Got Condo Association Reserves?

I know. Your condo association budget is written on a cocktail napkin. There are three line items: Water and sewer, master insurance, and the holiday party fund. It’s been this way since 1980 when the building was converted, and the heating system that you still have (the one that now sounds like a team of extreme deathmatch kickboxing squirrels) was installed.

Friends. People. Condo associations: Lend me your ears. When I list your condo and sell it for more money than you dared to expect because I’m so darn good, the buyer’s lender is going to ask for the budget. It used to be that it was just the buyer that cared that you had no reserves to replace the roof that Fred Flintstone installed. Now the bank does too. And they definitely no longer want to see that 3 line budget with the coffee cup ring on it. The bank does not want to buy into that condo association.

In the past year and a half, mortgages have gotten more problematic. Honestly, it’s gotten a bit harrowing for buyers, with more and more documentation being required, even at the last minute. The loan is endlessly passed from origination to underwriting to proctology. Somewhat torturous to say the least. And it’s gotten a bit harrowing for sellers too. Not just because the buyer might not be approved, but because the association that the unit is in might not be approved.

Here’s what you can do to protect the sale of your property (and any property in the building), as well as your property’s value: Make sure that you show on your budget a contribution of 10% of the condo fees to reserve. That means that if you have, for example, a four unit association with condo fees of $250 per month each, you want to show that the association is budgeting $100 per month/$1200 per year to reserve.

That’s pretty easy, right? You probably won’t even be asked for an actual reserve balance, and you don’t necessarily even have to maintain a separate reserve account (unless you want your condo association to be approved for FHA mortgages…but that’s another story). All that being said, there is the possibility of being asked to produce a statement with a balance in the equivalent of 10% of your revenues on your operating account. Really, it’s not very much and I’m actually a little surprised that they don’t need to see more, but there you go. You really should maintain a reserve anyway.

Here is an example of what your budget should look like. Different banks like to see different things, but this should get you through the wringer without losing too much sleep. And if you contribute a little bit more to reserve, you could even use some of it to pay for that holiday party.