What are special assessments?
When you buy a condo, you are often joining a cooperative or purchasing a property that is governed by a homeowner’s association (HOA). Occasionally, the board of the co-op or the HOA will call for a special assessment to pay for a major renovation for the property or to build reserve savings back up.
As a condo owner in a co-op or HOA, you already pay a fee every month. These fees generally range from $100 to $700 per month, depending on where you live, this fee covers different expenses. The least expensive fees generally just cover exterior maintenance, but some may cover the insurance for the building (meaning you just would have to pay for contents insurance). In other cases, the fees pay for utilities and security. If your community has such amenities as a swimming pool, a workout center, a clubhouse or other fringe benefits, your fees likely go toward the maintenance of those as well.
Some of the fees go into the reserve fund, which is supposed to be there for larger expenses such as roof repairs, foundation repairs, flooring in common areas, and the like. If the reserve fund happens to be low when an unexpected repair becomes necessary, then the board will call for a special assessment. This can happen in one of two ways: the assessment is broken down into monthly payments and added to your monthly fees until the assessment is covered, or it comes as a larger charge that owners pay in one lump sum, or several smaller payments.
Condo Management / Homeowner Associations (HOAs)
Condo management groups and HOAs vary in the quality of their management style. When these organizations are managed well, then the monthly fees are set high enough for the reserve fund to remain plentiful, unless several major repairs become necessary within a matter of months.
If your board has solid management, it will order a reserve analysis study at least once a year. This involves bringing in a licensed engineer to perform a study of the whole complex, including a detailed projection of the life left in such items as the elevator, the boiler and the roof. After making these projections, the engineer will provide the board with a recommendation for the size of the reserve fund. If the reserve fund needs to be increased, unit owners are more likely to support a modest increase in the size of the fee payments if they know it will help them avoid a sizable assessment within the next year.
Read before you buy
Before you close on a condo that is part of a co-op or HOA, look at the financial statements. These will show the current amount of cash in the reserve fund. If the fund is low, a special assessment would be likely in the case of an emergency repair. The larger the community, the larger the reserve fund would be.
Another document that you should read is the Declaration of Covenants, Conditions, Restrictions, and Easements (CC&Rs). This document has the procedures that the HOA must follow if they want to ask for a special assessment. Depending on the rules, the whole community of owners may have to vote to take a special assessment. In other cases, though, the only people who would vote on the levy would be the board.
You can protest a special assessment if you file a complaint with the board. However, it is important to build support with other owners in the development if you want the request to be taken seriously. In some jurisdictions, you won’t have the right to file a protest when the project that the assessment is funding is necessary for resident safety and health.
Occasionally, stories roll in about special assessments that seem to show up out of nowhere, without sensible explanations from the HOA boards. In some cases, the boards will not even show proof that they asked for quotes for the jobs. In cases like this, owners do not have much recourse.
Just one example happened in Toronto in the fall of 2013. Owners in a condo complex received notice that each unit faced an assessment for about $27,000, due in two instalments. One would come in two months and the other in six. The assessment was for roof repairs and came way too late, as unit owners had been pointing out roof issues for three years, but the board refused to take any action or even acknowledge the complaints. Instead, the board spent money on repainting garages and replacing doors and gates. Those cosmetic repairs drained about $450,000 from the HOA reserves. As a result, many of the condo owners faced an assessment that they could not afford and led to the need to seek out last-minute financing.
The bottom line is that if you face an assessment, you will have to pay it, unless your protest is heard and upheld. If you do not pay the assessment, the HOA or co-op can slap a lien on your property and end up foreclosing. Given the large amount of money that can be involved, it is important to understand how you can send the money.
There are ways to get banks to help you with financing to cover your assessment. If you have equity in the condo, then you can take out a home equity loan or open a home equity line of credit (HELOC) with your bank. You will have to go through the same sort of process you went through to get your mortgage in the first place, which means having the bank run your credit and verify your income and ability to pay. The HELOC might make sense if you think you will be able to cover the assessment with other funds but want some flexibility in case you need access to the equity just in case.
Cash / Savings
If you have adequate savings on hand, then this is the method that will cost you the least in terms of interest and other fees related to accessing financing. Of course, you don’t want to plunder your children’s tuition fund to pay a five-figure assessment if your kids are about to head off to college, but if you have set the money aside and have it on hand, then this is the source that makes the most sense. If you have a credit card that pays you cash back or gives you airline miles or other travel benefits, and you can use the card to pay for some or all the assessment. Just make sure that putting the cost on your card is not going to lead to months of paying high interest rates – the cash back and the air miles are not likely to be worth it if you’re paying 28% or higher on the revolving balance.
If you have another property that you have been thinking about selling, this can be a way to pay a sizable assessment. Obviously, you would want to be able to sell the property and close the deal before the payment is due. Given the real estate market right now, if you can sell a property without having to buy another property (as in the case of selling a primary residence), you could make a significant profit, depending on what the market was like when you bought that property.
In some cases, you might not be able to access some of the other funding methods listed above. Not everyone has five figures of credit sitting available to them on their credit cards, and not everyone can build up that much in savings. If you cannot get access to financing through your bank, then private lenders can provide access to funding that you might not be able to get otherwise.
Here’s how private lending works. A broker links borrowers with individuals and business entities that want to invest in the real estate market by putting money into mortgages. The interest rate will be higher than what you would pay to a bank for the same loan because the investor faces an elevated level of risk. Since you couldn’t qualify for a bank loan, then you represent higher risk from a credit perspective.
The term of these loans is generally 12 – 24 months. This gives you time either to pay off the balance or to get your credit to a place where a bank will allow you to move the loan there at the end of the term. At Amansad Financial, we have helped many clients who have the income stream to pay for a special assessment loan but don’t have the length of employment history or the credit score to satisfy their banks. Private lenders still look at your credit and your income, but they place more weight on the value of the property itself when they make a lending decision.
If you face a special assessment and are wondering how you can finance it, contact us for some recommendations. We will assess your individual situation and give you our feedback on your next steps forward. Contact us today.