Last month, a client of mine, Kelvin, finally saved enough for a down payment and was ready to buy his first property. He had his eye on a 30-year-old two-bedroom unit in Kowloon Bay, priced 15% lower per square foot than new developments in the area, thinking he had found a 'bargain.' The night before signing the provisional agreement, he suddenly asked me, 'Why does the agent say we need to look at the building's financial statements? It's so troublesome.' I immediately stopped the transaction, and upon checking, I found that the building's maintenance fund only had 800,000 left, but the exterior concrete was severely falling off. Major repairs were expected within two years, and each unit might have to contribute 200,000–300,000. Kelvin was so shocked that he immediately backed out.
This real-life case tells us: Buying a property is not just about whether the unit looks good; the 'financial health' of the building directly affects your mortgage pressure for the next 10 years. Today, let's break down why you must look at a building's financial statements when viewing a property, and which key numbers insiders pay attention to.
What Secrets Are Hidden in the Building's Financial Statements?
Maintenance Fund Balance: Your 'Hidden Debt' Indicator
Many first-time homebuyers think that after purchasing a unit, they only need to pay the mortgage and management fees. However, if the building's maintenance fund is insufficient, it can easily become your 'hidden liability'. According to the Building Management Ordinance, the owners' corporation has the right to levy special fees on owners for major repairs, and these are mandatory.
:::tip Expert Tips Generally speaking, for buildings over 20 years old, the maintenance fund should have a reserve of at least '100,000 to 150,000 per unit.' If the building has 200 units, the maintenance fund should have 20 to 30 million to be considered healthy. :::
When reviewing financial statements, pay attention to:
- Maintenance fund balance: Be alert if the number is too low
- Monthly contribution ratio: How much of the management fee is allocated to the maintenance fund? Generally, it should account for 20-30%
- Expenditure records over the past 5 years: Any sudden large expenses? This may indicate aging building facilities
Accounts Receivable Management Fee Arrears Rate: Reflecting Resident Quality
A debt ratio exceeding 10% is a warning sign. This not only reflects the financial situation of the residents, but also represents the efficiency of the building management. If many owners consistently delay paying management fees, it becomes difficult for the owners' corporation to recover the money, which will ultimately affect the quality of the building's daily maintenance.
The most outrageous case I have seen was in an old residential estate where the default rate reached as high as 25%. As a result, the building's elevator was broken for half a year and there was no money for repairs, seriously affecting the property value. When the buyers took over, they realized that the previous owners were also among the defaulters, and the new owners had to settle all the debts at once before the transaction could be completed.
Future Major Maintenance Plans: Know the 'Money-Collecting' Schedule in Advance
:::warning Guide to Avoiding Pitfalls When looking at financial statements, it is necessary to pay attention to the 'Notes' or 'Board of Directors' Report' sections, which disclose major maintenance plans and budgets for the next 1-3 years. :::
Common major maintenance projects include:
- Exterior wall renovation and concrete spalling repair (may cost 150,000–400,000 per household)
- Elevator replacement (may cost 80,000–200,000 per household)
- Rooftop waterproofing works (may cost 30,000–80,000 per household)
- Fire protection system updates (may cost 50,000–150,000 per household)
If the financial statements show major repairs in the next two years and the repair fund is insufficient, you need to set aside extra cash to cover it. This amount may be more than the renovation costs you expected.
Practical Case Studies: Three Real Stories to Teach You How to Avoid Pitfalls
Case 1: Taikoo Shing 'pay below-market rent' turns into 'pay above-market rent'
I have a client who bought a two-bedroom unit in Taikoo Shing in 2022. At that time, the monthly mortgage payment was calculated at $18,000, while the rent for a similar unit was about $20,000, so they thought, 'Mortgage is cheaper than rent, what a bargain.' However, six months after moving in, they received a notice from the owners' corporation that exterior wall repairs were required. Each unit had to contribute $280,000, to be repaid over 24 installments, which meant an additional monthly expense of $11,700.
Result: The total monthly expenditure becomes $29,700, far exceeding the rent level, causing the cash flow to immediately collapse.
If we had looked closely at the financial statements at the time, we would have found that the maintenance fund was only $12 million (for the entire building of 800 units), and the building is already 40 years old, with cracks on the exterior walls. Anyone familiar with this would immediately know that major repairs are imminent.
Case 2: The Truth Behind the 'Bargain' in Mobil Village
Mobil New Village has always been a popular choice for first-time home buyers, but not every building is the same. A reader asked me why, within the same estate, the price per square foot of some buildings is 8-10% lower. I told them to check the financial statements and found that the maintenance funds of those buildings were severely insufficient, and that there had already been two special levies in the past three years.
:::highlight Insider's observation Within the same housing estate, if the prices of certain buildings are significantly lower, there is a high chance it is due to 'poor financial condition' or 'upcoming major repairs.' Cheap does not necessarily mean a bargain; it could be a landmine. :::
Case 3: The Hidden Costs of 'Entry-Level Flats' in the New Territories
A private residential estate in Tuen Mun, 25 years old, has a two-bedroom unit selling for only $4 million, with a down payment of just $800,000, attracting many first-time homebuyers. But looking at the financial statements, you will find:
- The maintenance fund has only $3 million (for the entire 500 units)
- The monthly management fee is only $1,200, but only $200 of that goes into the maintenance fund
- The elevators have been in use for 25 years and may need to be replaced at any time
Professional estimate: Within the next 3 years, each household may need to chip in $300,000–500,000 to cover various maintenance costs.
For young people buying their first home, an $800,000 down payment is already the limit, and they simply have no extra cash to cover unexpected repair costs. As a result, many homeowners are forced to sell their properties and exit the market, ending up with a loss.
Practical Skills and Points to Note When Reviewing Financial Statements
How to Obtain Building Financial Statements?
According to the Building Management Ordinance, owners have the right to inspect the building's financial statements. As a prospective buyer, you can:
- Request from the Seller: Obtain the latest one-year financial statements from the seller through the real estate agent.
- Contact the Management Company Directly: Present the provisional sales and purchase agreement and request to review the records.
- Attend the Owners' Corporation Meeting: The annual general meeting will distribute financial reports.
- Check the Land Registry Records: Some major repairs have records filed with the Land Registry.
:::tip Experts suggest Ideally, obtain the financial statements for the 'most recent three years' to observe trend changes. If the seller refuses to provide them, that in itself is already a warning sign. :::
Five Must-See Financial Indicators
1. Maintenance Fund and Building Age Ratio
- Building age under 10 years: Reserve over $50,000 per unit
- Building age 10-20 years: Reserve $80,000-$100,000 per unit
- Building age 20-30 years: Reserve $100,000-$150,000 per unit
- Building age over 30 years: Reserve over $150,000 per unit
2. Management Fee Income and Expenditure Ratio A healthy building should have monthly income slightly higher than expenses, with any surplus allocated to the maintenance fund. If income consistently falls short of expenses over a long period, caution is needed.
3. Accounts Receivable Ratio Accounts receivable for management fees should not exceed "10% of the annual management fee income." Exceeding this indicates difficulty in collection and varying quality of residents.
4. Changes in Insurance Premiums If the insurance premium suddenly rises sharply (for example, an increase of more than 20%), it may indicate that an incident has occurred in the building or that the insurance company has assessed an increased risk.
5. Legal and Professional Fees If legal fees are unusually high, it may indicate that the building has ownership disputes, internal conflicts within the corporation, or ongoing litigation.
Common Mistakes and Pitfall Avoidance Guide
:::warning Misconception 1: You don't need to look at financial statements for new buildings Wrong! Even for new buildings, you need to check whether the management fees charged by the developer-appointed management company are reasonable, as well as the proportion of the maintenance fund contribution in the first year. Some new properties have very low management fees in the first few years, but the maintenance fund contributions are minimal, which may lead to a funding shortage after a few years. :::
Misconception 2: Cheap management fees are good Cheap management fees may indicate poor service quality or insufficient contributions to the maintenance fund. In the long run, it could actually affect property prices. I would rather choose a residential estate with reasonable management fees but good services.
Misconception 3: Having an Owners' Corporation Automatically Means It's Good Having a corporation is a good thing, but if the corporation is poorly managed or plagued by serious internal conflicts, it could actually drag down the building. When reviewing financial statements, pay attention to whether the 'Board of Directors' Report' mentions any internal disputes.
Misconception 4: Having a large maintenance fund means you can spend freely Some buildings have ample maintenance funds, but the owners' corporation might spend recklessly, such as on unnecessary luxury renovations. It's important to check the expense details and ensure the money is used appropriately.
Mortgage approvals will all look at financial status
Many people don’t know that when banks approve a mortgage, they also consider the financial condition of the building. If the building’s maintenance fund is seriously insufficient, or there are major repairs upcoming, the bank may:
- Lower the mortgage ratio (for example, from 60% to 50%)
- Increase the interest rate
- Require additional collateral
- Even reject the approval
So looking at financial statements is not just for your own sake, it also directly affects whether you can smoothly get on board.
Summary: Buying a property is a lifelong decision, don't lose the big picture over small things
After reading this article, I believe everyone understands why you need to look at the building's financial statements when viewing a property. Buying a property is not just about looking at the unit itself; the financial health of the building directly affects your future quality of life and financial burden.
Remember these key points:
- The maintenance fund should be sufficient; the older the building, the higher the requirement
- Be cautious if the arrears rate exceeds 10%
- Pay attention to any major maintenance plans in the next 1-3 years
- Obtain the financial statements of the past 3 years and look at the trends
- Don't be greedy for cheap deals; if it's too cheap, there is a reason
The Hong Kong property market is highly competitive, and many people are willing to do anything just to get on the property ladder. But buying a property is a lifelong decision, and spending an extra week or two doing research could help you avoid losing hundreds of thousands. It's better to get on the property ladder slowly than to buy the wrong property.
:::success Action Recommendations Next time you view a property, remember to ask the real estate agent for the building's financial statements. If they say, 'No need to check, this property is very popular,' you should insist on seeing them even more. Experienced buyers always do their homework when buying a property. :::
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All cases in this article have been adapted to protect the privacy of the parties involved. The data is for reference only, and the actual situation should be based on the latest market information. Please consult professionals before buying property.