It is a pleasant surprise when you reach into your pocket or purse and find a couple of $20 bills you forgot you had? Those are the type of surprises we wish happened more often. There are, however, surprises that we can do without, mainly if you are a condo or co-op buyer. In many instants, sellers hide costly repairs that the building plans to undertake. They hope the new buyer will be stuck with the bill after the property is sold.
Often these repairs are quite costly. The new condo and co-op owners will be “assessed” to pay for them. No buyer wants to open their mail, shortly after moving in, to see a $10,000 assessment to redo a roof or repair the elevators. If buyers knew this beforehand, many would walk away. Others will demand a major price reduction. It’s little wonder that sellers want to keep this stuff under wraps.
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What is a Special Assessment?
A special assessment is when a board typically levies these charges to pay for a significant project or repair. While no one likes to pay extra, you should understand the board’s options and why they are undertaking this one. Nasty surprises await condo and co-op buyers who don’t do a little detective work.
An Assessment Bushwhacking
New buyers who get bushwhacked by “surprise” assessments usually have only themselves to blame. The law says sellers must provide “full disclosure” about their property before a sale. However, many will not mention an upcoming assessment, assuming, that is, they know of it themselves. It’s up to the buyer to do their due diligence and find out if a nasty surprise awaits them after the closing.
This is particularly true in cities like New York. Where a large percentage of the housing stock consists of condos and co-ops. New York, in particular, is prime territory for assessment bushwhacking because it has a lot of aging buildings, many in need of costly repairs.
A Board’s Basic Options
A board has either decided to undergo a significant project; or circumstances dictate it, such as the need to undergo a large repair, such as a new roof, boiler, or façade. One way for your co-op or condo board to handle it is to have a reserve fund. This helps you budget your money better since the board has anticipated these needs and put aside money for large capital projects. Of course, you have likely paid extra monthly charges for the board to accumulate this fund.
The Board could also implement a special assessment. In this case, the project’s cost is typically allocated among the co-op’s shareholders based on the number of shares owned, or a condo’s unit owners. While it is usually paid over some time, the board could decide not to have an end date or impose a lump sum on the shareholders/owners. The board may choose the latter, even though it imposes a greater hardship if the work needs to get done urgently.
A Tax Break
An assessment used to fund capital projects adds value which is added to your original cost. When you are ready to sell, this lowers your capital gain, if you are fortunate enough to sell at a higher price than you paid.
However, should this fund operating expenses, this does not get added to your cost basis.
Less Appealing Choices
Aside from the two options mentioned above, a board may decide merely to increase the monthly maintenance or common charges. Generally, they are loath to do so since these are permanent. This causes the resident’s ire to go up and could hurt the resale value since prospective buyers compare the regular monthly charges across the different buildings.
The board could choose to borrow the funds to pay for the project. This could hurt the building’s financial position and may delay the day of reckoning, however.
You Have a Say
While certain repairs are unavoidable, as an owner, you have a voice in these matters. For instance, you can bring up a less expensive option. If the board is imposing a special assessment to fund an operating shortfall, you need to question the board’s financial acumen. Specific projects are discretionary, ostensibly done for the residents’ enjoyment. Depending on the cost, you can voice your opposition to the board.
When There is a Sale
If you are contemplating a purchase, your lawyer’s due diligence includes reviewing the financials and board minutes, which should help you understand whether or not the building’s finances are stable.
During the co-op or condo buying process whose board has already implemented a special assessment, you should know this is open to negotiation, meaning that you are not necessarily stuck paying the extra amount.
Become a Detective
There are several ways buyers can uncover pending building assessments. Buyers have to put on their Sherlock Holmes cap and do some digging. The first thing to do is to take a close look at the building itself. Does it look rundown and not well maintained? Is the lobby furniture dog-eared? Is the exterior in need of cleaning or a paint job? These sure signs that either the building is being neglected or that the current board of directors is not charging owners enough in monthly maintenance fees to maintain the building properly. If this is the case, you may get whacked twice. Once for an assessment and another in increased monthly maintenance fees.
A little personal sleuthing can uncover upcoming problems as well. If the building has doormen, ask them about the place. These guys know everything. They know if elevators are always out or if people are complaining about the heating system. They are typically the recipient of tenant complaints.
Tap the Gossip Channel
If you know other owners in the building or have a friend who does, they are a great source of building gossip. People often talk about problems within the building. Current owners have access to building newsletters,
Hire a knowledgeable buyer agent and lawyer
Perhaps the best way to determine if an assessment is pending is to hire a seasoned real estate agent. They usually know the right questions to ask and can research the history of the building or may have had the experience of working with the building before.
Some states; including New York; but not California; require that a lawyer is involved in this transaction. An experienced real estate lawyer will sift through the building’s financial statements to see if any red flags are indicating future repairs.
Check the Reserve Fund and Boardroom Minutes
These financial documents also show how much there is in the building’s reserve fund. These funds exist to cover unforeseen expenses. Many buildings underfund their reserves, so when something breaks down, the only way to pay for it is to assess owners.
A lawyer also can examine the minutes of the building’s annual board meetings. This often reveals persistent problems or upcoming maintenance projects. Buyers usually have five to seven days after the offer has been accepted to conduct this sort of due diligence.
It is never a bad idea to hire a lawyer, even if you’re not required to do so. Buying an apartment is likely a person’s largest single financial transaction. Nobody wants to find something costly was overlooked after the closing. When agents and lawyers work together as a team, it can only benefit the buyer.
Sellers Almost Always Hide Problems
Most condo and co-op sellers won’t hesitate to put a potted plant over a scuffed-up floor to hide a blemish. Others have no problem hanging a picture over a hole in the wall put there by a hockey puck gone astray. And some will go to great lengths to keep upcoming owner assessments from coming to light before the ink dries on the sales contract.
It’s left to buyers to uncover these omissions.