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How to Read and Analyze Condo Financial Statements [Tutorial] - YouTube
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In this Hauseit tutorial, we will be
showing you How to Analyze the Financial
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Statements of a condominium. Now if
you're watching this video, you're likely
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a home buyer. You may even be a real
estate agent broker salesperson or you
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could even be a real estate attorney. The
ability to review the financial
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statements for a condo is a very
important skill for all market
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participants in real estate and in
particular, it's very important to be
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able to analyze a financial statement
primarily because it will give you an
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idea of whether or not the building is
is well run prudently capitalized and it
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will basically give you a preview as to
whether or not you you would seek to
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expect any unusually high operating
expenses once you've actually purchased
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a property. If you're a real estate agent
the ability to analyze financials will
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help give you a bit of an edge versus
other agents who may not be able to
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advise their clients on how to actually
analyze a financial statement. It's also
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worth remembering that in terms of
responsibility load during a purchase, a
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real estate attorney will be the one who
conducts ultimate due diligence on a
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condo prior to a buyer signing a
contract so as a broker or even as a
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buyer you certainly can request the
financials prior to the accept that
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offer stage. You can review them yourself
but it's also good to know and remember
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that a real estate attorney will require
the financial statements as well as the
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offering plan house rules and any other
building documentation such as the
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purchase application and sublet
application in order to complete due
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diligence prior to advising their client
that it's an appropriate time to sign
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the contract. So in this video we're
going to walk you through a financial
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statement it's a real financial
statement for a building here in New
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York City and we're going to go through
the sections that are important for you
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as a buyer, as a broker or even as an
attorney. So the first thing you want to
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do when you open up a financial
statement is you want to obviously check
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the year. Usually attorneys
look for the two most recent years for
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the purposes of looking at the due
diligence materials so depending on
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where you are in the calendar year it is
possible that the building may be in the
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next fiscal year but they might not
necessarily have the financials ready
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for the one prior so you may want to be
mindful of that and also when it comes
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to a mortgage lender. If the building has
taken unreasonably long amount of time
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to actually come up with the most recent
years financial statement it may be an
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issue. In this case, we're looking at a
historical statement so not going to go
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into the details of the calendar but
just keep in mind, make sure you get the
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two most recent years of financials for
you to analyze. So as you scroll down
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into the financial statements the first
section is going to be usually it's
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going to be some sort of auditor's
report or opening letter. In this case
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the financial statement is audited which
means that basically an independent
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auditor has evaluated the financials and
been able to come up with an opinion as
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to the financial statements themselves.
If a financial statement is unaudited, it
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means that the actual accountant is not
preparing and providing any opinion as
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to what is contained within the
financial statements themselves. So when
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you're looking at audited financial
statements, you you can obviously start
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by looking at the various sort of notes
in a sense here and you can read through
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those but the most important thing is to
look at the actual opinion section. Now
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when you're looking at the opinion
section, you basically want to be looking
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for the following phrase presented
fairly in all material respects. This is
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the green light which basically means
that there are no issues that the
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auditor has discovered which may be
worth mentioning. Now as a quick aside, if
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you go onto the Hauseit website, there
is an article you can follow along with
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it's called Analyzing Condo and Coop
Building Financial Statements in NYC and
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it actually goes through all of the
points that we're discussing on this
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video.
So in particular, we've started with the
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opinion letter and as you can see here,
you'll want to look for keywords such as
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presents fairly which is a good sign of
a healthy set of financials. What you
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don't want to see are things such as
restrictive language including subject
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to or except for so if we go back here
again we'll see that they've used the
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phrase present fairly in all material
respects. So that's a really good sign as
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we start our review of the financials.
Now as we scroll down the next thing, we
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want to look at is usually the balance
sheet. Now the balance sheet is very
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important specifically because it will
tell us what the current cash holdings
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are for the condominium. In this case, the
condominium has three hundred and
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eighty-seven thousand dollars in cash
and cash equivalents. Now when we look at
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that number we need to analyze it in the
context of how long could that amount of
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cash support the building's operating
expenses right. So if we're looking at a
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massive condominium with four hundred
units and working and we're looking at
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another building with twenty units you,
can see how the size of this number
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doesn't necessarily have any realistic
meaning behind it if we don't look at
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the actual expenses. So what we want to
do here is we want to quickly jump to
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the the income statement and we want to
find out how much are the buildings
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operating expenses and once we've done
that ideally, we want to do some math and
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figure out how many months of operating
expenses does this cash balance support
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and as a general rule of thumb, we are
looking for for that to be three to six
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months. So if we go down into the income
statement, specifically under expenses
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looks like the expenses are
approximately a million dollars a year
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so if you open up a calculator on it so
we're just going to divide that by
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twelve
and it looks like we have approximately
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$80,000 a month to run the building. So
if we go back up to the cash balance its
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388 K so if we take three hundred and
eighty-eight thousand and we divide that
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by the monthly operating expenses and
convert it back to your number, it looks
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like we have about four and a half
months of actual operating expenses. In
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terms of the size of our cash position,
the next thing we want to look at are
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the accounts receivable. The accounts
receivable is very important because it
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gives us a general sense for the health
of the building in particular. If the
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accounts receivable are massive
percentage of our operating costs or of
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our current assets it may be an
indication that somebody hasn't paid us
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somebody hasn't been paying the condo
and there could be some sort of
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implication there for possible little or
no recovery losses so on and so forth. So
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in this case, the accounts receivable is
13,000. Now relative to a cash balance of
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400K more or less that is an
insignificant number. Therefore there are
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no issues with the accounts receivable.
Now on the flip side, if we go look at
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accounts payable this is another thing
that we want to analyze. Now in theory
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the condominium should be paying their
bills on time. There really shouldn't be
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any large accrual for unpaid expenses
and as a general rule of thumb you
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really shouldn't have
accounts payable that are greater than
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10% of the actual income of the building.
So in this case, we have a hundred and
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ninety three thousand dollars of
accounts payable compared to income. The
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revenue of saying 1.1 million so it is
actually a very large number and it may
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very well be concerning and it would be
something that your attorney if you're a
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buyer would would
possibly inquire about with the managing
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agent. Now before you you reach out to
the managing agent to confirm things, you
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may also certainly want to look at the
notes to the financial statements so
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every financial statement will have a
note section and if you you know if you
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go down here you you may very well find
something about the fact that you have
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like large accounts payable specifically
there is something mentioned here in in
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note 10 included in the condominiums
accounts payable is a hundred and thirty
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two thousand dollars in water and sewer
charges estimated to be due for prior
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years. They also make some mention of the
statute of limitations and that's really
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how they've computed this this number so
if we go back to the accounts payable
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and we think about what we just learned
just take a look here so of that one
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hundred and ninety three but excluding
the water issue it's about 60K which
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relative to 1.1 1.2 million dollars of
revenue is is still under under ten
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percent and that was kind of our
threshold so clearly, we found the issue
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here. There was some problem with the
water not sure what that is if we were
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to venture a guess perhaps there was
some sort of problem with the meter
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maybe the readings weren't working, maybe
the the condo was being under build and
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and the DEP at least in New York City
DEP is probably working on that arrears
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bill with the condo and presumably the
condo will have to pay out that money in
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the near future. So moving forward while
we're on the notes, this is the section
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where you're going to want to look and
see if the building has any sort of
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mortgage or loan exposure the notes are
going to tell you essentially what the
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interest rate is what the terms are of
the the actual possible floating rate
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right, when does it reset and also when
does the actual loan need to or rather
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when does it expire, when does it mature.
So that's something you're going to want
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to look at because if let's say the
building has a line of credit, that's a
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floating rate and it's reset annually
and in the last year interest rates have
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gone up. Astronomically, it would in
theory mean that the line item in the
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income statement for any potential
financing interest charges could go up
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drastically and if it does, you would
want to figure out is the current level
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of the conduct condo common charges
sufficient to help absorb that increase
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in financing expense for the building. So
in this case, the building doesn't appear
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to have any any sort of mortgages or
line of credit or anything primarily
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because if we go into the expenses, I
believe there's a note to that which
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tells us about the expenses. There is
nothing in here about there being any
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any financing charges so that being said
the takeaway is the notes of the
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financial statement are really important
if you discover anything in the
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financial balance sheet income statement
statement of cash flows that is
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confusing or sketchy the notes are going
to be where you can possibly figure out
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what exactly is going on. Now going back
into the income statement, it's also a
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good idea to generally-speaking analyze
the composition of the income. So for
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example, you you want to take note of any
specific line item that is a
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disproportionate size relative to the
total revenues. Now in this case, the
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revenues the vast majority of them come
from common charges now it's not a
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problem that the majority of revenues
comes from common charges that's
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actually a very healthy sign you know
and that means that the building
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receives money from the the owners and
those substantially basically pay for an
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account for all of the revenues and
consequential expenses in the building
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the issue would be. If let's say under
revenues instead of this line item
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saying common charges it said something
like flipped tax
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Now flip tax is usually for a co-op and
a flip tax is basically a private
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transfer tax that the coop charges
sellers so a seller of a co-op in the
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city. New York City has to
pay the governmental transfer taxes plus
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the transfer taxes for the coop. So if
for example, the revenues the majority of
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the revenues didn't come from the fees
the owners pay but rather they came from
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a flip tax it would mean that the
buildings revenue source is largely
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dependent on the continued rate of you
know buyer rather sellers transacting
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and selling properties. So if there were
a market disruption possibly and the
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volume of deals slowed in the building
and the majority of the income came from
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deal and sale related transaction, you
could see why it might be an issue. But
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in this case, the revenue is very sticky
common charges are the be-all end-all of
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revenue for a condo. Fortunately there
are a couple of super small items here
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They are pretty insignificant relative
to total revenues but nonetheless it is
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always important to look at and figure
out where is the revenue stream coming
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from another one to take note of is any
potential income from a commercial
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tenant. So if a condominium has some sort
of commercial space downstairs and
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they're receiving rent that rent is
probably sizable and therefore you want
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to be very very aware of when exactly
does that commercial tenants lease come
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up for renewal and perhaps even what is
the history of that of that tenant right
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So prior to that tenant or how long have
they been there prior to that tenant
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what's that space vacant, how long was it
vacant for so on and so forth. So we've
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talked about most of the statements now
we've talked about the balance sheet,
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we've talked a little bit about the
actual you know statement of revenues
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and expenses also known as the income
statement. We may also want to look at
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the the statement of cash flows so the
goal of analyzing the statement of cash
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flows is really just to make sure that
there is a a positive net cash flow for
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the building. Now obviously, if the
building has a negative cash flow
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subject to further review it likely is a
very very bad sign. So in this case, you
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know we're looking at
sort of what's what's the composition of
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this cash flow. Very positive here of
course the building had more revenues
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than expenses so if we go back into the
income statement we can actually see
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that so
147 140 is the excess of revenues over
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expenses and then we're basically seeing
a similar number over here. So if we look
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at what's going on with cash flows, we
can see that there's been a pretty large
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line item here of a negative cash flow
but in this case the money is actually
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going into the restricted fund the
restricted fund is basically the reserve
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fund. So if we do a control F here and
here we go so you can see here that the
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restricted reserve fund is to be used
exclusively for major repairs and
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replacements so very healthy sign here
that this building essentially increased
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its reserve fund by 50% more or less
over the past year. Again, that's a very
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positive sign so on the whole, if we were
to look at these financials there does
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not appear to be any any major issues.
The only thing that possibly looks a bit
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unusual is the water accounts payable as
discussed but that aside the building
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looks to be pretty healthy the other
thing we can look at again is the notes
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to the financial statements. Specifically
if there's any anything related to the
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financials you know this is interesting
here so looks like the condo has a some
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sort of lease with it with a laundry
provider and the condo receives 3,600
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from that. So that's not super super
relevant but it might be interesting
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breaks out here the prepaid expenses
also talks about other assets we did
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look at that already. If we continue to
go down, we they have a note about income
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taxes and not super important and we've
talked about the water and sewer and the
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other thing you might want to see is
this note about future major repairs and
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replacements. So in this case, which is
pretty common to see the condominium has
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not come
that a study to determine the remaining
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useful lives of the components of common
property basically that means that the
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condo hasn't sort of had someone come
and look at the roof boiler facade
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things like that but but in general
that's pretty common and the building as
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we've seen has a pretty healthy reserve
fund plus they they did make substantial
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excess in terms of income versus
expenses last year so everything appears
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to be pretty healthy. Now the final thing
you may want to look at in the financial
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statement is notes about increases
possibly to the common charges. In this
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case, there does appear to have been an
increase and so it has actually put that
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there in the notes of the financials. We
will have another video available about
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Analyzing a Co-ops Financial Statement
so feel free to check that out. We'll put
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the link down below and also if you look
below the video you will see a link to
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this specific article which goes through
the major talking points that we did
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today about How to Analyze a Condos
Financial Statements. If you have any
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questions, feel free to leave us a
comment below
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and we wish you the best of luck with
your real estate endeavors
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