Negotiating + Financing

Run from an empty reserve fund? Not so fast

By Margot Slade  | March 8, 2011 - 10:35AM

We thought it was a no-brainer that when a building's reserve is low--not just low, zero--the smart buyer says "no." A recent thread on, however, gave us pause. While several posts advised buyers to run, don't walk, several others said their buildings have happily kept reserves at a barely-there minimum, funding repairs through temporary assessments.

"It's not that serious," swears one. "I have owned a co-op for about 11-12 yrs now in the same boat. We have never had over $2k in our reserves! We keep our maintenance very low and everyone stays pretty current."

Another suggests reviewing a building's meeting minutes going back 5 to 10 years, looking for the number of assessments, their amounts and the purposes for which the money was used: "You can find out not only about past repairs and problems, but future repairs that will need to be addressed, as well as any problems with any of the owners being behind on maintenance."

A more heretical suggestion: "You could also ask to check out the finances of the other owners. Yes I know this is unusual and they don't have to show you, but it doesn't hurt to ask. Even though you have to prepare a package for them to approve you, I don't think it's crazy for you to ask for your own package to approve them!"

"Sometimes your gut can tell you a lot, don't discount that," said a third, while another notes: "By buying into a multi-unit building, you are proposing to become business partners with all the other co-owners. Is this how you'd be comfortable running a business you were part of? If not, don't buy into the building. Doesn't matter how much you love the apartment."

Other reasons to run:

  • Potential issue when obtaining a mortgage. "Fannie Mae wants to see 10% of the annual budget in the reserve fund … There are ways around this if your mortgage scenario triggers a Fannie Mae 'Limited Review,' but that is not always guaranteed when applying for a loan."
  • Without 10% of revenue in the reserve fund, the building may not have enough to repair or replace major systems.
  • "The problem with assessments is not only do you need to have access to the cash for your share of the repair, but you're counting on the fact that everyone else in the building will be able to."
  • "Assessments should be kept to a minimum and should really be used to make improvements to the building, not to maintain the fabric of the building."


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