Calculating reserves is art, not science
Q: How does your rule of thumb for condo reserves factor in the condo building’s location?
For example, the exact same building on Miami Beach and Fort Pierce would have the same reserve items and costs to replace. But the condo units on Miami Beach average $1,500,000, while those in Fort Pierce average $200,000.
A: Let’s start by saying that we wish there was an official rule of thumb for how much cash condominium’s should have in their reserves. Unfortunately, there is nothing official right now.
That doesn’t mean condo buyers (and owners) can’t make an educated guess as to how much should be available. When evaluating cash reserves, we believe you need to separate what a local real estate market says about property valuations and the actual cost to repair a specific item in a property. These are two separate issues.
For example, if you have two 10-story buildings of a similar age that have been taken care of reasonably well, it should cost about the same to repair the mechanics or components of the elevators, no matter whether the units in the property cost $250,000 or $2.5 million.
The same principle applies to replacing roof shingles. A single-family house in Boise, Idaho, is worth twice what it was 10 years ago, but replacing the same size roof using the same shingles shouldn’t cost twice as much as in a less expensive suburb.
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