The Condo Reset · Part 1 of 2
Investor Education · 7 min read
Don't Throw the Condo Out with the Budget
An owner called after reading the last piece. Paid-off unit, held for years, rented out, no mortgage. His question was the one I expect to hear a lot this fall: if dues go up, what's left?
It's the right question. But he was one step away from the wrong conclusion, and the step matters.
Why the free-and-clear owner gets hit hardest
Most owners assume a financing rule can't touch them if they have no financing. The opposite is true. The owner with no debt is the most exposed owner in the building.
A leveraged owner absorbs a dues increase into a carrying cost that is mostly debt service — a small percentage of a large number. The free-and-clear owner has no debt service. Dues, taxes, insurance, and vacancy are the entire expense line. An increase lands on net operating income at close to full weight, with nothing to hide behind.
And it doesn't just cost cash flow. It capitalizes. Two hundred dollars a month is $2,400 a year of NOI gone permanently. At a 5% cap rate, that's roughly $48,000 of value — on a building that did everything right.
That's the part nobody says out loud. Compliant buildings get cheaper too. They just get cheaper for a better reason.
The uncomfortable structure of condo ownership
Here is what the increase actually exposes, and it was always true.
You own the unit. You elected the board. You still don't control the budget.
You get one vote among many, at an annual election, for directors who then set the assessment on their own authority. Between elections there's no mechanism to reverse a budget you disagree with — and a single owner who thinks dues are too low has no more power than one who thinks they're too high.
In a single-family rental, you decide when the roof gets replaced and what you'll spend. In a condo, that decision belongs to the Board of Directors. For thirty years that felt like a convenience. Fannie Mae has now told the Board of Directors to spend more, and the convenience is showing its price.
That's a real structural weakness in the asset. It's worth understanding clearly. It is still not, by itself, a sell signal.
Sell the broken asset, not the worse return
Two different things get confused here, so separate them cleanly.
Sell if the asset is broken. Structural findings with no money behind them. A board that won't act. An assessment larger than a decade of the increase would have been. A warrantability failure with no visible cure. Those are asset problems.
Don't sell because the return got worse while the asset got better. A board that raises dues to fund at the highest recommended level is doing exactly what protects you: keeping the building warrantable, preserving the full buyer pool, and preventing the $40,000 assessment that arrives in 2031. You are being asked to pay now for something you were always going to pay for. What changed is the timing and the honesty — not the liability.
The dues increase is the bill for reserves that should have been collected years ago. It is unpleasant. It is not new damage.
The trap: your two goals pull against each other
There is a genuine tension here, and every condo owner should be forced to look at it.
An underfunded association gives you better cash flow today and destroys your exit. A properly funded one protects your exit and cuts your cash flow. You cannot have both, and which one you should want depends entirely on your horizon.
If you're holding indefinitely and never selling, low dues genuinely serve you — right up until the assessment or the warrantability failure arrives, and then they don't. If there's any exit in the next five years, you should be voting for the increase that's costing you money. That is not a typo. The dues increase is what protects the number you'll eventually sell at.
Most owners vote the opposite way on instinct, and it's the most expensive instinct in the asset class.
And the board may not be able to do it alone
Here is the part that turns this from advice into a ballot you'll actually receive.
Fannie Mae set a target the Board of Directors may not have the authority to hit. Under Civil Code §5605(b), the board can raise regular assessments up to 20% over the prior fiscal year and levy special assessments up to 5% of budgeted gross expenses without asking anyone. Past either line, it takes approval of a majority of a quorum of members, by secret ballot — and §5605(c) sets that quorum at more than half the membership no matter what your CC&Rs say. The §5610 emergency exception is narrow: a court order, or a genuine threat to health and safety. Thirty years of quiet underfunding is not an emergency.
A building moving from baseline funding to the highest recommended level is frequently looking at more than a 20% jump. Which means the board cannot deliver it. The membership has to vote to raise its own dues.
Owners have voted these down for thirty years. That is precisely how the reserves got where they are. The difference now is that the building's financing eligibility — and therefore every owner's exit — rides on the outcome.
What to do instead of listing
Before deciding anything, run the three moves that actually respond to a pricing problem.
Reprice the rent. Most long-held units are under market, often badly, because a paid-off property doesn't generate the pressure that forces the question. The dues increase just generated it. Find out what the unit rents for today, not what it rented for in 2022.
Run the after-tax number, not the cash-on-cash headline. Depreciation is still running. Dues are deductible. The return that looks wounded on a napkin often looks different on a Schedule E.
Reassess. If a $200 dues increase moves the unit from "good hold" to "must sell," the position was thinner than you thought, and the dues just told you something true about it.
When selling is the right answer — for a different reason
There is a legitimate sell case here, and it deserves to be named honestly, because it's the one that will actually apply to a fair number of owners.
You're holding a low-yielding, illiquid asset with an expense line you don't control, and a large block of equity sitting idle inside it. That capital could be working harder somewhere you actually govern — a single-family rental, an out-of-state property, a different asset entirely.
That's a redeployment argument. It stands on its own merits and it would have been true a year ago. The dues increase is the prompt that made you look. It is not the reason.
Don't conflate the two. An owner who sells because dues went up is reacting. An owner who sells because the capital is underemployed is deciding. Same transaction, completely different quality of thinking — and only one of them survives the seller's remorse.
County Property Management has managed residential property in Ventura County since 1986. Part 2 of this series looks at the same rule change from the buy side — and why it may be the best thing to happen to condominiums in thirty years.