Ask Habitat: When Buying Apartment, Should I Ask About Building's Finances?
June 2, 2014 —
I’ve fallen in love with this fabulous, light-filled apartment, but my attorney is concerned about the building’s finances. Why should I care?
HABITAT SAYS: Buying an apartment is more than the home you hope to live in, it’s an investment in a vertical city. And like most cities, it has an operating budget that must cover its expenses. If your attorney is concerned about the building’s finances, you should ask the following questions.
One, does the operating budget cover the all the expenses required to run the co-op or condo? And two, is there a reserve fund, and if so, is it big enough?
The operating budget is funded by the monthly maintenance or common charges all owners pay. Sometimes a building will fall short, like when energy costs run higher than expected, and a board may impose an assessment to cover any shortfall. Assessments can be one-time, or in some buildings they are recurring. And some co-ops and condos have to deal with owners who are late in paying their monthly payments, or who fall severely behind. Both situations impact budgets, and can unbalance even the best of them.
Have Reservations If There Are Poor Reserves
The reserve fund is like a savings account. Well-run co-ops and condos have one, because unexpected events can occur outside of what has been budgeted for the year. It’s often used by co-ops and condos to pay for large-scale capital improvements. Most management professionals consider a reserve fund with one to three months’ worth of maintenance or common charges to be safe.
Banks who make loans to apartment buyers look at reserve funds closely. Rules are constantly changing, but today many banks won’t give apartment buyers a loan if the building doesn’t meet certain reserve requirements.
Balancing Should Be No Act
One of the most important responsibilities of a co-op or condo board of directors is to make sure that the association’s finances are balanced, and reserves are adequate. Each year the board makes a decision whether monthly fees need to be raised to cover expenses. Raising monthly fees is always a tricky proposition, and sometimes unpopular. But a building in good financial health will help support apartment prices, and the reverse is also true.
If your attorney is concerned, ask him or her why. There are many apartments in New York City to choose from, and because this will be one of the largest investments you will make, it’s important to pay attention to the financial health of the association. If it’s good, your investment will most likely be, too.
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