Jan. 15, 2006 - Are your HOA dues too low? Too high?

$120, $175, $200, $240, $295, $315, $375, $425

Most buyers and owners of condominiums use the Goldilocks Rule of Thumb with regard to their monthly HOA.  This one feels too low to maintain the property, this one feels too high for my budget, this one feels just right.

Of course I don't know anyone who loves the math of condo dues like I do, so I'll try to keep it short.  You have two components to your condo fee.  The first is your operating budget and the second is your replacement cost.  The operating budget is spent every year and the replacement cost is either used to replace something or put into the Reserve Fund. 

Operating budget is easy.  You look at last year's bills.  You look at the place and see if you are happy with the level of everyday maintenance services.  You decide to hire a better landscaper at a higher price.  You add that to last year's costs.  Now you have your total annual operating budget.  Let's say that is $12,000 and you have 10 units.  Each unit pays $1,200 a year or $100 a month for the operating budget.  That's simple enough. 

The hard part that is rarely done well is the Replacement Cost/Reserves portion that you add to that $100.  It goes like this.

A new roof costs $200,000.  The "life expectancy of the roof is 20 years.  So you need to collect from the owners $10,000 each year so that in 20 years you have the money for the new roof without a special assessment.  You need to paint the exterior every 10 years.  It costs 60,000 to paint the exterior.  You need to collect $6,000 each year from the owners so that you will have $60,000 in the Reserves to paint the exterior in 10 years.  If you do the math and divide each annual amount needed by the number of units, you are doing it right.  This way if you live there 5 years, you have paid 5 years toward the roof replacement, your fair share, and 5 years toward the painting of the exterior, your fair share.  You do this for every "major component" that is in the complex.  Total cost to replace or repair divided by years of life expectancy divided by owners.  You take that total monthly needed from each owner and you add that to the operating budget monthly noted above.

$100 for operating plus $100 for replacement/reserves equals a $200 a month fee.  For most complexes that is about right.  If your dues are only $140 a month you may say GREAT!  until the big special assessment comes around or you can't sell your condo for a good price because it has tons of "deferred maintenance".  If you say I don't care what happens in 10 or 20 years, let the owners of that time worry about it...well, that's why we have some ugly looking condo buildings built in the 60s and 70s that are not appreciating at the same rate as the neighborhoods in which they are located.

When you buy a condo, you get a "resale certificate" that you check to make sure that Association is doing this right.  Be prepared that most aren't doing it exactly right, but make sure you understand it enough to know what your are buying.  I do check these for my clients and with my clients, but you can't rule out every condo that doesn't do this exactly right.  If you know the errors, you can run for the Board and help move things in the right direction.  Or you can just be prepared for a special assessment if you know the roof needs to be done next year (from the Reserve Study, I will explain in a separate entry) and Reserves are not sufficient to cover the costs.  Condos with elevators need higher reserves than condos without elevators, and should accordingly have higher dues.

I will go into this more, maybe highlighting some real numbers from some real buildings in the area.