How can you assess the financial strength of a condo building in NYC?
We’ll discuss this topic in the following video. I’m Nick at Hauseit, based here in New York City.
Check out our website hauseit.com to learn how to save money if you’re
buying or selling real estate in New York City. So let’s get started!
Before you sign a contract to purchase a condo, it’s important to assess the financial strength
of the building you’re buying into. If a condo building does not not have strong financials,
this puts you at risk of common charge increases as well as possible assessments.
Before going into the weeds, we want to make it very clear that there is nothing inherently wrong
with a building raising its common charges or levying an assessment from time to time.
The cost of living, and by extension, the cost of operating a condo building in NYC, always goes up
over time. In fact, annual increases of 3% to 5% are completely normal and nothing to worry about.
Moreover, there is no getting around the fact that even the best run condo buildings will
need to make costly repairs over time to things such as the roof, elevator, boiler and facade.
So if you’re about to buy a condo, and you discover that there’s an assessment,
that in and of itself is not a red flag. What is a red flag is if the building never stops
levying assessments, or if common charges are consistently going up more than 3-5% per year.
So, how can you assess the financial strength of a condo building in NYC?
Well, the first thing to do is obtain the building financials.
You and your attorney will typically receive a copy of the financials after there’s an accepted
offer. Reviewing them is part the ‘due diligence’ which your attorney handles in parallel with the
negotiation of the contract itself. This is all done before you sign the contract.
However, it’s also possible to obtain building financials before you submit an offer. Most
sellers and by extension, most listing agents, will have them available, so you can either ask
the listing agent directly, or if you have a buyer’s agent, ask her or him to obtain them.
The first thing I like to check is the accountant’s opinion letter. This is always
at the beginning of the financial statements. You’ll want to look for keywords such as “presents
fairly”. This is a good sign of a healthy set of financials. You won’t want to see
restrictive language such as “subject to” or “except for.” Such reservations warrant greater
scrutiny by you and your real estate attorney and will often lead to issues being unearthed.
Here is an example of what we’d consider to be positive language in the opinion letter:
“In our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Condominium as of December 31, 2019 and 2018,
and the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of America.”
The second thing I like to check in the condo financial statement is the
size of the reserve fund. Essentially, how much cash does the building have on hand?
A standard rule of thumb when evaluating a building’s cash and cash equivalents balance is
to make sure that it has a reserve worth three to six months of the building’s normal
operating expenses, in addition to any anticipated capital improvements for the next twelve months.
Now if there’s not enough cash but there’s a plan to deal with any anticipated capital improvements
over the next twelve months, such as a planned special assessment, then that works as well.
Aside from the amount of cash on hand, it’s also a good idea to check the accounts receivable
and accounts payable line items in the balance sheet. It’s never a good idea if
accounts receivable are too high, as this may suggest that commercial tenants or unit owners
are in arrears on their payments. As a general rule of thumb, you should do further
due diligence if the accounts payable balance is greater than 10% of the annual building revenue.
A normal coop or condo building should not have a high accounts payable balance.
Bills in a normal building are paid promptly when received.
There shouldn’t be debt accumulating and an excessive amount of accounts
payable owed to vendors may indicate that the building is undergoing financial trouble.
The next thing to look at is the building’s income statement.
It’s important to realize that unlike a for profit business corporation, a building’s aim
is not to make a profit. A building would ideally like to raise just enough revenue through common
charges or maintenance fees to cover its expenses and build an adequate reserve.
So if the building covers all of its expenses but only shows a small profit, there’s nothing wrong.
However, if the building continually does not raise enough revenue to cover expenses,
this is an indication that a common charge increase (or assessment) may be on the horizon.
Another question to ask when looking at the income statement is: what constitutes a
building’s income? Is there income from a tenant? You’ll want to be very careful in analyzing the
sources of a coop or condo building’s income and decide whether it is recurring or not.
In fact, any source of income greater than 10% of the annual building revenue should be
investigated to ensure that it will continue. Finally, we also want to check the notes to the
financial statement for additional insight. The notes may tell us more
information about litigation, a recent special assessment, or changes in management fees.
So there you have it! We hope you enjoyed this video, and if you did, please like, subscribe and
leave us a comment. We’d greatly appreciate it. And if you’re looking to buy or sell, check out
hauseit.com to learn how to save money. I’m Nick at Hauseit, and we’ll seen you on the next video!