How to Review a Condo or Co-op’s Financials: 7 Point Checklist

Audit ChecklistOnce you’ve found your condo or co-op, but before any money changes hands, you need to take a look at the building’s financial statements. (Your broker will be able to get a copy.) This step is important, because while you may be a financially stable person, your finances will now also be tied to your neighbors and to how the building is collectively run. If the building’s statements show anything that you do not understand, you need to have an accountant or someone with financial expertise to review them and explain to you what they mean. In other words, even if numbers are not your thing, you should understand these financials.

7 Items to Check:

1. Are the financial statements audited? If they are, it will say so right up front. Ideally, you want audited financials, but a small building (under 10 or so units) might not want to spend money on an audit and will just have their CPA prepare the statements (called compilation or review) without an audit verification. In a large building, anything less than audited financials is a red flag.

2. Is the audit opinion “clean”? Again, you’ll see it in the CPA’s report before any numbers. It should just say that the statements present fairly the financial position and cash flows of the building. If there are qualifiers to that simple statement, it’s a red flag.

3. Look at the Balance Sheet:

  • Cash. Has it changed from the year before? How does it compare to building’s annual expenses? It should be at least enough to cover a month of the building’s expenses and still leave healthy amount for a reserve fund. (See #6 below.)
  • Receivables. This is the money your fellow condo or co-op owners owe the building for common charges or maintenance. If it is more that 10% of annual fees, it may mean some of your neighbors are deadbeats.
  • Accounts Payable. This is the money the building owes for taxes, vendors and employees.  Anything more than 10% of annual expenses shows that bills take more than a customary 30-45 days to pay, indicating cash flow problems.
  • Mortgage Payable. This is the building’s mortgage, not the mortgage you will have on your unit. (Note that a building-wide mortgage only applies to Co-ops.) Look at the notes in the end of the CPA’s report to see when the mortgage is due and what the interest rate is. If the rates are going up and the due date is approaching, you’ll know that your monthly fees will go up.
  • Retained Earnings. A large negative number indicates that the building is run at a loss, which may lead to large common charge or maintenance increases, or special assessments.

4. Look at the Income Statement.

  • Fees from owners vs. commercial rents. In buildings with commercial property, you’d like to see a significant amount of income coming from commercial rents (such as stores and a parking garage) because that helps keep the shareholders’ maintenance fees down. (The old restrictive 80/20 rule that limited commercial rents to 20% of a co-op’s total income, in order to maintain shareholders’ tax benefits, was changed a few years ago.  There are now some lucky buildings where maintenance fees are more than paid for by commercial rents, as described in this New York Times article.)

5. Look at the Cash Flow Statement.

  • Is the building cash positive, i.e. taking in at least as much money as it pays out? If not, your monthly fees will have to go up.
  • Are there any unusual items compared to the prior year. Perhaps there are big expenses for capital improvements (new elevators, roof, hallways and the like). That would be good news because you would not be hit for those expenses.

6. Evaluate The Building’s Reserve Fund.

A well-run building will have enough money in a reserve fund to cover 3 to 6 months worth of expenses. However, there are buildings that keep maintenance fees low and use special assessments when something big needs to get done. As long as you know how the building operates, you can budget your expenses accordingly. If the building does not have much of a reserve fund, you need to have one personally. Typically, the major expenses would be heating/air conditioning systems, roof, building façade work, elevators and lobby and hallway renovations. If all of that work has been done recently, a smaller reserve may be enough. If none of it is has been done, then you’d like to see higher reserve.

7. Read the Notes to the Financial Statements.

This is the section that you will read very thoroughly. If there are any potential landmines in the building’s finances, this is where they are hidden. Watch out for statements about tax problems, pending litigation, upcoming major repairs and expiring commercial leases. These are the types of problem areas that can have severe impact on your fees and maintenance, or result in an assessment.

Author My First Apartment
Seija Goldstein

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Seija Goldstein is My First Condo's General Manager and occasional blogger. She is a business consultant to media companies, and a long-time shareholder in a large New York City co-op. She has survived both kitchen and hallway renovations and is about to redo couple of bathrooms.

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Comments (19)

  1. Ted J

    What does accumulated deficit mean on a coop balance sheet? What if it is at 10 million dollars?

    • Seija Goldstein Seija Goldstein

      Hi Ted J,
      The accumulated deficit can result from accumulated depreciation of the building’s original cost and all the additional improvements done over the years (roof, hallways, elevators, etc.) Although $10 million deficit sounds large, if you are looking at buying into a very large building their depreciation can add up. In addition, there could be some amortization of expenses related to financing the building’s underlying mortgage. If the deficit reflect these two so-called non-cash items it’s OK. However, if it is a deficit arising from buildings expenses continuously running above income, it’s a bad sign and portends future assessments.

      Look at the co-op’s income statement page in the latest financial statements. What does it say on the Income from Operations line. If that number is positive then you know that co-op has more than enough income to cover its ongoing expenses. If the number is negative, then the co-op runs deficits and you need to find out why. Is this a temporary situation or a perennial problem. If latter, how does the co-op cover the shortfall?

      When you review any co-op’s (any any company’s) financial statements, the notes in the back of the report are very important for you to read. They can explain what has happened and what the co-op expects to happen in the future. These notes may even explain where the deficit comes from.

      In any case, before you make an investment as big as buying a co-op, you need to hire an accountant who can understand the financial statements and will be able to explain to you exactly what they mean.

      Good luck with you co-op purchase.

      • Armando Garcia

        I had a buyer who wanted to purchase my co op. but the bank had denied them cause the 2014 financials had a 10,000 loss. I believed that there is no bank that will finance anyone.. and the board had denied a buyer that wanted to pay cash, what should i do…

        • Seija Goldstein Seija Goldstein

          Hi Armando,
          Co-op boards have much leeway in deciding who to let into the building. It is unclear from your comment whose financials had the 10K loss, the buyer’s or your co-op’s. In any case, try to find out what your board is looking for in a buyer. A broker who has experience in selling similar apartments and knows your building should be able to give you some insight. (P.S. We removed the address from your comment.)

  2. sandy wiegman

    we are trying to buy a 2000sq foot 3 bed duplex condo for $375,000. price dropped from $579,000 in 16 months. the property management office is saying they do not have and will not provide 2014 financials. trying to say it’s not required as in buying a home. shady right?

    • Seija Goldstein Seija Goldstein

      Sounds shady to us, if you are referring to the homeowners association. You will be a member of the homeowners association and paying it dues for common areas upkeep, so you should have access to their financials.
      However, if you are referring to the financials of company that is selling the condo, then the situation is different and you may not have right to their private financials. This is a question for your lawyer to answer.

  3. C from NY

    I own a condo; what can I do if management will not release my building’s financials to me? Also, is it common for a building to increase my common charge every year for the last 2 years? Something just doesn’t seem right and I feel as though the board knows something but will not say anything.

    • Seija Goldstein Seija Goldstein

      As a member of your building’s condo owner’s association you have the right to see the association’s financials.
      Here is and an article from that covers the topic.

      “The statutory right of inspection is rather limited in scope insofar as it relates to only three kinds of documents: financial statements; shareholder lists; and minutes of shareholder (as opposed to board) meetings. Moreover, shareholders seeking access to any of these documents are required under the statute to meet certain threshold requirements.

      Shareholders owning at least five percent of a company’s stock, or those who have been stockholders of record for all least six months, irrespective of the extent of their equity interest in the company, have an absolute right, upon written request, to obtain the preceding fiscal year’s financials, as well as the most recent interim financials to the extent that these have been distributed to the shareholders. Most co-op bylaws require that year-end financials be distributed to all shareholders as a matter of course within four months of the fiscal year end.”

      As to the annual common charge increases, it is typical that these charges go up as the building’s staff salaries and other expenses increase.

      • joanne

        I am trying to refinance my coop but the 2014 financials are required by the bank prior to approval. the coop board said they haven’t completed the 2014 financials as their cpa has been ill. do they have to file since we have 30+ units. it is a volunteer board.
        thanks you

        • Seija Goldstein Seija Goldstein

          You need to find out what are the laws in your state related to the governance of co-ops. Typically, co-ops, especially larger ones like yours, have their financial ready by second quarter and hold their annual meeting in May or June. The fact that the CPA has been ill or that the board members are volunteers, will not release them from their obligations as board members.
          As a practical matter, try to get your refinancing process started with 2013 financials, with 2014 ones pending, and keep pressing your board for speedy completion of the 2014 financials. However, the bank will likely not close before 2014 financials are ready because for them this delay is a red flag.
          Good luck.

  4. Brian Francis

    Have you ever heard of the CPA putting out a rough draft and having select members of the Board and an ex Board member review it before putting out the final report? I thought it was supposed to be an independent audit.

    • Seija Goldstein Seija Goldstein

      Hi Brian,
      Not every co-op actually has a full audit, which would include contacting vendors for verification of receivables and payables. Your co-op may only have the CPA review the books. You can see in the first page of the CPA’s report what level review they did and what caveats they may state. In any case, even with a full audit, it would is pretty typical that the audit manager would review the report with management before finalizing the audit. It does not mean that they would change anything, but they might need clarification for some items. CPA’s operate under strict rules so if they sign off on the financials their name and reputation is on line.
      If you suspect that something shady is going on have you accountant take a look at the co-op’s financial and if she agrees ask the management for an explanation in writing.

  5. Gizelle

    Living in a fourplex townhouse. Member of a 3 townhouses condo corporation. Would be wiser and cheaper to become a self directed fourplex and leave the corporation. Would we able to take our portion of reserve found with us?

    • Seija Goldstein Seija Goldstein

      Hi Gizelle,
      We don’t know about the legal ramifications and reserve fund split, but as a practical matter, even if leaving might be a little cheaper, do you want to handle all the ongoing paperwork? Starting with negotiating new insurance policies, setting up bank accounts, etc.

  6. Susan Keen

    I am in the state of Georgia in a 72 unit condo building, not a co-op. Does the property manager and management company have to balance the budget at the end of the year? In other words, if operations needs something for reserves move the money to zero it out, and if ops has excess move to reserves. Is it an option to keep money in ops and not move to reserves?

  7. Anthony de Fex

    Hello Seija. Its nice of you to answer questions. The board of our 12 unit co-op, in place since 6/15/2017, has issued 2 false financial statements, FY2016 and FY2017, and even falsely claimed that they are CPA certified. There is no continuity from FY2015 to FY2016. There was a never before credit card expense, of $5,000, incurred in the last 2 months of FY2016 and all vanished in FY2017. Large liabilities, a $18,000 property tax balance, and $32,000 unpaid liability to a contractor, were omitted in both statements. Building depreciation, value, and land asset, and stock holder’s equity also have been omitted. Many of the expenses are exaggerated and some categories, like Penalties, are completely invented. Cash asset shows $25,000 missing since 7/1/2017. 2 apartments were sold during this time frame. I saw that there is a law out there, “Issuing a False Financial Statement New York Penal Law 175.45.” I have records that prove that insurance, utilities, property taxes have been exaggerated and I have evidence of the omitted items in the balance sheet. I wanted to know if successful criminal prosecution can be undertaken here, and if so, what the process would be. Thanks in advance.

    • Seija Goldstein Seija Goldstein

      Hi Anthony,
      Have you talked to the other owners? Does anyone else share your concerns? Have you asked the board to explain the discrepancies?
      If you have tried to get an explanation from the board and it does not appear correct, your best bet is to contact a lawyer who specializes in co-ops.
      We are not lawyers and cannot give you any legal advice. Good luck!

  8. Anthony de Fex

    Hello Deija. I just wanted to post a comment. If it was true that only accountants are authorized to interpret these financial statements, not shareholders, as someone recently told me, then you would never have been able to post your very informative “How to Review a Condo or Co-op’s Financials: 7 Point Checklist” website. That’s all.