Buyers of condos and coops receive a package of documents for review after their contract is ratified. Part of this package is usually the association's financial statements. Buyers should pay close attention to these financial statements as they can provide many clues as to the health of an association. By understanding common red flags, buyers can identify potential issues to try to understand whether, should they buy the property, their condo/coop fees may go up significantly or whether a special assessment may be on the horizon. Here are five potential red flags to look for:
Low operating cash or a decrease in cash available on the balance sheet over time. This could indicate that the condominium association is struggling with cash flow or not taking steps to ensure money is properly managed.
High accounts receivable. This could indicate that the association is having trouble collecting payments from unit owners, or it could be a sign of lax billing and collection procedures.
Insufficient reserves. Reserves are important for the long-term financial health of any condominium association, and should not dip below adequate levels.
Large variations between budgeted and actual expenses. This could be a sign of poor budgeting, lack of financial control, or lack of proper oversight.
Large changes in expense line items from year to year. This could indicate that the board is not aware of major expense changes.
In addition to these potential red flags, buyers should also be on the lookout for any potential lawsuits or liabilities that could affect an association's financial health. For example, if an association has taken out a loan with a balloon payment, a buyer should understand when that payment will come due and the plan to pay it.
Not all of these issues will necessarily mean that the association is not in a strong financial position - but buyers may glean useful information by asking questions about these or other issues that are reflected in financial statements.