How Do I Read an HOA Budget and Reserve Study Before I Buy a Condo?

How do you read an HOA budget and reserve study before you buy a condo in Orange County? You look at whether the association's income covers its yearly costs and whether it has saved enough for future repairs, because when an HOA is short, owners usually make up the difference.

I'm Jeanette Nelson, a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas. When you buy a condo or townhome, you're also buying a share of a building, its roofs, its pools and its paving. The HOA's paperwork tells you how well that shared part is being cared for.

California Civil Code section 4525 lists what an owner selling in a common interest development must give a prospective buyer. The list includes the governing documents and operating rules, the most recent annual budget report, the financial statement, and notices of any unresolved alleged violations. If you ask, the seller must also provide board-approved minutes from meetings held in the past 12 months.

The three money pieces to focus on are below.

Under Civil Code section 5300, an HOA must send its annual budget report 30 to 90 days before the end of its fiscal year. It includes:

• A pro forma operating budget. The estimated income and expenses for the year.
• A summary of the reserves.
• A statement on special assessments. Whether the board expects one for major repairs, and an estimate if so.
• How reserves will be funded, and a general explanation of how they're calculated.

As you read, ask a few plain questions. Do dues cover the expenses? Is there a reserve contribution line in the budget? Did dues rise sharply, or not at all for many years? Are insurance costs a large share? A big change in either direction is a reason to ask why.

The reserve study is the HOA's long-range repair plan. Under Civil Code section 5550, the board must have a visual inspection of the major shared components done at least once every three years, and must review the study each year.

The study must:

• List major components the HOA maintains with less than 30 years of remaining useful life, like roofs, paint, paving and pool equipment.
• Estimate each one's remaining life and its repair or replacement cost.
• Calculate the yearly amount needed to fund those repairs.

Look for the date of the last inspection, the big items coming due in the next few years, and whether the plan assumes dues will rise.

You'll find this number on the Assessment and Reserve Funding Disclosure Summary required by Civil Code section 5570, which comes with the budget. It shows the reserve balance compared with the amount the study says should be saved, as of a date. It also projects the next five budget years.

The Department of Real Estate's reserve study guidelines describe the idea as cash reserves shown as a percentage of the amount needed. Lower means the HOA has saved less of what it will likely need. The law notes these are estimates, so a single number never tells the whole story. Read it alongside the repair list and the board minutes.

• A planned special assessment in the budget report or minutes.
• A large repair coming due with a low reserve balance.
• An old reserve study or a skipped inspection.
• Minutes that mention leaks, lawsuits or insurance problems.

This is general information, not legal or financial advice. For specific concerns, ask the HOA manager, and consider a real estate attorney or CPA.

You may also find these helpful: what you'll pay at closing and what happens in escrow.

If you are thinking about a condo or townhome in Orange County, I'd love to walk through the HOA documents with you during escrow, so you know what questions to ask before you remove contingencies. Call or text me at 714.366.8575 | DRE: 01397168, or contact me. Jeanette Nelson is a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas.