Special assessments: what they are and how to spot one before you buy

Why associations levy them

Common causes include:

• Underfunded reserves. The roof, siding, elevators or paving reach the end of their life and the reserve account is short.
• Insurance. The master policy has a high deductible, and a covered loss leaves owners to fund it. Rising premiums can also strain a budget mid-year.
• Legal costs. Lawsuits involving construction defects or disputes.
• Code or safety requirements. Work required by a local inspection or new rule.

The size depends on the project and each unit's share, which the governing documents set, often by unit size or a fixed percentage.

Finding one before you buy

Ask directly. Ask the seller, and the association or its manager, whether any special assessment has been approved or proposed. Get the answer in writing. Many states require associations or sellers to provide a disclosure package, sometimes called a resale certificate, that answers this.

Read the minutes. Two years of board minutes show what the board is worried about: deferred projects, contractor bids, insurance renewals, lawsuits or reserve shortfalls.

Compare reserves with the reserve study. If the study says the roof needs $600,000 in three years and the reserves hold $150,000, an assessment or a large increase is likely.

Check the master policy. Note the deductible and any pending claims.

Watch the lending signals. Fannie Mae's condo review checks whether the budget funds reserves of at least 10 percent and how many units are 60 or more days behind on each special assessment. A project that fails those checks can limit your loan options.

Who pays during a sale

The contract decides. A common approach is that the seller pays any installments due before closing and the buyer pays later ones, but there is no fixed rule. If an assessment has been approved and is payable in installments, you might negotiate a price reduction or credit that covers your share. If one is only proposed, you can ask the seller to pay any assessment approved before closing for a specific project.

An approved assessment that you will pay over time also affects your budget. Lenders may count assessment installments, so ask your lender how it will treat them.

Insurance and assessments

The Colorado Division of Insurance describes loss assessment coverage as protection for individual owners against special assessments levied for claim-related major repairs or lawsuits. It is usually an add-on to a unit-owner or homeowners policy, with its own limit. Because it is tied to claims, do not assume it helps with an assessment for routine repairs or a reserve shortfall. The division notes that some policies limit what they pay toward an association's deductible, and that coverage can depend on whether the policy in force at the date of loss or the date of assessment pays. Ask your insurer what is covered and at what limit, especially if the master policy has a large deductible.

The bottom line

Ask about assessments in writing, read the minutes and compare reserves with the reserve study. Settle in the contract who pays any assessment approved before closing, and consider loss assessment coverage on your own policy.