Q: I am considering buying a condomium unit. Several friends have warned me that the public offering statement may not accurately reflect the monthly maintenance fee I will be charged to live in the condominium. I have heard the term "low-balling" but do not quite understanding what that means. Can you explain?
A: Low-balling means that the developer of the condominium has significantly understated the condminium fee each unit owner will have to pay.
In every condominium building, there are certain maintenance charges for common elements. Every year, the building's budget committee attempts to make an assessment of the next year's operating costs, and each condominium unit owner is assessed a prorata share for maintenance.
Once in a while a special assessment must be made for emergencies such as a leaking roof or a malfunctioning elevator. Most condominiums set aside money for emergencies, but not all have the foresight.
When the Department of Housing and Urban Development studied condominiums a few years ago, it determined that one of the most significant problems nationwide was the underestimating of operating expenses, or "low-balling." Here, the developer makes low estimates of the common maintenance expenses, and buyers later find that maintenance fees are much higher than promised.
In fact, many developers will guarantee that common maintenance expenses will not increase while they are still involved with the building. While this sounds good, buyers later find that the developer has been subsidizing the maintenance costs. Once the developer leaves the project, HUD found, common expenses paid by each unit owner can rise substantially.
Whether you are buying a new condominium, a newly-converted one, or a resale unit, it is important for you to carefully analyze the building's operating budget. If the budget is only an estimate, go over each item to determine whether the projections are realistic. For example, many developers indicate that such items as accounting and legal fees will only be $100 per year. From my own knowledge in this area, this is clearly an underestimate of reality.
Check with the government office in charge of condominiums in your city or county. Look at the budgets of other condominium projects of similar size, to determine whether there are any glaring discrepancies.
Look at the reserves. Most public offering statements spell out the useful life of such items as the roof, heating and air-conditioning systems, plumbing and electricity. If, for example, the statement suggests that the useful life of the roof is only three to five years, clearly the reserves budgeted should be higher than if the roof has a 20-year life.
Low estimates of future common expenses can have serious consequences for many buyers who simply cannot afford the cost increases. Non-payment of common expenses can result in foreclosure by either the mortgage lender or the owners' association.