Condo Curveballs

Why Didn’t Anyone Tell Me!

BY WILLY WISE

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So you bought your condo in Paradise, tossed the snow shovel, checked your budget, and headed to Mexico for the winter - happy days are here again!

My wife and I did just that after our first visit to Cabo. Not having owned a condo before, we soon learned that communal living was not always what we had imagined. The insomniac living below us blaring the TV, short term renters partying until the wee morning hours, screaming kids at the pool, dogs left alone in units barking for hours…was there no solitude to be had?

Don’t get me wrong, condos are a great option for the convenience of locking the door and coming back to the same when you return. With the right bunch of like minded people you will have good neighbors and at best a fun social group. Doing your homework on the front end is the key to avoiding unpleasant surprises to your serenity and your budget.

Let’s start at the beginning when you find a place you think you like.

 Rule #1 location, location, location: don’t be writing an offer until you scope out the place with all of your senses.  Go there at different times of the day and listen to the sounds. Roosters and barking dogs in the early morning, squealing kids at the pool in the afternoon or rush hour road noise just when you’d be sitting down for a cocktail; what do you hear? Talk to people about the complex and listen to them.  Real estate agents have the facts but owners, neighbours, property managers and on-site condo administrators have the stories.

 Look around, too, and consider which direction the sun and breeze come from at the time of day you want to be enjoying your balcony or with blinds wide open for the view.  Also remember breezes bring smells from nearby restaurants or worse yet sewage vents from holding tanks. Don’t laugh – wafting sewage odour and using gray water for irrigation is a common occurrence here. And lastly when you do write the offer remember what you can’t sense so make sure the offer is conditional on a building inspection by a professional.

Rule #2, Rules & Regulations: Los Cabos basic condo administrative guidelines are governed by Decree #1695, the 2007 Baja California Sur (BCS) state legislated rules. The Homeowners Association (HOA) for each condo complex needs to be structured and operated in accordance with these rules. HOAs formed after 2007 will likely use these rules but older complexes may not. Regardless, don’t assume the rules are as stringent as they are north of the border – they aren’t. Ask for a copy of meeting minutes and the financial statements. The minutes will tell you about any issues you didn’t hear about from others.

Rule #3 Look for curve balls (the unexpected): Pay attention to mention of the dreaded “cash call”. Don’t be fooled by low dues when comparing one complex to the next; this is one of the biggest and costliest mistakes. The dues are what you pay monthly but the HOA board has the ability to make a call for extra cash from all owners whenever they see fit to make up budget shortfalls or for capital projects such as repairs after big storms. They can be hefty so think about your ability to cough up USD $5,000 or more on short notice. It can be tougher in smaller complexes as larger complexes have more wallets to meet the call. Ask how many “calls” there have been in the past five years and how many owners didn’t pay it.

Rule #4 Show me the money! The financials will also tell you how your HOA dues budget might be affected. Not good with numbers? Here’s a few tips on what to look for:

Look at the income statement and calculate the percentage of specific expense categories to the total expenses (even better if you have multiple years to see trends). This is how your HOA dues are spent; what are the biggest categories of expense? Lots of repairs? – not necessarily good if it’s a newer complex. Is one of the big expenses water? - ask if it’s a collective expense or if individual units are metered for cost recovery. Legal expenses? -maybe something smells other than the sewage holding tank.

Look at the balance sheet for a large accounts receivable number – a.k.a. the delinquent owners list. Every complex has deadbeat owners who won’t pay their dues or cash calls. The HOA can’t cover expenses from recorded income if it’s not collected income. More recently the Mexican legal system became sympathetic to HOAs vs the delinquent owner but it’s a minimum two year legal fight by the HOA to recover outstanding dues from a forced sale of the unit.  HOA’s may have to increase dues or make cash calls to cover the deadbeats who don’t pay.

Look at both the income statement for insurance expense and the balance sheet equity category for reserves which will help the HOA weather a catastrophic event. You didn’t have to be here to experience Hurricane Odile’s financial impact.

 The BCS rules require each complex to set aside 5% of annual income for refurbishment reserves but these reserves are not restricted to catastrophic events and can be used for various purposes if the majority of owners agree.  Reserve funds can be used for planned capital improvements or covering the insurance deductible for unpredictable events. Most HOA’s buy hurricane and earthquake insurance but it’s not cheap. This can be the largest US dollar expense in the income statement but well worth it in my opinion. Insurance policies here are “co- insurance” with a deductible and coverage for 80% of the loss which means both the deductible and 20% of the loss is the owners’ obligation.

Some complexes choose to “self insure” meaning instead of buying insurance they set aside a special reserve to accumulate the equivalent of the premium expense, betting that the reserve will be enough to cover the costs when the unexpected happens. In addition to bigger storms, this place is shaking all the time and you never know when a big one is coming. Just for fun go to www.quakebulletin.com and look at the 100 largest earthquakes near Baja California Sur. A lot of complexes in Cabo are built on packed sand versus bedrock meaning a big shake could crack foundations and result in a condemned building and you risk losing everything.

This isn’t everything you need to know about condo ownership but the moral of the story is the importance of making an informed decision so you can enjoy your time in Mexico for years to come.