This is the last of a three-part series on researching the purchase of a condominium. Note that this is a general discussion of this form of home ownership that in no way describes, or is directed toward, any specific condominium association. The author also lived and practised for many years in the United States, as well as Bermuda, and had exposure to owners / builders / attorneys and tenants of various condominium structures.

In the first two segments of this article, archived on www.royalgazette.bm April 2008, we discussed the legal and physical structure of the organisation, the responsibilities of the condominium association and understanding whether you (and your lifestyle) will fit within your new condo community. Just as important, this week the focus is on assessing the financial health of the condominium association.

If you own a unit in a condominium association, you have a right to see the following financial information. If you are thinking of a condominium purchase, make sure that you are able to review in full the financial statements before you sign the sales agreement. After negotiating a mortgage, and a sales price, you don't want the inconvenient surprise of a capital special assessment, just months after you move in.

Balance sheet — a broad overview and not designed to be an exhaustive missive. Financial statements can be incredibly detailed.

1. Review the association balance sheet and the income statement. If numbers are not your forte (no shame in that), get an accountant friend, or pay to have someone look at these. You might want to have a couple of years of financial statements for a comparison review.

It is worth the expense to know that your future home association is solvent, that vendors are reliable and prompt, that the capital reserves are adequate, that cash is handled appropriately from an investment risk perspective, and that the association is fully insured for contingencies, both physical, i.e. hurricanes and intangibles such as misappropriation of funds.

2. Accounts receivable balance. This is the general ledger account use to record condo fees assessed and other receipts due, such as leasing arable land, or other association-owned equipment, property rights, etc. What is the balance, what percentage of fees are overdue, and why? This is one indicator of the financial health of the owners and the association because a high old receivable balance indicates that condo fees are not being collected.

3. How much liquidity — cash is available?

4. Is the capital reserve allotment being set aside each month? Where is it; what is it invested in; and who is handling the investment process?

5. Are the Condo Association financials audited?

6. Who has access to the accounts and the cheque book? Are there risk controls in place, i.e. two unrelated party signatories required for large payments.

7. Accounts payable balance. How much owed and how old are they? You want to know that vendor bills are paid promptly, for work performed of course.

8. Who are the major vendors? Was there a fair and bid/hiring process devoid of personal conflicts of interest with the board or owners?

Income / Expense Statement

9. Does condo fee revenue for the year appear about right? Try the average condo fee per unit times number of units times 12 months and see if it appears reasonable when comparing to the income statement.

10. Do any expenses look excessive on the income statement, especially miscellaneous categories. If large numbers with no detail, request a copy of the invoices — this applies to owners?

11. Did the Association have a surplus at the end of their fiscal year? Too large a surplus means that condo fees might be a bit too high, or it could mean that the Association is trying to build additional capital reserves. Too little surplus could indicate excessive expenses, or too low fees, with no capital reserve.

10. Does the Association have a yearly budget and is it meeting its budgetary goals?

11. Are there any stated or unstated liens on the Association? Or lawsuits?

Anecdotal evidence. It is not pleasant to have to sue in court to gain access to detailed financial statements (and underlying invoice documents) being paid out of condo fees. In these cases, the community harmony is disrupted while the process of discovery and initiation of fair play in all matters is resolved to the satisfaction of all parties.

If the Association uses a management company...

• Does your new home look well maintained?

• Who performs the maintenance and are repairs handled in a timely manner?

• How are the utilities billed?

• Where is the water supply, how metered, do you share with another owner? Understand how the water supply is handled, does each unit have its own tank? Imagine the vexation in having six party people next door practicing ultra-clean hygiene. You get up to head out early to work, no water for you!

• Any noticeably bad odours? One complex visited many times over the course of year never solved a septic odour problem. It was not, and I repeat, not a great place to come home to.

• Some condo owners have become very independent. They've taken over the maintenance themselves, similar to single family homeowners. They feel they have more control over their assessments and the appreciation of the property.

Beware of the consequences of choices. If you work 16 hours a day, you may not want to do maintenance during precious home hours, nor do you want to be accused of not 'contributing your labour' to the condo maintenance group.

Last, But Not Least:

• Take the time to interview other tenants if you can, preferable renters, regarding their overall impression about living there long-term.

• Check all the covenants in the Association documents. In particular, know the rules about unrelated parties residing in each condominium unit, using your parking space, and overloading the septic systems

• Watch for poor construction, such some types of particle board that eventually blows up in the humidity here like a sponge. Monitor the thickness of privacy walls. At that same odoriferous complex described above, one could hear the neighbour going up and down stairs at all hours of day and night.

• Pay a few visits at odd or different times. Things still look good?

• Give it the image test. Does the place feel like, look like, (smell like) home? Remember this is your new home. You want to feel proud to be there and watch your new home grow in value.

Martha Harris Myron CPA -NH1929, CFP® -67184 (US licences) TEP — Society of Trust and Estate Practitioners. She is a Senior Wealth Manager at Argus Financial Limited, specialising in comprehensive financial solutions and investment advisory services for individual private clients and their families, business owners, endowments and trusts. DirectLine: 294-5709 Confidential e-mail can be directed to mmyron@argusfinancial.bm

The article expresses the opinion of the author alone. Under no circumstances is the content of this article to be taken as specific individual investment advice, nor as a recommendation to buy/ sell any investment product. The Editor of the Royal Gazette has final right of approval over headlines, content, and length/brevity of article.