Buying My First Condo. Can I Avoid Special Assessments?

You might be considering a condo as a way to break into the housing market. Or you might be downsizing, and opting for a compact lifestyle. Maybe you just want to live in a community with great amenities. You could even be planning to buy a condo to rent out.

You know about the monthly HOA dues, of course. But what’s up with potential special assessments? When the monthly dues can’t cover an unplanned expense, then the homeowners’ association (HOA) board of directors may decide to impose a special assessment.

It’s fairly common for condo owners to face these unexpected costs for major repairs. So, let’s talk about condos and one of their least popular aspects: special assessments. Consider this article your issue-spotting checklist.

✅ Check the Age of the Building(s).

The phrase “special assessment” usually won’t sit well with unit owners. But the older the development is — all other things being equal— the more likely they’ll hear it.

Is the development you’re looking at more than 35 years old? If so, there’s probably a good deal of wear and tear on the common areas. The property’s infrastructure may need special maintenance or updating. The board might need all the owners to come up with the extra money, above and beyond the dues they pay monthly.

Skilled property managers:

• Perform regular inspections.

• Anticipate and carry out necessary upgrades.

• Keep ample sums in a reserve account.

If the property managers are alert, they can anticipate unscheduled costs in older buildings. Still, condo buyers can make their purchase offers contingent on an inspection of the building’s foundation, roof and duct work, and overall structural integrity.

✅ Check the Governing Documents.

Look for information on how condo dues and special assessments work in the property’s Covenants, Conditions, and Restrictions (CC&Rs). You’ll see how the property imposes payments (and the penalties for nonpayment). HOA documents often say  capital improvement assessments. That means special assessments.

Regular monthly dues (regular assessments) pay for the property’s common needs. This means routine maintenance for buildings and grounds, salaries, the master insurance premiums, and other normal operational expenses. When the regular funding falls short of a pressing need, or there’s sudden damage that can’t be covered by the master policy, the board can impose special assessments. At that time, the condo unit owners may need to cover, proportionate to their ownership share, the amount needed. But HOA boards can’t exceed their authority as laid out in a property’s governing documents and applicable laws. 

So, look at the master policy deductibles and caps. This will help you and your insurance broker project your potential needs for extra coverage. The state’s condo law will tell you more about the limits of an association’s assessment authority. It may tell you other important information too, such as stating that unit owners have to vote to approve larger special assessments.

✅ Check the Reserve Fund.

The HOA’s cash reserves get replenished month by month by unit owners’ HOA dues. But how does the board determine what the reserve fund will be? How often are the property’s financial needs actually up for review?

Some condo properties, for instance, bring their engineering company in and carry out reserve fund studies every three years.

Ask the property manager how this is handled. Or consult with the current board chair.

Ask to see the latest reserve study and the property’s master insurance policy. Get an opinion from your insurance broker. A well insured condo is less likely to call for special assessments to cover unpredictable damage, spikes in inflation, or other tricky situations.

Speaking of getting professional opinions, your mortgage specialist may also be a good guide. A mortgage expert can look over a condo property’s financial plans, its reserves, and its insurance coverage to help you judge the property’s financial strength.

✅ Check With Your Tax Specialist.

As long as a condo board follows its rules and the condo law of the state, and assuming its decision-making process is reasonable and in the condo unit deed holders’ best interest, owners will need to pay the extra charge. Otherwise, they risk getting liens slapped on their units’ titles.

Now, you might wonder: can these unforeseen charges be written off your tax bill?

Unfortunately, no. If you buy a condo to live in, your condo fees and assessments aren’t deductible. Later on, your extra payments can be added to the cost basis of your property when you sell, so you could receive a tax advantage then.

If you’ll rent out part or all of the condo, you may be getting tax breaks on the costs of improvements to the property. We cannot offer personalized financial planning or tax advice. So, speak to a tax expert for current guidance that applies to your situation.

✅ Check the Area’s Weather History 

Buying into an area prone to flooding, fires, earthquakes, or severe weather? Find out if the board and management are acting mindfully, and keeping enough in their reserves.

Do your own research to learn whether the area is prone to fires or prone to flooding. In a time of climate disruptions, this step is essential.

Some homeowners’ associations go many years without a special assessment. Some elect competent boards and hire experienced work teams, and supportive managers. Some don’t. (HOA boards are made up of unit owners and many have no particular qualifications.)

If you really want to know where the finances stand, run for a board position. At least attend the meetings. Learn how frequently the board meetings are open to the whole community. If the board acts in a transparent way, you should be able to get a good idea of how your funds will be handled.

✅ Check In With Your Insurance Broker

You could ask your broker about purchasing an endorsement to your home insurance policy called loss assessment coverage. This coverage can help you pay for property damage, and even medical costs.

Such an endorsement could be useful in the case that damages to the common elements of the property add up to more than the property’s master insurance policy will cover.

This type of coverage doesn’t help pay for preventative upgrades — just the damages involved in the special assessment. To find out more, ask your insurance pro.

In This Together

As long as the property has a functional board and competent management, the potential for special assessments should not be a deal-breaker for the condo shopper.

As a rule, everyone dislikes special assessments. Board members are unit owners, too. They’ll take pains to avoid burdening owners with surprise costs. But unplanned needs can occur at any property. When used with care, special assessments can support the best interests of the deed holders.

So, it’s important to learn how a property is operated before signing that purchase agreement. To take care of the property’s needs, the board must be committed to sound, regular financial planning. It’s the only way to avoid too many special assessments.