Tag Archives: Due Diligence

Condominium Due Diligence–Our Professional Responsibilities

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The stormy winter we have experienced needs to be factored in when purchasing a condominium unit. Roofs and other systems have been under a considerable amount of strain, and according to casualty insurance statistics, claims are at record levels.  Those leaks through ceilings and walls can be plastered and painted over. The causes of the problems, however, are being addressed by Condominium associations and the results may well be future special assessments. I am continually told by Sellers that the Condominium Trustees “do not keep minutes of their meetings.” This is distressing on two levels (1) is it a short-hand way of saying the Trustees really never meet? or (2) are there matters which are being discussed which can have potential financial impact to the Unit Owners, which the Trustees would rather keep to themselves? In either circumstance, this type of response raises a “red flag” for me, the attorney tying to protect my client who is considering a Condominium purchase.

More than at any time, the present state of Condominium governance places a responsibility on us as real estate professionals to ask questions and probe.  Ask the Management Company or a member of the Condominium Board of Trustees whether the Condominium is planning an assessment for a new roof or extensive system repairs. If there are assessments coming, try to negotiate with your Seller to pay some ,or even all, of planned assessments. Speak to other unit owners. Find out what they know.

At Topkins & Bevans, we pride ourselves on giving responsible representation to Buyers.  We review (1) Condominium documents, (2) minutes of the Trustee meetings and (3) recent budgets. and financial statements. We poke holes in these documents, where necessary. We direct question to the Management Company, the Trustees and the Seller so that when the Buyer moves forward, he or she is apprised of the animal he or she is dealing with. Sometimes, our Buyers move forward even though we have warned them of the pitfalls associated with their purchase. That is their choice, but at least we have permitted them to make an informed decision.

Review of Condominium Financial Statements and Operations–Some Guiding Principles

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One of the functions of an attorney representing a Buyer of a Condominium is to review the financial statements and operations of the Condominium, as well as the constituent condominium documents such as the Master Deed and the Condominium Declaration of Trust. In a future post, I will delineate what I look for in the Condominium Documents. This post, however, concerns the important information which can be gleaned by doing a careful review of the Condominium Financial Reports,  and Minutes of Trustees, and asking some questions of the Condominium Trustees, either directly or through the Selling Agent or Buyer’s Agent, as the case may be.

        1. Condominium Statement of Operations

                          a.  Look at ALL of the captions, especially Repairs. Do the Repair costs seem high? If they are more than a few hundred dollars, more information is needed.  Is the Condominium “patching” where they should be making capital improvements? Will the new Buyer be required to pay for prior problems? Higher than normal Repair costs can tell you about how carefully the Condominium has been managed. See if the Condominium has a caption for “Accounting” and “Legal”. If there is none, that may be a danger sign. The Trustees may be “winging it” on decisions where they need professional guidance.

                    b.  See whether the income received represents payment in full from all units for the entire year. If that number does not compute, there are almost always delinquencies for common area fees. Massachusetts Condominium law ( and most other jurisdictions, too) gives the Trustees broad powers to start litigation for common area fees. The cost of same, including attorneys fees, is to be borne by the delinquent Unit Owner. If there are delinquencies, it may mean that the Trustees, for one reason or another, are not making real efforts to collect what is due from their neighbors. That is a danger sign for a potential Buyer, and could signal problems down the road.

                    c. If possible, obtain Financial Statements for more than one year. Carefully analyze the receipts section. If the number is consistently on the rise, it means that the Trustees are constantly raising the common area fee. Find out what the reason for that has been. If there is a pattern of loose or sloppy management, it may manifest itself in continuing increases in the common area fee.

     2. Condominium Balance Sheet

                             a. Look for how much is in the Reserve Account. While many Condominiums have taken a “pay as you go” approach to improvements, make sure that a Reserve Account is, at least,  in existence. In most states, Trustees are required to maintain an Operating Account and a Reserve Account. If there is no Reserve Account at all, the Trustees are not adhering to their statutory responsibilities. Perhaps, they are not adhering to other provisions of the Condominium law, as well.

                              b. See if there are any Accounts Receivable on the Balance Sheet. If there are, they are more than likely from delinquent Unit owners. Inquire as to the status of collection efforts. If they have not begun, that is a red flag for poor Condominium Management.

The other thing I always ask to see are Minutes of the Trustees for at least the prior Eighteen (18) months. If none exist, or if the Trustees do not regularly meet, there may be problems. I try to ask why.  If there are Minutes, i look at them for any indication that a Special Assessment may be coming. This can be an unpleasant surprise for my client, and when I know a Special Assessment is “right around the Corner”, I can sometimes request that the Seller bear some of the cost thereof. Depending on whether the Special Assessment is forward (something new that really is not the Seller’s issue) or backward (a repair of a roof or other important constituent common area part) I have had some success in requests for contribution.