Due Diligence for Buyers of Condos and Planned Developments

Several bloggers and industry experts have posted blogs or articles on the completion of due diligence before buying a condo. A common theme among the suggestions include:

•     Conduct a visual inspection
•     Review minutes of meetings
•     Review the operating budget
•     Review the current reserve study
•     Review the association rules and regulations
•     Policy Review of the insurance association

I would say that is not enough to “review” the operating budget. I recommend examining each item in the current budget, and its comparison with the budgets of the previous two years to identify trends and accuracy. With regard to the study of the reserve, if you have no experience in construction or maintenance of the building, passing the report to a friend or relative who may have knowledge and can provide valuable assessment. Also, be sure to check out the escrow account, in addition to the actual subject of study.

As for the rules and regulations, we also recommend reviewing the statement of the association and the bylaws. You do not have to be a lawyer to identify gaps and potential problems. In reviewing insurance, be sure to look at the limits of the policy, deductibles, Directors and Officers coverage and endorsements for specific multifamily residences, such as sewer backup, code compliance and coverage of the demolition to name a few. There is no substitute for review by a professional insurance agent or consultant.

I would also add the following to the list of due diligence:

When performing visual inspection, stopping to talk to homeowners and ask them a few strengths and weaknesses of the community. You may be surprised by what you discover, both positive and negative.
Call the manager of the association and ask them the same question. They are not paid by such calls, but can provide a brief summary of the community.
In these times of economic crisis, be sure to examine not only the operating budget, but bad debts and collections / foreclosure rates.

Finally, I believe the above steps are not limited to condominiums, but the evolution of the Planning Unit (“PUD”) or Communities of Common Interest (“CIC”), too.

Buying a condo can be more complex than buying a house. For a successful purchase, be sure to perform your due diligence.