There was an investor who bought a condo in Detroit. It was an old building near downtown. He signed the contract with the intention of renting it out. However, he only found out after closing and moving in that there was a rental restriction in the building's management regulations. Only 30 percent of the units could be rented out, and the limit had already been reached. As a result, he had to wait several months without being able to rent it out. He only got his turn after being placed on the waiting list.

The average management fee for condos in Detroit is around $274 per month. Some reports suggest that the median listing price can rise to $350 per month (according to Crain's Detroit). However, older buildings can have management fees that are much higher than expected. There have been reports of aging condos where the management fees exceed the monthly mortgage payment. In the past, it was common to find buildings with management fees below $100. Now, $400 is considered low in the current market.

Why does this happen? The reason is simple. Detroit has a higher proportion of older buildings compared to other Midwest cities. As buildings age, the costs for replacing facilities like roofs, plumbing, and elevators increase. If the reserve fund cannot cover these costs, management fees will either be raised or special assessments will be imposed. In both cases, it ultimately falls on the residents. A low management fee should not be a cause for relief. In fact, it may indicate that the reserve fund is insufficient to maintain the property.

Detroit has more old buildings than any other city. Therefore, the importance of the reserve fund is significantly greater than in other cities. The Michigan Condo Act (MCL 559.205) mandates the maintenance of a reserve fund. Administrative rules (R 559.511) set the minimum reserve requirement at 10 percent of the annual budget. There is a point to note here. This 10 percent is a minimum threshold, not a sufficient standard. However, many in the field mistakenly accept this number as adequate. A bill (HB 5019) is also under discussion to mandate a reserve study every five years, but it has not yet passed. Until the law is enacted, the only option is to check the financial statements of each building directly.

This is not just a story for investors. It applies to those who buy for personal residence as well. If someone buys an old building at a low price and then faces a situation where the entire roof needs to be replaced a few years later, they could be hit with special assessments of thousands of dollars per unit all at once. It's easy to overlook this risk if decisions are made based solely on the purchase price. It's essential to consider both the reserve fund and the age of the building. If you are looking for a condo in Detroit, please check the following:

• Rental restriction clauses and current rental unit ratios
• Reserve fund balance and its ratio to the budget
• Building age and history of major facility replacements
• Recent special assessments

If you are an investor looking to buy a condo for rental purposes, you must read the management regulations before signing the contract. There are actual cases where expectations of rental income are thwarted due to rental restrictions. Mortgage lenders also review the rental ratio and reserve status together. If the criteria are not met, it may be classified as a non-warrantable condo. This can reduce the number of banks willing to lend and result in less favorable interest rates. There is no need to rush just because the listing price is low. If you are moving to Detroit from another state, also check that property tax and insurance systems are different.

Do not make decisions based solely on management fees. The reserve fund must also be considered. Only by looking at both numbers side by side can you see the actual financial health of the building. If the management fee is low but the reserve is also thin, that is a warning sign. Conversely, if the management fee is somewhat high but the reserve is solid, it may actually be a safer choice.

This article is not investment or legal advice. Before making any actual contracts, please ensure to thoroughly check the management regulations and reserve status with a real estate professional.