Simple status of the property and association’s involvement in leasehold related activities.
- Presence of time share or hotel activities.
- Known hazards.
- Insurance covering common elements.
- Expenses included in the maintenance fees.
- Increases in maintenance fees.
- Special assessments and owner payment options.
- Planned major repairs to common elements.
The Associations Financial Statements consist of a balance sheet, an operating income statement, and a reserve income statement.
The balance sheet reports how much money the association has in the bank to maintain the assets under management and the value of the assets under management. The balance sheet helps show the long-term financial health of the association.
The operating income statement shows the financial short-term health of the association. Does the revenue from maintenance fees and special assessments pay for the payroll, materials, services, insurance, and taxes needed to maintain the common elements? A net loss shows the association is keeping maintenance fees artificially low, and failure to address the issue with fee increases will result in the eventual need for a special assessment or obtaining a loan.
The reserve income statement shows the financial long-term health of the association. Does the association have enough money on hand to fund the capital projects needed to repair wear and tear on the common elements? Some condominium or neighborhood complexes can and do ignore reserve management resulting in financial distress in the future. In extreme cases, financial distress results in failing infrastructure like reliably working elevators are no longer available, and closed amenities like swimming pools.
Reviewing the financials are essential to making sure you can afford the fees associated with the condo and neighborhood in addition to the mortgage you are obtaining. Both associations and your mortgage company can foreclose on your unit. Most foreclosures start out with the association taking possession of the property from the owner and then the bank or mortgage company taking possession from the association once the process plays out. Take the time to conduct your due diligence and ask questions and/or seek help if you do not fully understand what the financials are saying.