Due Diligence

Things to Check Before Buying a Condo in Japan

By Jeff Wynkoop

There are a lot of things to keep in mind when looking for a re-sale condo. Usually people in the market categorize properties based on the area or areas they want to buy in first, then compare different properties in terms of size and layout of rooms, how far the properties are from the closest train station, access to sunlight, etc.

But an important factor people sometimes forget is the various risks associated with management of the property by the Homeowners’ Association (管理組合, or kanri kumiai in Japanese). The Homeowners’ Association is the organization which is legally responsible for the building’s common areas and governing the building as a whole, and is comprised of each of the condo owners in the building.

Property Bylaws and the Homeowners’ Association Minutes

One of the first things prospective buyers should do when contemplating a purchase is ask for a copy of the Property Bylaws (管理規約, kanri kiyaku in Japanese), and whether there are any other guidelines regarding use of the property (for instance 使用細則, or shiyou saisoku in Japanese). However, these may not contain all of the relevant restrictions on the prospective buyer’s use of the property.

For this reason, it is important for buyers to receive a record of the last few years of decisions by the Homeowners’ Association, including the minutes of past meetings (legally the Homeowners’ Association must hold a general meeting at least once a year). The decisions may contain information about future restrictions or obligations of homeowners in the building, and should be checked in any event so the buyer has comfort the building is being taken care of in a responsible fashion. The minutes are important because even if an issue was never actually put to a vote, the prospective owner may want to know what was discussed (for example, if some people in the building want to restrict animals in the building, e.g., allowing no dogs in common areas at any time).

Long-Term Capital Expenditure Plan

Another important issue to check concerns the Homeowners’ Association’s Long-Term Capital Expenditure Plan (長期修繕計画書, or chouki keikakusho in Japanese). This is important because even if it hasn’t been included in a recent Homeowners’ Association meeting, there are still ongoing capital expense obligations that bind the prospective buyer to making payments into the condominium’s capital fund. One should also check past capital expenditures, and whether they ran over budget, were completed on time, etc. Further, if the payments for future capital expenditures are small now, the prospective buyer should consider whether they are actually sufficient at present, and what the chances are of a big increase of these annual rent-like payments in the future.

Reviewing Financial Statements

The prospective buyer needs to be aware that even if the seller has met all of his or her financial obligations in the past, there may still be other owners in the building who are delinquent, which could cause all owners having to pick up the difference when repairs become unavoidable. It is thus advisable to review the approved financial statements (the income statement, 損益計算書 or son eki keisansho and the balance sheet, 貸借対照表 or taishaku taishouhyou ) over the past few years, to ascertain if there are any past delinquencies by other owners that have not been brought up to date.

Other Issues

There is a plethora of smaller issues to check as well, for example, are all of the parking spaces for the building actually bringing in revenue for the Homeowners’ Association? Are repairs to the building being considered and carried out in a timely fashion? What is the likelihood that the condition of the building will rapidly deteriorate in the future? In real estate as in life, an ounce of prevention is often worth more than a pound of cure.

Top image: A re-sale condo for sale in Tokyo