Condos in California are about to explode - the sad truth

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I have been in this industry a long time.  I wondered how long the No Doc loan scam was going to take before it exploded.  And, when it did,  wow! 

Condo/PUDs are next in my opinion.  Forever,  the law requires the seller to provide all the disclosure documents as required by California Civil Code 1368.  One of those requirmenet is a resonably competent analysis of what items in teh common area are going to require repair and replacement in the future.  Obviously,  all of them.  And, it is suppoed to be based on an analysis of WHEN it has to be replaced and the estimated cost at that future date.  This is typcally called a reserve study.  Many association,  even though required by law,  decide not to have one because of the expense. Although a problem,  that is not the major problem.  That is that HOAs are supposed to be using accural accounting for their reserves.  This means if the driveways and parking lot is going to cost $67,000 to replace in 2015, the Association by law is required to start collecting today,  so that when 2012 arrives,  there will be the money and no special assessment is due.  The problem is that too many associations are not collecting enough TODAY.  The reason is simple.  Boards or Directors are also homeowners,  so they don't want to raise their or other homeowner dues.  So,  many are underfuned,  way underfunded. 

The other problem is that even if documents are provided,  there is no state mandated requirement of uniformity in the method of disclosure.  So,  even if you get the docs,  it is very difficult to know how to understand them,  especially an uninformed buyer.  The Seller, not the HOA,  is required to make these disclosures by law,  so you can imagine that they add little to the process.  So,  one of the main questions that agents and consumers should be asking themselves is .......what is the % of funding of the reserves.  (I have seen them as low as 20%). 

It ultimately either drives down the price for knowledgeable buyers,  or burns the buyers in the future when the bill comes due.  Here's the truth.  Expenses will eventualy come due.  So,  in the case above,  if there are 100 units,  each unit's share is $6,700.  If the fund is 50% funded,  then each unit could legally be assessed 1/2 of the cost.  And,  assessments are due now.

So, instead of collecting a monthly charge of $2.80 per unit for the Parking lot,  some in the future is going to be stuck. 

Remember,  this applies to every part of the common area,  landscaping, sidewalks, sprinklers, roof, exterior of building, electrical, pook, etc, etc, etc.  So,  if you are selling or buying a unit,  look at the reserve ratio.  Find out total amount that is in arrears,  then divide by the number of units.  This will tell you how much the unit should be discounted to make up for the dues that have been kept too low on purpose.

This problem is not state specific.



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Guy Berry

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Comments (1)

Bill Carrington
Walker Realestate and Assoc; - Cupertino, CA

Thank You very much for releasing some of your vast knowledge of Real Estate, I really enjoy this site and the wealth of information on it.... hanks Again!!  Bill

May 24, 2008 01:11 PM

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