Inquire about association's finances before buying a condo

Purchasing a condominium may be the first significant financial decision a homebuyer makes. While the location, building design and amenities are important, there are also several financial and legal aspects to consider before making the commitment.

In condominium living, that commitment includes not only the purchase of property, but also automatic membership into a condominium association.

For people making their first entree into the home-buying market, condominiums historically had the best appreciation of any residential real estate investment.

The information you gather before the purchase will help you create a complete picture of how the association operates. You should become familiar with some of these nuances and learn what makes this transaction different from the purchase of a single-family home.

Several key issues should be addressed through the written contract you will present to the seller. The contract should include a clause, or be attached as a separate document, called a "rider," that asks the seller for certain documents and records to be disclosed. Under Section 22.1 of the Illinois Condominium Property Act (765 ILCS 605/22.1) you are legally entitled to this information, but you must make the request in writing to the seller, who will obtain it from the association.

By reviewing these documents, you can learn about the association's financial picture, whether any legal action is pending against the association or the individual owner, and such things as whether the association bylaws prohibit certain pets, for example. This law applies to condominium associations and not townhouse and homeowners' associations, even though they operate in a similar fashion.

Illinois law requires the buyer to ask the seller to produce the following documents:

• Copies of the association's declaration, bylaws and rules and regulations.

• A list of any liens placed against the unit.

• A statement of the account that details the amount of unpaid assessments and charges owed to the association.

• Capital expenditures expected by the association within the current or succeeding two fiscal years.

• The status and amount of reserves, both for replacement and for specific projects.

• Statements of the association's financial condition for the last fiscal year.

• Status of suits or judgments in which the association is a party.

• Details on the insurance coverage provided.

• Improvements or alterations made by prior owners to the unit or limited common elements, which are in good faith believed to be in compliance with the condominium rules and regulations.

These documents will create a picture of how the association is managed, how much money is in reserve, and how owners' monthly assessments are being spent. Does the association have adequate insurance to cover replacing the condominium building in the event of fire, theft or other damage? Given the age of the property, have reserves been accumulating to cover routine maintenance projects, as well as more significant planned improvements? If the answers to these questions are no, it could be a financial liability to the owner. This is particularly important if you are buying via a short sale, from a bank's foreclosure inventory or an insolvent developer.

The association's declaration and bylaws and the rules and regulations will help you understand what types of activities are permitted in the complex. Are unit owners allowed to leave trailers, trucks or motorcycles outside? Are pets allowed and, if so, are there weight restrictions? If you have a 75-pound dog or want to buy the unit as an investment to rent out, these documents could dramatically change your plans.

Is the property managed by a professional management company, an employee of the association or the board? How the property is managed may have an impact on your decision.

Is the association involved in litigation? Is the board being sued or are they a plaintiff against someone else? Sometimes association litigation is covered by insurance. Litigation can be very costly and that expense comes out of the budget.

By doing careful research before you purchase, you can save yourself from surprises and focus instead on living your new life as part of a condominium association. After all, association membership is not a privilege, it comes with ownership.

• Jordan Shifrin is an attorney with Kovitz Shifrin Nesbit in Buffalo Grove. Send questions for the column to him at jshifrin@ksnlaw.com. This column is not a substitute for consultation with legal counsel. Past columns can be read at www.ksnlaw.net.