Connecticut and Rhode Island Active Adult Real Estate

Interview on Channel 30

Buying into a Common Interest Community, Part 3

Looking at a Community Budget

By Barry Rosa

This is the third installment in our series on common interest communities and we’ll take a careful look at something that every buyer should look at:  The actual operating budget.

Remember, if you are looking at a brand new community, the budget is also brand new-there is no history of expenses for the association.  If it is a home or unit in an existing community, there will be a track history of expenses.

We’re including an operating budget for a condo that we’ll call “Green Acres”.  The name is not real, but the condominium is.  As you read this, refer to the budget, so everything makes sense.

Here is some additional info we need to know.

The Green Acres condo contains 124 units, and they fall into 2 types, 2 bedroom and 3 bedroom.  It is a mid-rise condominium with a clubhouse and a pool and is about 3 years old (so there is no need for capital item replacements yet).  The development is sold out and fully occupied.

The common charges are apportioned by unit type.

The developer chose to have the common charge calculated by the size of the unit.  The units are either 1,400 square feet (2 bedroom) or 2,000 square feet (3 bedroom).  So, if you take the total annual budget ($316,200) and divide it by the total square feet of the units (210,800 sq ft) it means the budget represents a cost of $1.50 per square foot, annually.  So, if you have a 1,400 square foot unit, your common charge is $2,100.00 annually or $175.00 per month.  If you have a 2,000 square foot unit, your common charge is $3,000.00 annually, or $250.00 per month.

Is this budget ok, or will the common charges go up?

To answer this question, you have to look at the line items in the budget in combination with the explanations in the condominium documents for the expenses.

This is a newer condominium, so there is not a lot of track history.

Here’s where to focus:

There are three major categories of expenses in a typical budget:  Fixed, variable and capital replacement.  The management fee is probably fixed with a contract in place (a percentage of the budget is normal).  Most associations hire a professional management company to run the day to day operations (a good idea).

Utilities are variable expenses.  As we all well know, electric rates can change quickly and dramatically in the current environment.  Also, keep in mind that the utilities charges in this budget are for common areas, i.e., hallway and exterior lighting, heating the hallways and stairways, etc.  Snow removal is a variable expense as well.

The most common capital expense is a reserve category.  This budget contains two entries in this area.  The first is for capital replacement ($25,000).  Presumably, this is for major items such as the roof, parking lot repaving, replacement of clubhouse items, etc. 

The additional $2,000 in this category is intended to cover typical operating expense overruns.  Think of this as a “cushion” for day to day expenses.

On the surface, this appears to be a good operating budget.  Certainly, the fact that it has reserves for capital items as well as operating expenses, are good things.  To know that the capital reserve is adequate, you have to look at what went into it.

In this case, the condo documents show that the roofing systems need to be replaced at 15 years ($255,000 cost estimate now) and the pool needs to be resurfaced/equipment replaced at 10 years ($60,000 cost estimate now).  Additionally, the exercise equipment will have to be replaced at 10 years ($ 20,000 cost estimate now). 

This means that each year, there should be a contribution to capital reserves of $17,000 for the roof, $6,000 for the pool and $2,000 for the exercise equipment (hence, the total of $25,000)

In this case, the capital reserves are as they should be.

Where else to look?

The variable expense categories can cause common charges to rise (but this would happen if this was a traditional single-family home as well!).

Recently, the costs of energy have gone up quickly, especially electric rates and fuel costs.  Insurance costs are also rising quickly.

If the cost of electricity goes up from $23,800 to $32,000, fuel goes from $14,000 to $24,000 and insurance rises from $48,900 to $58,900 the additional costs ($28,200) will have to be spread across the common charges.  If they are not, the annual budget will run a deficit, not a good thing.

If we have a winter with more snow events than planned for and the cost of snow removal goes from the budgeted $5,000 to $8,000, the manager/association may make the decision to take the additional $3,000 from operating reserves. There would be no impact on common charges.

Summing Up

This is why it is so important to read the condominium documents and the budget.  Do expect to take some time to analyze it:  It is in your best interests as a buyer or as an owner.

Also remember that the budgeting process with a condominium is really the same process that we should all engage in each year if we own a single-family home.  The cost categories are often very similar (insurance, utilities, grounds care, snow removal as well as the need to reserve for major capital item replacement) with some differences (like a management company).  There are a lot of us that don’t do personal budgeting as single-family home owners, but it becomes a necessity as an association.

Barry Rosa is the Vice President of the New Homes and Land Division

and Director of the Active Adult Division

Prudential Connecticut Realty.

He can be reached at brosa@prudentialct.com

(860) 571-6690

Buying into a Common Interest Community, Part 2

Budgets: Who Pays For What!

by Barry Rosa, Vice President

Active Adult Division

Prudential Connecticut Realty

This is the second article in our series on common interest communities (condominiums).  We want to take a more detailed look at budgets.

Remember that with a condominium, there are clear items that are owned by you, the unit owner (it does not matter if you live in a freestanding home or in an attached town home or a ranch or flat type unit).  A good example of what you, the owner, are responsible for:  Appliances in your kitchen, interior floor coverings, interior walls, etc.)

In many cases, there are also items called limited common elements.  Some good examples of these can be balconies or terraces, parking spaces outside of your unit and similar items.  In this case, the limited common elements are owned by the association, but you receive exclusive use of these areas.  You are probably responsible for maintenance of these, but these costs may be paid by all the unit owners.

The third area is common elements.  Common elements are often those things completely outside your unit, such as a clubhouse, roadways, and gardens and the exteriors of the buildings.  The cost of maintaining, repairing and replacing these items is normally borne by all the owners.

The condominium documents will tell you what areas are owned, limited or common and who pays for what.  At least, we hope that the documents are very clear and comprehensive in these areas.  This, unfortunately, is not always the case.

You will also need to take a careful look at the budget.  The budget that you received with the documents when you purchased your unit may not now be the most current, so you may want to obtain the most current copy from the association.

Here are some areas that you will want to look at carefully, since these can cause an increase to the common charges or may result in individual expense that was not anticipated.

Reserves for capital items

This part of the budget should contain sufficient funds to cover the replacement of larger items that will eventually need to be replace that are a part of the common elements. 

An example is with roof coverings:  Estimated cost to replace, $20,000, remaining life of 10 years.  The budget should have a base of $10,000 now and an additional contribution of $1,000 should be made each year for the next 10 years.

Shortages in the capital reserve category will often lead to special assessments when a capital item needs to be replaced.

Maintenance & Repairs

Very often, this is the largest part of the budget with the most detail.  Items that you will see here can range from landscaping services (read:  mowing the lawns) to snow removal to repainting common elements.  These are variable expenses and will go up and down based on usage and are often called operating expenses.

A good example:  The budget includes monies for snow removal for seven snow storms.  If the weather is worse, and there are 15 snow storms, the additional funds will have to come from some portion of the budget.  If the additional amount is several thousand dollars, the association must make a choice to levy a special assessment for the additional funds, move funds between accounts or allow a deficit to occur in the operating budget.

Here is where life gets interesting sometimes.

An example:  You have a fireplace in your unit.  There is a masonry chimney that vents the fireplace to the exterior.  There is little question that you, the unit owner, are responsible for the fireplace itself.  It is contained within the boundaries of your unit.

What about the maintenance of the flue (cleaning), however?  Is this paid for by the owner or the association?  The answer is not known, unless the condo documents make it clear.

Here is another example:

There is a sewer line that runs underneath your garage that breaks and need repair.  Do you pay for this, or does the association?  In most cases, it is the association.

A slight variation of this:  A drain pipe breaks inside your wall in your unit.  Is this repair at your cost, or is it the association?  In many cases, it is your responsibility.

Yet another example:  Your condo consists of single-family detached homes.  The exterior will require repainting.  Is this cost yours or is it the associations?

Again, you must look at the condominium documents to determine where the expense will rest.  If it is on the association, the budget should reflect the inclusion of these expenses. 

The budget has to match the condo documents in these areas.  If it does not, there will be problems at some point.

The Association

This group, made up of unit owners with elected representatives from the unit owners that manage the condominium is the key group that controls the budget after the development is completed and sold.

Very often, the condominium association hires a professional management company to run the day to day affairs of the condominium.  It is critical to note though, that the management company cannot make decisions on who pays for what:  They only have authority based upon what the agreements in place with the association dictate.

If the condo documents are unclear on where the financial responsibility rests on a given item, it will be up to the association to determine this.  Such a decision may also require professional legal advice.  As a unit owner, you may well also require such advice.

The Bottom Line

The advantage (and disadvantage) of a condo ownership format, is the ability to share in common expenses.  For any of us that have owned a single-family home, we are well familiar with the need to anticipate and budget for operating as well as capital expenditures.

The advantage of a condominium is the ability to create a detailed structure and budget and frankly, to plan properly for expenses that many of us with single-family homes deal with on an emergency basis.

The disadvantage rests with the fact that it is sometimes not clear who is responsible for what expenses.

Next article:  A detailed look at a typical condominium association budget.

Barry Rosa can be reached at:

BRosa@Prudentialct.com

(860) 571-6690

Buying Into A Common Interest Community: The Basics

by Barry Rosa, Vice President Prudential Connecticut Realty

You've decided to take a look at one of the age-restricted 55+ communities, but you are coming from a traditional single-family home.  In fact, like many of us, you have never owned a property that is regulated by a community or homeowner's association.  There are some things that we all need to know before purchasing in a common interest community.

Many of the new (and existing) age-restricted communities, such as condominiums, are organized in the common interest legal format; while others may be governed by a homeowner's association.  Governance is less about the type of property (single-family vs. a town house) and more about the legal form of ownership.

Here's a quick shopping list of things that you should know and areas to investigate when considering a common interest community.  It is also wise to ask your real estate agent for help when considering this type of move.

The State has a law called The Common Interest Ownership Act.  Among other things, it regulates what information a buyer must be given by the Association (of the community you are considering) or the developer.  In many cases there is a "right of rescission."  This means that after receiving the legal documents, including governance rules and regulations, you have the right to cancel the purchase if anything contained in the documents is unsatisfactory to you.

Needless to say, reading the documents is a good place to start.  These documents are often large, and written with a great deal of legalese and technical terms - but plow through them!

Here is the basic information that you need to know:

1)  What are the responsibilities of the Association?  Quite often, all exterior maintenance and landscaping are done by the Association on behalf of the owners.

2) What do the rules and regulations (often called by-laws) say about what you, as an owner, can and cannot do?  A simple example: There may be regulations on the type of changes that you can make to the outside of your home.  There may also be regulations on how long a guest can stay in your home.

3)  There will be a budget that requires you to pay a monthly fee to the Association.  It is extremely important to take a careful and slow look at this document.

The budget generally covers all of the association expenses that are common to the homeowners.  It can often include landscaping, snow removal, insurance on the common areas, maintenance on the exteriors of the home and other expenses.  Each budget for each community is different based on what's included.  The total amount of the budget is apportioned among all of the homeowners and that becomes the monthly common charge.

The budget should also include reserves for capital items.  This is very important.  For example, let's say the roofs on the homes are a common expense in this community (in other words, the cost of roof repair or replacement is paid for by the Association).  The roofs will need to be replaced in 20 years at an estimated cost of $250,000.  If the roof has an estimated remaining life of 18 years, it stands to reason that $12,500 per year should be set aside in a capital replacement fund (reserves).  If this budget has no capital reserves, it may result in a special assessment that will be levied against each homeowner later on.  Be ready for it, if this is the case.  Coming from a traditional home, we all know that we need to set aside money for repairs and replacement.  A common interest community is no different, but it is done in common.

Are there other things that you need to know?  Of course, this is but a brief review of some of the more important of them.  Quite often moving to a common interest community can be a culture shock, especially in terms of rules and regulations.  Do your homework, ask for your real estate agent for help, consult your attorney for legal matters.  Change is good.  Just be sure to understand what the differences are.

Copyright 2006.  All rights reserved.

Barry Rosa is the Vice President of New Homes and Land and Active Adult Specialist Divisions of Prudential Connecticut Realty.  He can be reached at (860) 571-6690, or (800) 571-6690; or at brosa@prudentialct.com

3rd Quarter Connecticut Market Report

Returning to a More Balanced Market

by Barry P. Rosa

We need to balance our thinking about the reality of the current market with the market of last year.  We have enjoyed unprecedented levels of sales and price appreciation over the past several years, most of it driven by exceptionally low mortgage interest rates.  It was easy to sell properties because the market was willing to buy almost everything there was for sale.

The market has changed.  Why?  The simple answer is because interest rates have gone up.  When interest rates increase, the rate of home sales typically decreases and price appreciation moderates - this has been true many times in the past.

If we look closely, this change actually began in the latter half of 2005.  While mortgage interest rates are still very low, short term rates in every other category are much higher.  Equity credit lines, credit card rates, etc., in combination with increases in ARM rates and energy prices are putting pressure on consumer spending. The resulting financial effect of overall higher interest rates on a homebuyer is greater overall expense.

On a state-wide basis over the past 5 years, there have been an average of about 60,000 residential properties sold annually (single-family and condo).  This accounted for the generally low inventory levels in the market during that time.

This year our indicators show single-family sales will be off by about 15% and condo sales will be off by about 8% from last year by the end of the year.  The resulting bottom line is that we should have about 85% of last year's level of single-family sales and about 92% of last year's level of condo sales. The market should have about 51,000 sales by end of 2006 in total.  If we look at those numbers, relative to historical figures, this will be a good year!

Prices for single-family homes are currently increasing at an overall annual rate of 1% to 6%.  This is lower than the figures for the past several years.  Condo prices are a bit stronger, showing overall appreciation rates of about 5% to 12%.  Again, this is lower than the past several years.  It is also possible that some communities will show a decrease in the median prices (with single-family homes) based on a shift of what price ranges are selling best now.

The market is not stagnant, but it is a different market, and has been for many months now.  Buyers are more cautious, especially in light of the many negative stories in the media, specifically tales that predict price decreases and market collapse.  The facts do not support these kinds of dire predictions here.

There continues to be plenty of buyers and home sales in Connecticut, and there will continue to be.  Yes, interest rates are higher, but they are not excessive.  Is a 6.25% 30-year fixed mortgage interest rate really that bad?

The transition to a more balanced, traditional market can be tough to take when we come off of years of unprecedented strong growth, but it had to happen.

It is also very important to remember that we have a good economy.  This is not 1990-1993!

Barry P. Rosa is Vice President of Specialty Services at Prudential Connecticut Realty, and Director of New Homes and Land and Active Adult Divisions.  He can be reached at (860) 571-6690, or at brosa@prudentialct.com

Universal Design

by Barry Rosa, Vice President, Prudential Connecticut Realty

BRosa@Prudentialct.com

With the advent of active adult and age-restricted communities, more attention is now being devoted to home features.  Universal design, however, has less to do with active adult communities and more to do with creating a home that can meet the needs of many parts of our life stages.

A lot of attention is focused on the position of the master bedroom, and rightly so.  A hallmark of an active adult home is often a first floor master bedroom, but there is much more to the creation of a universal home.  Quite often, it is the smaller features, and the ones that are not so obvious at first look that make all of the difference.

We compiled a partial list of universal design features very relevant to new construction.  Some of these items could also be incorporated into remodeling of an existing home as well.

This is not an exhaustive list.  Many of these features are easy and inexpensive to include in new construction, but some could also be very expensive to retrofit into an existing home.

The choice of whether to remodel an existing home or purchase a new home with most or all of the design features desired should be based on economics.  To do this, you need to know the market value of your current home (as it is) along with the costs of making design feature changes and then the market value after the changes are made.

This should be balanced against the option of buying a new home that includes the features desired.  There is no right or wrong answer to this decision:  We all need to decide this for ourselves.

One word of advice:  If you find yourself wanting to change major portions of the home, or creating a new floor plan, it may well be best to look at purchasing a home that includes most of what you want.

Exterior/Entry

At least one entry to the home should be at ground level (think about icy steps and moving heavy items in or out of the house), without raised thresholds.

*A protected entry (awning, canopy, roof) with sufficient room to either side of the door swing.  (Ever stand in the rain waiting for a door to be answered?)

*Door widths of at least 36" and hallways that have a sufficient turn radii (ever try and get the couch or a large item in or out of your home?).

*Lever style door handles (very easy to open, especially with items in one hand).

*Sufficient lighting near the entry and along a walkway to the entry (ever tripped in the dark?).

Interior

There are numerous items on the interior of a home, some obvious and some not so obvious.

*Lever-style door handles.

*Anti-scald faucets in the kitchen and all baths.

*Rounded edges on counter tops.

*Sufficient counter space in the kitchen, especially around appliances.

*Appliances with front mounted controls.

*Counters and work surfaces at two different heights (think about the kids).

*Equip kitchen cabinets with pull out shelves, lazy Susan's and other devices that allow easy access to contents (do you need a step stool to access some of the kitchen cabinets?).

*Good lighting in work areas.

In Bathrooms

A separate tub and shower are best.

*Avoid sunken whirlpool tubs or tubs that require a long leg lift to enter.

*A shower seat can serve many purposes.

*Install tubs with a wide rim.

*In tile showers, avoid high thresholds; consider non-slip surfaces for tubs and showers.

*Good lighting combined with larger mirrors.

*Install blocking for grab rails in proper locations.  Grab rails do not need to be installed unless necessary.

*A telephone jack in the bathrooms.

Some other general considerations

*Level passage between rooms (again with entry widths that are sufficiently side).

*Plenty of electrical outlets (child proof) and switches that are easy to use.  Watch heights of outlets and switches!

*Stack closets on a multi-story home to allow for future installation of an elevator, if needed.

*Make sure closets have wide entry, adjustable shelving and/or rods and do not have bi fold or accordion style doors.  Plenty of lightening, with the switch outside the closet door is best.

Again this is a very partial list of universal design features.  Got you thinking?

Internet sites to browse (for home matters as well as broader topics related to aging):

The Home Builders Association of Connecticut:  Use this site to find local builders and remodelers as well as more information on building.  http://www.hbact.com

Connecticut Commission on Aging:  This site offers a comprehensive guide to state and local resources on aging and related issues.  http://www.cga.ct.gov/coa/

AARP:  This site offers information on many areas, including housing and universal design.  http://www.aarp.org/

Administration on Aging:  Many resources and a great information source.  http://www.aoa.gov/