Jul. 19, 2009 - Condo Resale Certificate Review

Reviewing the Condo Resale Certificate - A Workshop Post

The "condo" development I am looking at today has slightly over 200 units, and those units are side by side townhomes. The townhomes were built between 1995 and 1997, and there is no clubhouse or pool. What I am looking for IN the Resale Certificate is governed by the major components of the total community. Reviewing a Resale Certificate without having seen the townhome complex as a whole, is not as good as knowing in advance what you are looking FOR vs. AT.

The packet is usually between 2" and 5" thick. Remember, this is a RESALE Certificate, so this is not how you conduct a condo new construction review.

I am the Agent for the Buyer. If I were the Agent for the Seller, I might look at a few things differently. WHO I represent when looking at something, influences what I am looking for. From a Buyer's point of view I am projecting forward, more than when I am looking at a Resale Certificate from a Seller's point of view. That goes without saying, I think, but just in case - worth mentioning.

1) The first thing I do is grab the small 5 page or so document that was especially prepared for this buyer shortly after the buyer and seller signed this specific Purchase and Sale Agreement. These numbers are as of NOW, for the most part, and so the most relevant.

For instance The Balance Sheet might seem most important, but it is as of 12/31/08. The information in the form titled "Washington State Condominium Resale Certificate" (in this case) has the most current and relevant info. The main reason you review this first is, if there is something there that strongly suggest you wouldn't want to buy in this complex, you are done. You cancel based on the Resale Certificate and go find a different condo in a different complex to buy. So to avoid wasting your time...start with the most current and relevant data.

A quick review shows me:

1) There are amazingly few delinquencies. Over 200 townhomes and less than 2 months of dues in arrears. That is beyond good. Looks like 1 person is 1 month behind, plus a penalty fee for being delinquent. In today's economic enviroment, that is astoundingly good and somewhat unexpected. Makes me wonder if Uncle Guido is their dues collection enforcer. THAT good :)

2) The document confirms that there are no Special Assessments. Don't rely on the property Listing Information in the mls in that regard. Always look for special assessments in the Resale Certificate. Big Red Flag here...determining if FUTURE Special Assessments might be an issue, is much more difficult, and not in this step #2 of the review of this form, but hugely important. In fact, likely the biggest mistake that condo buyers make is taking everything at "face value" in the Resale Certificate, and not adequately ascertaining if future Special Assessments are imminent, though not yet identified as such.

3) I skipped "current monthly dues" above, as most times you already know that before you make an offer to purchase the townhome. A quick glance so see that the regular monthly dues are "as expected" takes about two seconds. Important, but the instances where that is not the case are very small, particularly in July. Most times when they are higher in the Resale Certificate, it is due to a recent change since the property was listed for sale. Most increases happen on 1/1, so this will often happen if the property is listed in December. It can also be the case if the condo has been on market for many months, and a change happened during the term of the listing.

4) Amount in Reserves - This is probably the most important number, and yet the most difficult to determine as to sufficient or insufficient. In my opinion, no one who has not seen the complex can adequately advise regarding this all important aspect of The Resale Certificate. Hiring someone to Review the Resale Certificate for you, who has not seen the complex ever, is pretty much a waste of time and money. If they have the full and complete Reserve Study (not just the summary page) maybe...but rarely does a Resale Certificate have the Reserve Study, or even the relevant portions of the Reserve Study, as they are not required in WA to be in the Resale Certificate. There is a recent law compelling a complex to DO a Reserve Study, but not yet one requiring the Summary Page be IN the Resale Certificate, to the best of my knowledge. Even if you have the Summary Page or even full Reserve Study at your disposal, but have not been to the complex, that is only 80% OK. Reason being, the Reserve Study may have missed or misrepresented the cost of a Major Component of the complex (and that is often the case).

Parts of the package I do not review as the agent for the buyer, unless there is a reason for me to do so, are listed below. I expect the buyer to very carefully examine the House Rules. I only look at House Rules if my client had a parameter that included something that may be prohibited by the House Rules, such as pet issues. If I have no such issue to look for, then the buyer is to review the House Rules on their own, as I have no basis for judgment of which House Rules they may have a personal issue with. 

1) Condo Owner's Association Management Agreement

2) Condominium Declaration

3) By-laws

4) Full Master Insurance Policy

(I do look at what is called "The Dec Page" which is a brief declaration of basic coverage. In this one I see a $5,000 deductible, which is twice as good as I expected, so OK on that and I look at the Earthquake deductible of 10% which is 30% better than I expected, so OK. I expect a $10,000 deductible on general claims and a 15% or more deductible on Earthquake. So $5,000 and 10% is good.)

5) Big list of unit nos. and addresses

I do glance at the financial statements, and look more closely when I am not happy with the total amount held in reserves. All HOA dues break down into X dollars for Operating and X dollars for Replacement Reserves.

Operating tells me they have a surplus operating net income. So OK. I note that the largest single expense is landscaping and the second largest is insurance.  All OK

This is a particularly well run community with what appear to be adequate reserves. Since there is no Reserve Study, I will make an appointment with the management company to review the Reserve Study in detail. I also have a few questions regarding a current replacement project, and the information in the Resale Certificate does not match what the agent for the seller said and what the Form 17 said. That is reasonable, as most owners know "a story" that is either true or not true, when it comes to what repairs are being done in the complex. The facts need to be checked and the only info you can rely on is the info that comes from the Management Company, not the unit owner. I am making copies of a few things that I need to double check on next week. 

The unit owner needs to be accuarate as to what he owns singularly, and the Resale Certificate has to be accurate as to what the unit owner has an interest in with regard to common area and overal complex management, repair and maintenance.

I glance through the minutes for red flags, but expect the buyer to carefully read all of the minutes in the Resale Certificate and note any questions that they may have.

I now deliver the Resale Certificate to the buyer for his review. My review is complete except for a couple of questions I need to address with the management company regarding the Reserve Study and current repair project.

If this were a different buyer and or a different complex, I would likely have different steps, so I will try to do a workshop post each time I review a Resale Certificate, so people can see the various issues one might look for during their review.