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Thinking of purchasing a condo or co-op? You likely know that as part of the process, your financial situation will be reviewed thoroughly. But what you may not realize is that at a certain point in the process you get to “look under the hood” of the building you’re considering calling home and see how fiscally responsible and secure it is.
Of course, you should always have a real estate lawyer review the financial statement of a co-op or condo building you are looking to buy into, but it never hurts to be able to read those documents yourself.
We asked three real estate attorneys what they look for when reviewing a building’s financial statement. Here’s what they told us—it’s less complicated and intimidating than you might think.
1. Read the notes
Attorney Adam Stone of The Stone Law Firm, points to the notes section (usually toward the end of the document) as a prime source of information—or information that sparks further questions.
Examples include the year the co-op or condo was founded. If it’s young, you would want to know: Is the board used to running a building? Has the building settled and construction quirks been worked out? And find out the number of units, which could impact how well the building’s financials could weather a tenant or two being late with payments. Similarly, if a building has a lot of sponsor units, buyers are essentially going into a partnership with an entity.
“It’s a concentration of credit risk,” says Stone. That in turn could impact a buyer’s ability to get financing; on a more practical level those sponsor units are investor owned and will be rented out, which is an important thing to be aware of.
2. Assets vs. liabilities
This is a big one, as it’s an indicator of the overall financial health of a building. How much money does the corporation or condo association have, versus how much it owes. Steven Wagner, a partner at real estate law firm Wagner Berkow (and Brick Underground partner), says at minimum the ratio should be 1:1. “Anything better is great, but I would accept one-to-one,” he says.
Ideally, you’ll see financials for the two most recent years. (If not, which could happen depending on when in the calendar year you’re buying, you can request a projected budget.) How specifically expenses are itemized in this section of the statement will vary (some documents get into the nitty gritty in the notes section), but you’ll see line items for things like “administrative expenses," “operating expenses," “repairs and maintenance.”
The main thing you’re looking for is consistency year over year. “They should be relatively the same,” says Wagner, pegging within 2 percent as ideal. “It’s a hallmark of good management and reflects planning.”
4. Expenses on the horizon
Are there any big money expenditures down the road? That could be anything from an assessment for a new roof, or an underlying mortgage likely to be refinanced at a potentially higher interest rate. “Any potential changes that might impact the maintenance,” says Craig L. Price, partner at Belkin Burden Wenig & Goldman.
Think of it as the co-op or condo’s rainy day fund—how much money does it have if things should go wrong? You’ll find it under the category, “other assets.” Wagner likes to see at least three months of operating expenses in this fund.
While you don’t want to see indications of irresponsible or inefficient spending (again, something you might be able to tease out in the notes section), spending on upgrades is often a good thing. Wagner says that it’s important to invest in improvements to keep things working well.
Is there an ongoing lawsuit? What’s it about? Could the building be hit with paying significant damages?
6. An audit
It’s not crucial, but if a building’s financial statement has been audited (i.e., an independent firm verified that the document is accurate and correct) it’s a nice thing to see.
7. Anything weird
Finally, in addition to checking these standard items, you want to keep your eyes open for anything out of the ordinary.
“Due diligence is a bit of a fishing expedition,” says Stone, who says aberrations aren’t necessarily a sign of trouble, but do warrant further investigation. “You come up with other questions. What do you want to dig into deeper?”
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