Purchasing in a Condo or HOA Community? You’ll Want to Look at the Reserve Study

Condos and townhomes are a common entry point to homeownership for new buyers. But there are some things you should know about them, including some changes coming for these developments in Maryland later in 2023.

Condominium and townhouse units are almost always governed by a homeowner’s association (HOA) or a condominium association. These bodies oversee operations of the development, make necessary repairs to the shared spaces, and charge monthly fees to unit owners to cover ongoing costs. They can also charge one-time “special assessments” for unexpected expenses.

To make it easier for homebuyers to evaluate what fee increases and assessments might be charged in the future, Maryland now requires that all associations conduct an initial “reserve study” by October 1, 2023, and update that study every 5 years after that. The only exception is for associations that have amenities valued at less than $10,000.

A reserve study looks at the finances of the association and the condition of the property, then evaluates whether the association has enough savings to pay for its future repairs and obligations.

If the study shows that it does not, the association will need to make up the difference in their reserve account within 3 years, according to the law. That time is when unit owners can expect to see increases in their monthly dues, a special assessment, or both.

When you are looking to buy a condo or townhome, how can you know the health of that association’s finances?

Both condo associations and HOAs are required to provide what is known as a resale or disclosure packet to all buyers, and to give you a certain amount of time to review it. In that packet, they must include at least a summary of the current reserve study report, the amount of their reserve funds, or a statement that they do not have a reserve fund.

You should carefully review the association’s financial statements and this reserve study report to see if the association is in sound financial shape. If the amount of the reserve fund is dramatically lower than the recommended amount in the most recent reserve study, or, if the association has not taken steps to conduct the study before October 1 and create a reserve account, buyers should anticipate that a special assessment or increase in monthly charges will be imposed on unit owners in the near future.

If the potential for large increases to monthly fees or a looming special assessment is of concern to you, you have a short window to cancel your contract to purchase a unit in that development.  You will want to discuss this option with your REALTOR® so that you meet the appropriate deadlines and give proper notice.

For more information on these changes, visit the Maryland General Assembly’s website for House Bill 107 (2022): Legislation – HB0107 (maryland.gov)