In this Hauseit tutorial, we will be showing you How to Analyze the Financial
Statements of a condominium. Now if you're watching this video, you're likely
a home buyer. You may even be a real estate agent broker salesperson or you
could even be a real estate attorney. The ability to review the financial
statements for a condo is a very important skill for all market
participants in real estate and in particular, it's very important to be
able to analyze a financial statement primarily because it will give you an
idea of whether or not the building is is well run prudently capitalized and it
will basically give you a preview as to whether or not you you would seek to
expect any unusually high operating expenses once you've actually purchased
a property. If you're a real estate agent the ability to analyze financials will
help give you a bit of an edge versus other agents who may not be able to
advise their clients on how to actually analyze a financial statement. It's also
worth remembering that in terms of responsibility load during a purchase, a
real estate attorney will be the one who conducts ultimate due diligence on a
condo prior to a buyer signing a contract so as a broker or even as a
buyer you certainly can request the financials prior to the accept that
offer stage. You can review them yourself but it's also good to know and remember
that a real estate attorney will require the financial statements as well as the
offering plan house rules and any other building documentation such as the
purchase application and sublet application in order to complete due
diligence prior to advising their client that it's an appropriate time to sign
the contract. So in this video we're going to walk you through a financial
statement it's a real financial statement for a building here in New
York City and we're going to go through the sections that are important for you
as a buyer, as a broker or even as an attorney. So the first thing you want to
do when you open up a financial statement is you want to obviously check
the year. Usually attorneys look for the two most recent years for
the purposes of looking at the due diligence materials so depending on
where you are in the calendar year it is possible that the building may be in the
next fiscal year but they might not necessarily have the financials ready
for the one prior so you may want to be mindful of that and also when it comes
to a mortgage lender. If the building has taken unreasonably long amount of time
to actually come up with the most recent years financial statement it may be an
issue. In this case, we're looking at a historical statement so not going to go
into the details of the calendar but just keep in mind, make sure you get the
two most recent years of financials for you to analyze. So as you scroll down
into the financial statements the first section is going to be usually it's
going to be some sort of auditor's report or opening letter. In this case
the financial statement is audited which means that basically an independent
auditor has evaluated the financials and been able to come up with an opinion as
to the financial statements themselves. If a financial statement is unaudited, it
means that the actual accountant is not preparing and providing any opinion as
to what is contained within the financial statements themselves. So when
you're looking at audited financial statements, you you can obviously start
by looking at the various sort of notes in a sense here and you can read through
those but the most important thing is to look at the actual opinion section. Now
when you're looking at the opinion section, you basically want to be looking
for the following phrase presented fairly in all material respects. This is
the green light which basically means that there are no issues that the
auditor has discovered which may be worth mentioning. Now as a quick aside, if
you go onto the Hauseit website, there is an article you can follow along with
it's called Analyzing Condo and Coop Building Financial Statements in NYC and
it actually goes through all of the points that we're discussing on this
video. So in particular, we've started with the
opinion letter and as you can see here, you'll want to look for keywords such as
presents fairly which is a good sign of a healthy set of financials. What you
don't want to see are things such as restrictive language including subject
to or except for so if we go back here again we'll see that they've used the
phrase present fairly in all material respects. So that's a really good sign as
we start our review of the financials. Now as we scroll down the next thing, we
want to look at is usually the balance sheet. Now the balance sheet is very
important specifically because it will tell us what the current cash holdings
are for the condominium. In this case, the condominium has three hundred and
eighty-seven thousand dollars in cash and cash equivalents. Now when we look at
that number we need to analyze it in the context of how long could that amount of
cash support the building's operating expenses right. So if we're looking at a
massive condominium with four hundred units and working and we're looking at
another building with twenty units you, can see how the size of this number
doesn't necessarily have any realistic meaning behind it if we don't look at
the actual expenses. So what we want to do here is we want to quickly jump to
the the income statement and we want to find out how much are the buildings
operating expenses and once we've done that ideally, we want to do some math and
figure out how many months of operating expenses does this cash balance support
and as a general rule of thumb, we are looking for for that to be three to six
months. So if we go down into the income statement, specifically under expenses
looks like the expenses are approximately a million dollars a year
so if you open up a calculator on it so we're just going to divide that by
twelve and it looks like we have approximately
$80,000 a month to run the building. So if we go back up to the cash balance its
388 K so if we take three hundred and eighty-eight thousand and we divide that
by the monthly operating expenses and convert it back to your number, it looks
like we have about four and a half months of actual operating expenses. In
terms of the size of our cash position, the next thing we want to look at are
the accounts receivable. The accounts receivable is very important because it
gives us a general sense for the health of the building in particular. If the
accounts receivable are massive percentage of our operating costs or of
our current assets it may be an indication that somebody hasn't paid us
somebody hasn't been paying the condo and there could be some sort of
implication there for possible little or no recovery losses so on and so forth. So
in this case, the accounts receivable is 13,000. Now relative to a cash balance of
400K more or less that is an insignificant number. Therefore there are
no issues with the accounts receivable. Now on the flip side, if we go look at
accounts payable this is another thing that we want to analyze. Now in theory
the condominium should be paying their bills on time. There really shouldn't be
any large accrual for unpaid expenses and as a general rule of thumb you
really shouldn't have accounts payable that are greater than
10% of the actual income of the building. So in this case, we have a hundred and
ninety three thousand dollars of accounts payable compared to income. The
revenue of saying 1.1 million so it is actually a very large number and it may
very well be concerning and it would be something that your attorney if you're a
buyer would would possibly inquire about with the managing
agent. Now before you you reach out to the managing agent to confirm things, you
may also certainly want to look at the notes to the financial statements so
every financial statement will have a note section and if you you know if you
go down here you you may very well find something about the fact that you have
like large accounts payable specifically there is something mentioned here in in
note 10 included in the condominiums accounts payable is a hundred and thirty
two thousand dollars in water and sewer charges estimated to be due for prior
years. They also make some mention of the statute of limitations and that's really
how they've computed this this number so if we go back to the accounts payable
and we think about what we just learned just take a look here so of that one
hundred and ninety three but excluding the water issue it's about 60K which
relative to 1.1 1.2 million dollars of revenue is is still under under ten
percent and that was kind of our threshold so clearly, we found the issue
here. There was some problem with the water not sure what that is if we were
to venture a guess perhaps there was some sort of problem with the meter
maybe the readings weren't working, maybe the the condo was being under build and
and the DEP at least in New York City DEP is probably working on that arrears
bill with the condo and presumably the condo will have to pay out that money in
the near future. So moving forward while we're on the notes, this is the section
where you're going to want to look and see if the building has any sort of
mortgage or loan exposure the notes are going to tell you essentially what the
interest rate is what the terms are of the the actual possible floating rate
right, when does it reset and also when does the actual loan need to or rather
when does it expire, when does it mature. So that's something you're going to want
to look at because if let's say the building has a line of credit, that's a
floating rate and it's reset annually and in the last year interest rates have
gone up. Astronomically, it would in theory mean that the line item in the
income statement for any potential financing interest charges could go up
drastically and if it does, you would want to figure out is the current level
of the conduct condo common charges sufficient to help absorb that increase
in financing expense for the building. So in this case, the building doesn't appear
to have any any sort of mortgages or line of credit or anything primarily
because if we go into the expenses, I believe there's a note to that which
tells us about the expenses. There is nothing in here about there being any
any financing charges so that being said the takeaway is the notes of the
financial statement are really important if you discover anything in the
financial balance sheet income statement statement of cash flows that is
confusing or sketchy the notes are going to be where you can possibly figure out
what exactly is going on. Now going back into the income statement, it's also a
good idea to generally-speaking analyze the composition of the income. So for
example, you you want to take note of any specific line item that is a
disproportionate size relative to the total revenues. Now in this case, the
revenues the vast majority of them come from common charges now it's not a
problem that the majority of revenues comes from common charges that's
actually a very healthy sign you know and that means that the building
receives money from the the owners and those substantially basically pay for an
account for all of the revenues and consequential expenses in the building
the issue would be. If let's say under revenues instead of this line item
saying common charges it said something like flipped tax
Now flip tax is usually for a co-op and a flip tax is basically a private
transfer tax that the coop charges sellers so a seller of a co-op in the
city. New York City has to pay the governmental transfer taxes plus
the transfer taxes for the coop. So if for example, the revenues the majority of
the revenues didn't come from the fees the owners pay but rather they came from
a flip tax it would mean that the buildings revenue source is largely
dependent on the continued rate of you know buyer rather sellers transacting
and selling properties. So if there were a market disruption possibly and the
volume of deals slowed in the building and the majority of the income came from
deal and sale related transaction, you could see why it might be an issue. But
in this case, the revenue is very sticky common charges are the be-all end-all of
revenue for a condo. Fortunately there are a couple of super small items here
They are pretty insignificant relative to total revenues but nonetheless it is
always important to look at and figure out where is the revenue stream coming
from another one to take note of is any potential income from a commercial
tenant. So if a condominium has some sort of commercial space downstairs and
they're receiving rent that rent is probably sizable and therefore you want
to be very very aware of when exactly does that commercial tenants lease come
up for renewal and perhaps even what is the history of that of that tenant right
So prior to that tenant or how long have they been there prior to that tenant
what's that space vacant, how long was it vacant for so on and so forth. So we've
talked about most of the statements now we've talked about the balance sheet,
we've talked a little bit about the actual you know statement of revenues
and expenses also known as the income statement. We may also want to look at
the the statement of cash flows so the goal of analyzing the statement of cash
flows is really just to make sure that there is a a positive net cash flow for
the building. Now obviously, if the building has a negative cash flow
subject to further review it likely is a very very bad sign. So in this case, you
know we're looking at sort of what's what's the composition of
this cash flow. Very positive here of course the building had more revenues
than expenses so if we go back into the income statement we can actually see
that so 147 140 is the excess of revenues over
expenses and then we're basically seeing a similar number over here. So if we look
at what's going on with cash flows, we can see that there's been a pretty large
line item here of a negative cash flow but in this case the money is actually
going into the restricted fund the restricted fund is basically the reserve
fund. So if we do a control F here and here we go so you can see here that the
restricted reserve fund is to be used exclusively for major repairs and
replacements so very healthy sign here that this building essentially increased
its reserve fund by 50% more or less over the past year. Again, that's a very
positive sign so on the whole, if we were to look at these financials there does
not appear to be any any major issues. The only thing that possibly looks a bit
unusual is the water accounts payable as discussed but that aside the building
looks to be pretty healthy the other thing we can look at again is the notes
to the financial statements. Specifically if there's any anything related to the
financials you know this is interesting here so looks like the condo has a some
sort of lease with it with a laundry provider and the condo receives 3,600
from that. So that's not super super relevant but it might be interesting
breaks out here the prepaid expenses also talks about other assets we did
look at that already. If we continue to go down, we they have a note about income
taxes and not super important and we've talked about the water and sewer and the
other thing you might want to see is this note about future major repairs and
replacements. So in this case, which is pretty common to see the condominium has
not come that a study to determine the remaining
useful lives of the components of common property basically that means that the
condo hasn't sort of had someone come and look at the roof boiler facade
things like that but but in general that's pretty common and the building as
we've seen has a pretty healthy reserve fund plus they they did make substantial
excess in terms of income versus expenses last year so everything appears
to be pretty healthy. Now the final thing you may want to look at in the financial
statement is notes about increases possibly to the common charges. In this
case, there does appear to have been an increase and so it has actually put that
there in the notes of the financials. We will have another video available about
Analyzing a Co-ops Financial Statement so feel free to check that out. We'll put
the link down below and also if you look below the video you will see a link to
this specific article which goes through the major talking points that we did
today about How to Analyze a Condos Financial Statements. If you have any
questions, feel free to leave us a comment below
and we wish you the best of luck with your real estate endeavors