First-Time Condo Buyers Beware: The Real Story Behind 'Affordable' Monthly Charges

Transitioning from a developer to a condo board can bring unwelcome surprises and stark choices. That was the case at a Brooklyn condo, when new management took over and discovered owners were paying only half the amount needed to cover basic operating expenses. The artificially low monthly charges—which had attracted many first-time buyers—were temporarily masked by reserve funds that were rapidly depleting.  Anes Radoncic, managing partner at VNYPM, tells the tale to Habitat’s Paula Chin, from discovering the shortfall to the board’s bold move towards financial stability.

How To Run Your Building: For Co-ops and Condos

Transcript

Paula Chin: Welcome to How to Run Your Building, a conversation with New York's leading property management executives. I'm Paula Chin with Habitat Magazine and my guest today is Anes Radoncic, managing partner at Venture New York Property Management.

For property managers, taking on new clients is part of the job, and sometimes one of the most challenging. That's especially true at new construction, co-ops or condos when a new board takes over from the developer only to be shocked when they discover that their finances have been mismanaged and maybe that they're deep in the hole.

Anes, you dealt with just that problem when you took on a building in Brooklyn. That was a pretty tough transition for them. Can you tell us about it? 

Anes Radoncic: Yes. Sure thing. So we transition properties all the time, either through existing management companies through developers, or through change of hands.

For this particular property. We transitioned over from a developer, and to our surprise, the monthly maintenance that the owners were paying was significantly lower than what their expenses were to operate that specific building. They were bringing in, let's say, hypothetically a hundred dollars, but their expenses were $200. In any formula, any sort of mathematical equation, the math doesn't math. And we were able to assess this obviously during the transition and after the transition from the developer is what we call an an audit period, which is in a sense us transitioning all the documents from either a management company or a developer.

And we're able to see in real life exactly all the money coming in, all the money coming out. And after our financial team did an analysis, we saw that there was a huge discrepancy as to what was going on. 

Paula Chin: How had they been getting along then if they were only taking in half of their operating expenses?

Anes Radoncic: So the building did have a plump reserve that they were able to obtain from the developer which I believe was through a working capital when purchasing into the building. So they were able to rely on that reserve to get 'em along the way. And naturally, in most cases, what we see is typically for new construction properties when the maintenance is extremely low, this is where you get an influx of first time home buyers or new condo owners. Typically, when you have a first time home buyer and or first time condo owner especially, they're almost numb to the fact, or if you will, clueless to the fact on what it takes to operate a condo. And in their mindset, they still have that somewhat renter mentality.

Until they get to that breaking point, when they realize, hey, look at all these red flags, you know, what's going on. So in short, what was happening is they were relying on the reserve to keep them afloat while maintaining their monthly dues at such a low rate. But the reality of it was they were paying roughly about a hundred to 150% less than all of the properties within the neighboring perimeter.

Paula Chin: When they took control, didn't they get the documents first so that they could see that they were bringing in only half and that their surplus would run out? 

Anes Radoncic: This is going back to the point where, first time homeowners, first time condo owners they're not experienced in reading a financial statement or a financial plan.

Especially one that comes from a developer, which is gonna be skewed in some way, shape or form to create an attractive future to bring in these new buyers. 

Paula Chin: Then you had a big task. I imagine you worked out the budget or perhaps first had to deliver the bad news. 

Anes Radoncic: So delivering the bad news, it's not my favorite part because when you are a new management company, the last thing that you want is the first impression to be, Hey guys, we need a significant increase. Because it's always misconstrued by other owners who don't realize, the realistic expectations, which is, Hey, you guys are making X amount, but you guys are spending Y amount.

So it comes down to us to break it down in a way where it makes sense for everyone to understand. But we were able to do that by essentially assessing all of their actual expenses and then forecasting and projecting what their expenses would be for one year, two year, three year, four year, five year.

We, in a sense created a five year plan projecting and forecasting expenses for those five years. 

Paula Chin: So I imagine then you went, down a line by line item list and telling them exactly what their expenses were. 

Anes Radoncic: Absolutely. So the biggest expenses typically when it comes to condos and co-ops-- if you're a co-op, obviously you have the mortgage and you have the taxes.

But for condos, typically it's gonna be the repair line item. You're gonna have the insurances, which is have been absolutely staggering in the last 48 months. But in short it's about your property manager having knowledge of what's going on in the economic climate. And what I'm referring to is, for example last year we had an increase for utilities, roughly 4.5%. We just got notice, we just got word for this year that we're expecting water to increase almost 9%. So all of these factors you have to take into account when budgeting appropriately, because if you have an increase, for example, for insurance, 15 to 20%, which is what we are seeing on a regular basis. Then you have utilities going up another 9%, and then you have your repair line item going up another 15 or 20%, naturally, where's that money coming from? It's coming through regular increases. And the standard rule of thumb for increases for the last 15 years have always been roughly 3%.

That 3% is out the window in the last, I would say, three or four years. We're seeing on average now between five to 8%, depending if it's a condo or co-op. 

Paula Chin: Now in this case doing the budget, obviously you have to factor in unexpected things, repairs, something going wrong. Do you also budget in a way that anticipates, perhaps the charges will be, utilities or wherever a little bit more than you expect?

In other words, do you put in a little extra cushion? 

Anes Radoncic: Yes. Great point. So when we forecast the budget, we typically stick to the one year, three year, and five year plan. And when we do forecast the budget, we always put in a contingency of about five to 7% in every specific line item. We simply round the numbers off to the nearest 10th or the nearest hundred because you never know where it's gonna fluctuate.

Let's face it, a budget is a forecast; it's like predicting the weather, do you know a weatherman that's been a hundred percent accurate? We fall under that same line item, but obviously there's a lot more control, with the exception of having a forecast on repairs.

The other utilities and regular service contracts, things of that sort, we're usually able to get very close within five to 10% variance. But when it comes to repair that's the kicker that can typically make or break a budget. 

Paula Chin: Now, if you said they were paying half. That is an enormous common charge increase.

How did you get the money for all of the expenses going forward? A realistic budget. 

Anes Radoncic: So once we put together the budget, we put together a one year, three year, and a five year plan. And within that budget what we did is we laid out multiple options. In this specific incident, the building needed essentially a hundred plus percent increase in their monthly dues to essentially catch up for the, if you will, miscalculation from the sponsor as to what their forecasted expenses would be. Ultimately it comes down to realistic expectations and presenting it to the client in a way that they are able to understand, and that really is the most challenging part because you'll have individuals that are maybe more, if you will, savvy in that department that are inclined to understand the concept a lot smoother versus, the other half, which is, Hey, we bought into this, this is what we were told.

Now they're upset, they're pissed off, they wanna sue somebody. We've been guided in the wrong direction, et cetera, et cetera, et cetera. But the reality of it is, they should have done their due diligence with respect to how it is to live in a condo. So all of this has to be broken down in a way where it's massaged nicely for the new homeowner, new condo owner or new co-op owner to understand.

Paula Chin: I imagine you would, in terms of being real realistic, would have them look at comparable common charges or maintenance in the area, right? So that they could understand that they were given a really good deal that could not last.

Anes Radoncic: A full comparative analysis and comps in the area are always done when we put together a budget just to let everybody know where they stand in relation to their neighboring properties or properties that are of comparable amenities, features, so on and so forth.

So then they have a better understanding as to where their money is going. We typically do this with buildings that we've had for 10, 15 years. And we do this with buildings that we've just onboarded. So it's a common practice because what happens is you get board turnover, you get unit owner turnover on a regular basis, and you're constantly in the process of reeducating and or educating, new people when they do come in. 

Paula Chin: Is it part of your task to help unit owners or shareholders understand, or does that terrible job fall to the board? 

Anes Radoncic: That's the question for the ages when it comes to condos and co-ops: educating board members is something that there's no school for, right?

Typically board members will jump on to be on a board if there's an issue in the building that is a personal issue for them. Or if they have a very strong vested interest in the complex, or if they have a trait that can contribute for the betterment of the complex, that's typically the board members that we see.

But in some cases you have board members that are simply on the board to try to educate themselves as to what's going on, but they really have no sense of direction. Those are the board members that you know, and I hope board members will listen to this. I urge you to rely and trust your management company because this is what they do for a living.

If you have a reputable management company, trust in their judgment because they will not steer you in the wrong direction. They have a fiduciary duty just like you have a fiduciary duty. It's in their best interest to see you guys succeed. Because if you guys succeed, then they succeed. So ultimately, a lot of what we do is educating the unit owners, especially the board members, as to what the processes are.

You have board members that are more intimately involved with the day-to-day of management activities, and then you have other board members that are more inclined to trust the management company and let them do their thing. We've seen success on both sides. Naturally, we prefer to be called the real estate doctors, right?

So this is the perfect analogy that I give. When you go to a doctor and you have a cough and you have a runny nose, you've self-diagnosed yourself a hundred times, and you have everything under the sun from A to Z. When you go to the doctor, you're telling the doctor, Hey, I think I have this.

I think I have this. This is what I think I should do. The doctor will just stay quiet and then when you're finished speaking, the doctor will say, you have a simple flu, please let me do my job. So that's ultimately what we ,do. So when there is a situation in a building, for example, let's say the roof is leaking, we'll typically have board members that think that they're an architect, an engineer, an accountant a roofer, and they will try to assess it on their own and try to take the initiative, but ultimately they're being led astray into a different direction because these contractors are ruthless. They're gonna promise you everything under the sun, and then you're gonna end up spending a lot more than you would have by actually following the doctor, aka, the property manager.

Paula Chin: So there's a real learning curve. Now with this particular condo, you said you presented different options for them to come up with the money. What were the options and what did they choose? 

Anes Radoncic: The options for this particular property was a massive increase in the monthly dues that would, in a sense put them on par with their neighboring properties and comparable properties within the area.

Another option was to do an assessment to infuse themselves with cash that they can rely on while doing smaller increases as the years progressed, so they have a cushion to sit back on. And then a third option was to do a working capital loan. Which is in a sense, taking out a loan that's labeled as a working capital loan from a reputable bank comparable to NCB.

And these loans specifically are designed for any sort of projects or hardships that a building may undertake, which they are allowed to be infused with cash by following a rigorous application process in order to obtain that loan. So we provided to them all of these options and ultimately the board did decide to go with option number one, which was the massive increase, which helped them offset all of their expenses and naturally start building a natural reserve, versus relying on regular assessments to flow in, to build a reserve for down the road when they do need it. 

Paula Chin: Was there like a huge uprising?

Anes Radoncic: There was a handful of individuals that were extremely upset and they weren't necessarily upset with management. They were upset with the board and they were upset with the developer. And we hear everything under the sun. You have the owners shouting out. The board is in cahoots with the developer, they're under the same umbrella.

Or you know this, they lured us in, they lied to us, et cetera, et cetera. And my response typically in these situations in the nicest way possible is, nobody forced you to buy. You had to do your due diligence in regards to the finances of the building, but also the condition of the building and everything else in between, comparable to doing a home inspection prior to buying a home. And once you're able to relay this information over and depending on who the individuals are that you're speaking to, they have to absorb it with a realistic approach and take that blame onto themselves and say, Hey, I should have done my homework prior to purchasing.

I indeed was blinded by the cost. It's those situations. If it's too good to be true, it usually is. 

Paula Chin: Okay. So they did a hefty common charge increase. How long ago was that and how are they doing? 

Anes Radoncic: That was a couple years ago. I believe that was about three or four years ago. They're doing fantastic now.

They have a ripe reserve. They're trending as they should have been years ago. And the largest increase that they've had since then has been a 5% increase, which is absolutely fantastic. They have funds in their accounts who abide by all the local laws that New York City has been able to throw at them.

And everything else in between. As we know, local law is a whole separate other piece of a conversation. 

Paula Chin: And they were able to build up their reserves through the common charge increase. Not an assessment? 

Anes Radoncic: Correct. So when we did the increase, we did it in a surplus fashion where they were able to not only cover their expenses, but also building natural reserve, as the months and years progressed.

So they were able to build a reserve. Naturally it's not a six-figure reserve, but it's something that they're building organically versus relying on assessments to come in. 

Paula Chin: Is there a number, a percentage that you like to see people use, X percent of their common charges to put into the reserve?

Anes Radoncic: This is a very good question, and when I hear property managers give a specific formula, it bothers me, doing this for almost 20 years, because every property has a different dynamic to it, right? So a perfect example, if you have a six unit walkup building that's bringing in, let's say a hundred thousand dollars a year.

Then you have another six unit building, but they have an elevator. They have a gym and they have a massive boiler that services all the units. So naturally, the first building, which is the six unit walkup, which all the owners are responsible for their own heating and cooling. There's no elevator to maintain, there's no gym to maintain.

 Typically the only thing that this particular building would be responsible for is just general maintenance, building insurance, and maybe some utilities. Versus the other building, which is also a six unit. They'll be responsible for maintaining the boiler if it does go down, which is roughly a hundred plus thousand dollars expense. They have a gym which they have to maintain and they have all these other amenities and features. So the building that's just a standard walkup, I would probably recommend maybe $10,000 in their reserves. And then the other building with all the amenities and features, I would probably recommend a 50 to $75,000 reserve option. Because the reserves are based off of the expenses that you would potentially be expensed within a course of five, 10, or 15 years. So if one building has nothing to expense, then naturally their reserves should be a lot lower. Having money in the reserves, just doing nothing, does nothing for anybody. So it's one of those situations where every building has its own character. 

Paula Chin: How common is this problem, Anes, with people, new clients that you take on? 

Anes Radoncic: It's a very common problem with new clients as well as existing clients. Usually it's board related, if I could say that, because like I said before, individuals join a board if there is a personal matter that's close to them, if they have an expertise that they wanna share for the betterment of the building, or if it's personal interest.

And what I've seen over the years is board members of personal interest, what they would particularly do is they would jump on a board and minimize any and all increases, rely on the reserves, and then after the course of three or four or five years, they would sell their apartment. Then the building will be stuck , if you will, on a deficit. And now it's left to the other board to figure it out. You have situations like that where board members will try to live as meager as possible in regards to the building's health so then their expenses don't go up because they're one foot out the door already.

 And it's tough to call out specific board members. So it's one of those things where all financial management reports are presented to the board as a whole.

We present all financial management reports to all of the board members individually as well as in a group setting, so everyone's able to understand the health of the building as it relates to the finances.

We typically don't like to rely on one board member making all of the financial shots because five different board members, seven different board members, or 11 different board members. They're all individual people. They're all separate people. They all have their own personal opinions and their own personal agendas, if you will.

Some better than others. So it's best for us to educate the full board members to know what their situation is, so then they don't get to the point where they're running in a deficit. 

Paula Chin: Getting back to new buildings with new boards, what would you say the takeaway is?

What's the lesson? 

Anes Radoncic: The lesson here is do your due diligence when you're purchasing into a condo or co-op. Review the financial reports. Do a home inspection and if you have any questions prior to purchasing, get on the phone with your agent and or attorney and simply say you wanna have a conversation with the property manager because believe it or not, having that one conversation with the property manager can alleviate and can answer 99.9% of the questions you may have in regards to potentially purchasing the unit or not purchasing the unit because you'll be hearing it directly from the horse's mouth.

Paula Chin: Okay. And so what about for the boards that, take over and like you said, they're hit with this bad news. What's the lesson for them? 

Anes Radoncic: The lesson for them is to entrust the management company that they do know what they're doing. And naturally, some management companies are better than others, but it comes down to just using your due diligence and reviewing everything.

Assign yourself on the board, or if you take that voluntary position to be on the board, there has to be a due diligence done on your end because the decisions that you make not only impact you and the board, but they impact all of the occupants in the building. It's a realistic expectations of what the role is and how the decisions affect not just your household, but everyone's household. 

Paula Chin: Okay. Anes, thank you so much for joining us. This was a very, I think, instructive story. Thanks again. 

Anes Radoncic: Absolutely. Thank you Paula for having me.