Whether they're called condo fees, association dues or homeowner's association dues, they all do essentially the same thing. When you own a condominium, you are a member of an association along with the other unit owners. The association is responsible for maintaining all of the shared areas of the condo complex. Your fee funds the association so that it can pay the maintenance, repair and operating costs. In addition to paying ongoing costs, the association holds extra money in a special account, called a reserve fund, that it uses to pay for major projects.
Uses of the Reserve
Reserves are used to pay for all major replacement expenses in the common areas of the building. For example, if your building periodically needs to have its elevators or its common heating system replaced, reserves would pay for them. Reserves would also pay to replace the roof and siding on a condo where the building exteriors are commonly owned, or even to replace a shared swimming pool.
Fees vs. Reserves
Reserves exist hand in hand with condo fees. When a unit spends more money on maintaining its systems, it replaces them less often, reducing the expense for reserves. Touch-up painting can prevent the need for frequent repainting of the entire property, while furnace filters and tune-ups extend the life of a building's heating, ventilation and air conditioning system.
Your condo association can set its reserves at whatever level it wishes, subject to limitations imposed by the laws of its state. Many associations get a professional reserve study done periodically to see what their capital expenses will be over a 40-year period. It's important to have adequate reserves. If a condo owner wants to be able to sell a unit to a buyer needing a mortgage, the condo association's reserves will need to be properly funded. As of July 2013, Fannie Mae and Freddie Mac require condo associations to deposit 10 percent of their total fees into the reserve account. If the requirement isn't met, the property may not be eligible for a mortgage underwritten by them. The Federal Housing Administration program also maintains reserve requirements that can impact a condominium community's ability to be financed by a mortgage that they guarantee.
Too High / Too Low
The drawback of having a reserve account that is over-funded is relatively obvious -- it makes your monthly condo dues go up. While having one that is underfunded can be tempting since it lowers monthly dues, doing this creates a problem that will eventually pop up in the future. If the association's reserve accounts are underfunded, it will need to significantly increase the monthly contribution, or levy a special assessment when a major expense comes up and there isn't enough money to pay for it.
- Charles Gate Realty Group: Condo Fees in Boston: The Importance of a Properly Funded Reserve
- Habitat: Are You Contributing Too Much to Your Co-op or Condo's Reserve Fund?
- The Washington Post: Real Estate Matters: New Lending Guidelines Require Adequate Reserves for Condo Associations
- Inman News: FHA Policy Shift Leaves Many Condos Ineligible for Financing
- Kaman & Cusimano, LLC: The Special Assessment Problem
- Naples News: Richard White: Condominium Association's Underfunded Reserves Causes Red Flag Situation
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.