My Condo Came with a Pile of Cash: The Unrecognized Costs of Traditional Home Ownership

Picture this: you’re buying a traditional home and you arrive at closing to find the previous owner sitting in front of pile of cash! “Here,” they say. “You paid us a fair market value, but over the years we set aside $12,500 for a roof, which is 1/20th of the cost of a new roof, and we want you to keep that money for this beloved house. Oh, and here is another pile of cash for the furnace replacement we expect in 5 years. … And here is another for the driveway; it won’t last forever.”

A core concept behind this post is that traditional homeowners typically do not recognize all their costs of ownership; in each year, and over time, deferred and scheduled maintenance costs are there whether you see them or not, and someone always pays the proverbial piper (even if it isn’t you). But well-run condominium homeowner’s associations DO recognize those costs in real time, and fund reserves that you inherit when you buy in. They essentially hand you the money to address coming maintenance.

A school or business is often required to have a “sinking fund” or other earmarked savings toward large-but-predictable costs. But how many new homeowners buy a house with a roof that was replaced only five years ago, and say, “Gosh, in addition to my insurance, mortgage, and other costs, I’ll set up a special savings account for my $30,000 new roof—so $2,000 per year I’ll set aside just for that. Oh, and I’ll do the same for the driveway, exterior painting, furnace and air conditioner.” Nobody does that! Not even the most anal-retentive planners and thinkers among us.

Why? There are many reasons—including and most especially because we can get away with not having that kind of discipline, even if we have the money. And of course the truth is that many of us probably live above our means to properly maintain a home in the long term; instead we gamble that values will increase and we’ll be gone before the needs arise. If home prices rise over time, and the average time of home ownership is only 5-7 years, we can ignore these certain future costs and get away with it—even for a lifetime! Rinse. Repeat. Not your problem if it’s 40 years from now, right? Well, fair enough. But a condo association has no such freedoms. It has a moral and legal responsibility to the current and future owners.

For owners of traditional homes, the fact that you didn’t have a sinking fund set aside for 1/20th of your roof, driveway maintenance and replacement, deck replacements, etc.—means “paying the piper” may result in a sale price lower than you would have had otherwise. Or at the worst, you may be distressed by a major “surprise” expenditure that you actually have to cough up the money to cover, though you may say “damn these unexpected repairs of homeownership,” and you move on. But as David on Schitt’s Creek would say with a low-key, accusatory, icky-faced smirk, “But … was it really unexpected?”.

Again, a condo is different! While you may “own” your condo, technically you are a co-owner when you buy a condominium, and become a member of the larger condominium homeowner’s association (HOA). That HOA has legal responsibilities to not just one person, but to all co-owners. Under the law, you need to be setting aside reserve funds and planning for known expenditures. Thus in theory, when you buy into a condo HOA (at least one that’s been properly run by it’s boards), you’re not getting stuck without savings for all the maintenance obligations that have built up, but not yet been realized. Or stated differently, you didn’t pay a market price that had been much lower than it otherwise would have been if the neighborhood and the association had not been maintained—and no savings was in place to fund that maintenance. As in our opening example, you got the piles of sinking-fund cash when you bought in! They saved and you benefited.

In theory, when you step into condo ownership, you should be stepping into shared and structural elements for which the maintenance and replacement savings is current, and properly funded for the future.

Now, is that always the case? No. Is there a huge range of reality? It’s true: some associations don’t plan well, and membership whines about dues so the board caves and keeps them artificially low; it’s also true that sometimes the truly unexpected and unforeseeable just happen. In those situations, a condo owner still pays the proverbial piper of deferred or unexpected maintenance.

You are then bitten by the two words every condo owner fears: “special assessment”. The association literally can demand of you a surprise assessment (in lump-sum payment or installments) in addition to your normal operating dues! That assessment is to pay for those big unfunded items. Avoiding special assessments should be the long-term goal of every condo board of directors (with perhaps the exception of capital improvements or expansions of offerings/amenities agreed upon and approved by the membership).

So it’s true that all condos are far from the same in this regard; and similarly, the range of obligations a homeowner’s association is responsible to maintain or replace is massive. Some associations are responsible for driveways, roofs, exterior siding and painting, garages and more. Others are responsible for almost nothing on individual homes that are site condos (separate single-family dwellings similar to a plat), and some owners don’t even know they are living in condos at all (sad, but true). But we digress.

Having fallen into the detailed “weeds” a bit here, hopefully we’ve not lost the main idea. Condo associations should be saving and planning for the things they’re responsible for maintaining and/or replacing, as required by law. When you buy in, you are often getting something a homeowner doesn’t give you: a good history of maintenance and reserves of cash to cover the associations obligations. Thus, in theory, condos should be less prone to the wild swings of fortune that happen with other residential housing, where some owners save nothing for repairs, and others set aside more reserves than an accountant with OCD. But there range is great, so it’s vital that you do your homework.

(For more information on what SHOULD be set aside, we found a cool blog post here at Herzel Law.)