New Rating System for Condo Associations? Could this catch on?

When buying a condo the biggest concern you should have is the state of the condo association. You are not just buying a property to live in, but you are also buying into an association which manages the common grounds of the property, pays bills for the property, among other things. During the last real estate crash we saw many condo associations in financial difficulty due to mismanagement of funds, poor management companies (or complete lack of) and inexperienced board members who had no business being on a condo board in the first place.

When you purchase a condo in the state of Illinois you are entitled to certain things. You can gather all the information from the condo association such as the meeting minutes, the budget, their bylaws, rules & regulations and a form called a 22.1. A 22.1 form is a standard form that asks questions of the condo association such as “Is the association involved in any litigation” or “Are there any special assessments planned?”

Some buyers take the time to review this information but others do not. In my opinion, this information is extremely critical. I always review these documents for my clients and stress that they review them on their own and direct any questions they have to myself and/or their attorney. A new company, founded here in Chicago, is out to standardize how condo associations are evaluated. They have developed a system, similar to the FICO Credit Score system that evaluates condo associations based on numerous, numerous factors. They then assign a numerical score to the condo association. Their thought is that such a score is much easier understood than evaluating all the condo docs that a buyer may receive. Their thought is “this way, a buyer can look at the score and know immediately the general health of the building itself.”

From a pure business perspective I think the idea is brilliant as it definitely fills a need and want in the market place. From a practicality standpoint, in the real estate industry, I am a little worried about some problems that may arise from such a system.

One of the concerns I have is that buyers will start to simply rely on only the rating. The problem is, with any rating system, no matter how forward thinking they may be, the rating is only good for a current point in time. It does not look forward or help predict problems that may arise in the future. While it may provide valuable insight into a condo associations current health it also takes the work away from the buyer. The buyer may say “great, I don’t have to read all these documents now” but the buyer will also then be less educated as to what is going on with their association.

What about condo associations on the rebound? As many of you may have experienced there have been associations that have had financial problems in the past. What about those that are on the mend? What kind of rating will they get? Could a low rating due to problems in the past keep them down and delay their recovery?

Does this now add to the already expensive process of buying and selling a home? Will this become the new industry norm that not only buyers will use but banks may use during their underwriting process as well? Could this eventually mean longer wait times for mortgages or could it mean lesser wait times because the banks will now only have to look at a score given by this rating agency?

The biggest concern I have, however, are those that will now look at such a rating agency as a replacement for their own due diligence. It was this attitude that spurred the credit bubble we saw just over a half decade ago and it is something we cannot afford to see again. I believe the concept of Association Evaluation is phenomenal and can be a wonderful tool for buyers, sellers and condo associations. But again, it needs to be just that, a tool and not a replacement for Realtor’s, Buyers, and Lenders own due diligence.

 

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