Ask An Expert: Understanding Condo Costs
Owning a condo is a lot like playing on a soccer team – the individual members can do things to contribute to the experience but in the end? It’s all about the team score.
In northern New Jersey, condominiums are a fact of life. Much of the housing stock in Hoboken and Jersey City is comprised of multifamily condominium units, especially in newly constructed buildings. The Metro Moms caught up with residential property manager Peter Johnson to discuss how much money a condo association should have in the bank.
Q. How much money do condo associations typically save?
A. These days, mortgage lenders require a condo association to save 10% of the annual budget each year in a reserve fund. However, that does not mean that you will see all of that money in the reserve fund since the association needs to spend some on repairing the building common areas. It also does not mean they are collecting the amount needed to replace your capital items.
Q. What is a capital item?
A. Capital items range from building to building depending on construction. All buildings have a capital item list that includes the roof, plumbing and walkways, some have a central boiler (heats the whole building so the association is responsible versus individual HVAC in each unit), elevators and façade brick repointing.
Q. So how much total should an association have in the reserve fund?
A. The total amount in the reserve fund is a moving target depending on the age of the building and when it expects to make repairs. You want to have enough money available to repair or replace capital items when they break or wear out. For example, a 10 year old building will have a 10 year old roof. The typical life expectancy for a roof is 25 years, so that means you have 15 years to save $80,000 to replace the roof. However, a 60 year old building that just completed a lot of repairs will have a lot less in its reserve fund than a 10 year old property that has a number of upcoming construction projects.
Q. How do you know what the capital items are and their replacement costs?
A. The best place to start is an engineering reserve study. For $2,000-$3,000, an engineering firm will survey your building to determine what the capital items are, see what kind of condition they are in, estimate how much useful life is left, and how much it will cost to replace those items. From there, the firm will figure out how much money you need to save based on how much your building currently has in reserves and when you will need to replace a capital item.
Q. Should condo buyers request a copy of the association engineering reserve study and expect to see exactly the recommended amount in the reserve fund?
A. An engineering reserve study is not set in stone. It is simply a point of reference that will get you to your desired reserve amount. If you maintain capital items they will often last longer than projected by the engineering reserve study and therefore you will need less money in your reserve fund. Engineering studies need to be updated every few years as the building ages to adjust the projected life span of capital items, which changes the calculation. You may find your building needs an investigative study involving testing, which could cost $10,000.
Smaller buildings can create their own reserve studies by getting quotes from contractors, but that is a very time consuming process. In an eight unit building, the cost of an engineering study works out to $275-$350 per unit.
Have a question about your property? Leave a comment below so Peter can respond.
Peter Johnson has over 15 years of property management experience and is a principal at Progressive Property Management. Founded by developer Rich Dinar in 1981, Progressive Property Management brings commercial expertise to residential properties. Managing buildings throughout New Jersey, Progressive specializes in buildings with more than 20 units. You can reach Peter at [email protected]