When appraising condominiums, it’s not just about the brick and mortar; understanding condominium declarations and bylaws is also crucial for a credible valuation. These documents can often reveal hidden factors that might make or break a property’s market value. From special assessments to critical repairs, knowing what’s behind the scenes can help you, as an appraiser, avoid pitfalls and ensure you are providing a credible valuation. In this blog, we explore why these details matter during a condo appraisal, and how recent changes in regulations highlight the need for a keen eye on potential red flags.
Summary
Appraising condominiums goes beyond just comparing and adjusting for relevant characteristics such as view, floor location, and living area. It’s also essential to review the condo declarations and bylaws, inquire about pending critical repairs (whether known by the association or observed), and evaluate the impact on the market value of any special assessments related to these repairs. Although this might seem like a lot of additional research, understanding these details helps you provide a more credible appraisal and identify any marketability issues. Keeping up with regulations and potential problems can help you avoid surprises (and liability) and enhance your appraisal expertise.
Condominium declaration and bylaws
Condominium declarations and bylaws are more than just legal formalities—they define key aspects of condo living. The condo declaration outlines common elements like storage and parking, specifies ownership percentages, sets leasing availability and requirements, and details occupant rules such as quiet hours, decor standards, and pet policies. These rules and regulations can significantly impact the marketability of a property.
But it’s not just about the restrictions. Imagine if there are no rules governing critical factors. What if there’s no limit on how often or by how much condo association fees can increase? Picture a scenario where, aside from an unforeseen disaster, these fees double in just six months. In this case, a lack of regulation can be just as detrimental to marketability as overly restrictive rules.
During a condo appraisal, your review of these documents need to be thorough, especially in the current environment. It’s not uncommon for appraisers to claim that they didn’t review condo documents because they weren’t available, or not part of the scope of work. However, with more documents now accessible online, it’s wise to ask the owner, developer, property management, association representative, or lender about their availability before concluding they’re inaccessible. If the documents truly aren’t available, you should disclose this in the scope of work and limiting conditions and provide details about the efforts made to obtain them.
Identifying deferred maintenance and critical repairs during a condo appraisal
The 2021 Champlain Tower South condo collapse in Surfside, Florida highlights the importance of understanding these documents related to deferred maintenance and critical repairs. Construction flaws led to the building collapse that killed 98 people and this heartbreaking eventshows the importance of identifying unsafe conditions and significant deferred maintenance. Issues like these can lead to unsafe living conditions, evacuations, and severe financial hardships for homeowners. Special assessments to address such problems can strain finances, increasing the risk of loan defaults and foreclosures.
New Project Review Requirements from GSEs
In response to these concerns, Fannie Mae and Freddie Mac have updated their project review requirements. These updates apply to condo loans and co-op share loans with five or more attached units. The new rules define critical repairs, material deficiencies, and significant deferred maintenance, and prohibit the sale of loans in projects with critical repairs or current evacuation orders.
Additionally, there are now requirements for reviewing structural or mechanical inspection reports within the last three years, as well as new criteria for projects with special assessments. Projects with unfunded repairs exceeding $10,000 per unit or an “Unavailable” status in Condo Project Manager™ (CPM™) are also restricted.
Critical repairs are serious issues not cosmetic repairs. They are material deficiencies, potential system failures, mold, water intrusions, or damaging leaks. Projects showing advanced physical deterioration or failing mandatory inspections for structural safety are also flagged as needing immediate attention. If repairs exceeding $10,000 per unit are necessary within the next 12 months—and those repairs aren’t funded—this is a major red flag, unless the needed repairs are covered by special assessments.
The Impact on Marketability
How does all of this impact marketability? Let’s look at what’s happening in Florida. Condo listings in the state, particularly in South Florida, are surging. This spike comes as new regulations require regular inspections of older properties, causing homeowners association (HOA) fees to continue to rise. In fact, the number of condo listings in Palm Beach, Broward, and Miami-Dade counties skyrocketed from 8,353 in the second quarter of 2023 to 20,293 for the same period in 2024. Nearly 90% of the units listed are in buildings over 30 years old.1
The surge in listings is partly due to many condo owners rushing to sell before mandatory inspections reveal potential structural issues. But they might be too late. Buyers are increasingly wary of older buildings, especially after the tragic collapse of the Champlain Tower South. The new SB 4-D Bill, introduced in May 2022 in response to this disaster, now requires buildings 30 years or older to undergo mandatory inspections before the end of the year, with strict penalties for non-compliance.2
These regulations also require condo associations to prove they have the necessary funds for inspections and any potential repairs. For many owners, particularly those on fixed incomes, these new assessments can be financially overwhelming, forcing them to sell. Unfortunately, the flood of 30-plus-year-old condominium units on the market means prices are falling as many buyers are steering clear.
The Role of Appraisers
As an appraiser, you play a critical role in this scenario. During a condo appraisal, it’s essential that you document any special assessments or significant deferred maintenance known or visible at the time of inspection that could impact the safety, soundness, marketability, and the overall financial stability of the project. Special assessments typically fall into two categories: those for utility or infrastructure needs, often in newer projects, and those for repairs or updates.
For example, let’s say you’re appraising a condo in a 40-unit building that recently suffered roof damage from a windstorm. The condo board needs $30,000 to cover repairs but doesn’t have enough in reserves. As a result, each unit owner is assessed $750. In your appraisal, you would need to report the total cost of repairs, the payment plan, and the purpose of the assessment, noting any outstanding balance. This information is vital for forming a credible opinion of value.
It’s also important to evaluate both existing and proposed special assessments and their potential impact on a unit’s value and marketability. Getting this information can be challenging, but it’s necessary for a credible appraisal. Always identify the source of the information, and consider appending any relevant documentation to your report. An appraisal is incomplete without it!
Learn more about condo appraisals with continuing education courses
Condominiums are the second largest type of property appraised in the United States, and they bring unique challenges to a valuation. To learn more about the Individual Condominium Unit Appraisal Report and other essential information, check out our course, Appraising Condominium Units.
Unlock this course and more with our Unlimited CE Membership! You’ll get access to our entire catalog of appraisal CE courses, plus our Learning Library with over 400 resources, including webinars, checklists, job aids, and more!
