Condo-Buying Walkthrough: Condominium Fees
Condominium fees are monthly dues paid by each unit owner. The fees are commonly based on the percentage of the development that is owned by each owner. For example, the owner of a three-bedroom, 2,000 square feet unit will likely be assessed more than the owner of the two-bedroom, 1,500 square feet unit next door. Fees can also differ based on each unit's view, which floor the unit is located on, and so forth. The fees are used to pay for expenses such as maintenance of the common areas, property and liability insurance for the building's exterior and common areas, and certain utilities, such as the water or electricity used in common areas. Condominium fees generally do not cover insurance for individually owned units; each unit owner is responsible for securing adequate property and liability insurance.
Condominium fees vary based on the development and market. It is difficult to establish an "average" fee since many factors determine each development's fees. Developments with swimming pools, tennis courts, and fitness centers may have higher maintenance and liability costs and therefore higher condominium fees. Large, multi-level developments – with elevators, fire suppression systems, and extensive HVAC systems – may also necessitate higher condominium fees.
Prior to making an offer on a condominium unit, it is important to investigate the development's condominium fee history. The seller or the condominium association's treasurer should be able to provide several years of history so that buyers can review trends and find out how much the association has in its reserve fund. Potential buyers can also compare the development's fees to others in the area. If the fees seem too low, the development could be in disrepair, or it might not have enough reserves to handle unexpected maintenance expenses. Fees could also be low to entice buyers while the developers sell all of the units. Once the property is turned over to the condominium association, however, the fees could increase significantly.
In certain developments, condominium fees may be equal to or greater than the mortgage itself. It is important to find out why the fees are so high and to determine if the property is being efficiently managed. Costly repairs and replacements, for example, can often be avoided by simple preventative maintenance. Additionally, property managers may not be taking a cost effective and direct approach to contracting maintenance tasks. For example, a property management company might hire a property manager, who contracts with a pool maintenance company, which hires a foreman, who supervises the person or crew that cleans the pool. Each layer costs the association more money.
Reserves and Special Assessments
A percentage of each unit owner's monthly fees may be placed in the development's reserves. These funds are used to pay for non-routine expenses such as replacing the roof, painting the exterior or renovating a lobby. If the reserve fund is not large enough to cover these expenses, all unit owners may be charged a special assessment to help cover the costs.
Special assessments can range from about a hundred dollars to many thousands of dollars, depending on the special project. Rising insurance costs, too, can deplete a development's reserve funds, forcing the association to levy a special assessment. This is increasingly becoming a problem for areas prone to natural disasters such as coastlines that are hit frequently by hurricanes.
Non-Payment of Fees
All homeowners' associations, whether for condominium developments, townhome developments or single-family subdivisions, face the possibility that an owner or several owners will default on payment of fees. The problem has become so widespread since the 2008 economic crisis that certain states have enacted new legislation to assist associations with collecting unpaid fees. Associations can seek a lien in court against a property based on any unpaid fees, and either the association or a bank can initiate foreclosure proceedings.
In some states, the association is allowed to demand rent payments on delinquent units to be handed directly over to the association instead of to the unit owner. In Florida, for example, an association can evict a delinquent homeowner, find its own tenants to occupy the unit or find new renters for an abandoned unit, and collect the rent directly (the association must first foreclose on the unit ahead of the bank, taking title to the property).
When the association forecloses on a property, lenders may be averse to making futures loans on properties in the development, which can make finding new owners a challenge. Both non-payment of fees and unoccupied units can drive up the price of monthly dues for all other unit owners.