Buying A Condo Is Not Like Buying A House

People tend to think of condominiums as smaller houses without the yard work.

And, since most condo owners are at opposite ends of the homeownership spectrum, either first time buyers seeking affordability or long-time home owners looking for an easier life style, home buying may be a new or only distantly remembered experience. Buyers may not think about the very real differences between buying a condo and buying a single family home.

First of all there are the legal differences. A single family home conveys with all the land around it and gives total control of its (legal) use to its owner. Condos, however, can only be possessed from the outside of the inside walls and anything beyond that is controlled by what is supposedly a democratic rule of all of the owners of the complex. In other words, no, you may not paint the front door in purple and green stripes or chop down the messy willow in "your? front yard.

When you move into a condo you don't just have neighbors. You have co-investors and you have enforced relationships that simply do not exist after the usual home purchase transaction.

Condos are a wonderful lifestyle choice, and in congested urban areas may be one of the few homeownership choices. But make sure you understand what you are buying and what you are buying into.

First of all, ask the right questions. Your agent will probably not have all the answers and the listing agent may not either. Therefore the first question you ask is if the complex is professionally managed. If it is, ask for the number of the management company. If it isn't ask for the name and number of the head of the Home Owners? Association (HOA).

If the complex is professionally managed, the manager will probably be more than willing and prepared to answer questions. If the complex is self managed as many smaller complexes by reason of economics must be, HOA board members are volunteers who are less prepared or even less willing. More about this later. But here are some of the questions you should ask.

  • What is the percentage of owner-occupied units in the complex?

    This is important for two reasons. First, Fannie Mae and Freddie Mac may not finance the purchase of a condominium in a complex which they view as too heavily owned by non-occupants (investors). The usual benchmark for financing is around 2/3 owner occupied. The wisdom of this was amply demonstrated during the banking crisis of the early 1990s when thousands of condo units were foreclosed in complexes with high investor ownership. While those foreclosures were taking place, condo fees were not being paid so associations had to defer maintenance. Innocent owner occupants found themselves held hostage in units which were deteriorating, losing value, and stigmatized in the eyes of real estate agents and buyers. Condo developments in which Fannie Mae and Freddie Mac had granted mortgages remained relatively stable in the midst of the chaos. Of course, the ability to mortgage a property is important not only when you are a buyer, but also later, when you are trying to sell the unit.

    The second reason for asking this question is the difficulty condo associations have in enforcing rules against renters. HOAs are really dependent upon the willingness of owners to discipline their tenants. These owners may or may not have any interest in the property beyond a highly leveraged financial one.

  • Have there been any special assessments in the last three years? Are there major maintenance or improvement projects anticipated in the next 12 months? Are there sufficient reserves to cover those expenses?

    Homeowners have unexpected repairs and so do condo associations. But a well run association plans for these and sets condo fees so sufficient reserves exist to cover emergencies. Multiple assessments are a sign of poor planning. How unfair to purchase a unit from someone who had enjoyed artificially low condo fees for years, only to have to immediately cough up a huge assessment when the underground parking garage begins to collapse.

  • Are there any current disputes among owners that the Association is trying to resolve?

    If owners are fighting to the near death over one or more issues, you may want to think twice about buying into a hornet's nest.

    Some issues that keep popping up;

    Hanging items on or from balconies. This rule was originally put into condo documents to prevent stringing up laundry or hanging bird feeders which might cause hygiene problems, but countless battles have been fought over the last three years over its enforcement against flying the flag.

    Pets. Condos that don't allow them are often pressured to admit them; those that do permit them are pushed into conflict by one owner's nasty poodle. Even where the right to own a pet is sacrosanct, behavior of individual pet owners can cause complex wide disagreements.

    Age restrictions. Over-55 developments can be thrown into turmoil if an owner's kid moves back home with ill-behaved teens or a remarriage or illness changes a family dynamic.

  • Is the HOA involved in any lawsuits?

    It is not unusual for condo owners to end up in litigation with the developer of the complex, with the manufacturer of building products used in the development, or with an individual homeowner. Such lawsuits are not necessarily a deal killer, but something to discuss with your attorney.

  • Are there any amendments to the condominium by-laws currently under discussion?

    It would be a heck of a note to be handed the keys to your new condo only to discover a new amendment to the bylaws limiting each owner to one parking space. How scary to leave the Ferrari parked on the street. An extreme example, but some sudden bylaw changes could impact on your use and enjoyment of the property. Once you actually own your unit, you have a vote.

    As stated earlier, you may find HOA members less than forthcoming. They may not know the answers, they may be worried about repercussions from your seller, other association members or even legal action, or they may simply not want to be bothered, particularly if you are still at the shopping stage. No matter. The answers or lack of same may be all you need to decide in favor or against investing in the development. If you do decide to proceed with an offer, there is a lot more research to do and a number of contingencies you need to put in the offer and we will discuss these in the next article.
However, you can ask questions, you won?t always get satisfactory answers.

That?s ok. It would be nice to know all of that stuff before you waste your and your agent?s time on a potentially untenable situation. But, if you think the condominium is right for you, go ahead and make an offer, just guarantee yourself the right to get this information.

Your offer will, of course contain all of the contingencies you would put into one on a single family home:

  • A mortgage commitment to allow you to complete the purchase;

  • Satisfactory inspections by a qualified professional for: Structure and major systems; Lead paint if the property was built prior to 1978; Radon gas in air or water if appropriate in your area; Pests (or proof of an HOA maintained termite/pest contract);

Plus any other contingencies specified by your attorney or dictated by personal circumstances.

Given the nature of condominium ownership and management, however, you should also make your offer contingent upon a satisfactory review of:

  • All condominium documents and bylaws

    Condominiums are an exercise in community living, and the majority rules. You need to know if any of the restrictions in the by-laws will hinder the way you hope to live in your new home. There can be some very restrictive rules.

    Even when something is permitted, there can be underlying restrictions. For example, a development might allow pets, but strictly limit ownership. It is very common for condos to restrict cats to one per unit or limit dogs by weight, i.e., only dogs under 20 or 30 pounds. This can effectively ban any dog much larger than a Miniature Poodle or a Pekinese.

    If you are buying a condo because of amenities such as the club house, tennis court, pool or gym, make sure that they can be used when and how you want to use them, and that they have not been abandoned by the HOA because of insurance or other problems.

  • Current and previous year's condominium budget and year-to-date actual expenditures.

    Get a professional to review these. Are expenses appropriate to the size of the complex? Are adequate amounts budgeted for routine maintenance, on-going capital expenditures, and reserves? Are fees for management and outside contractors in line with local standards? Are there any expected line items that are missing? How do budget projections match actual expenses?

  • Balance Sheet for several years

    Are reserves adequate for generally expected expenses? Roofs need to be replaced every 25 to 30 years, is the HOA planning for the next roof, or for a new HVAC system? There are guidelines for reserves. Again, consult an expert.

  • Minutes of the last year's HOA meeting minutes;

    These are a treasure trove of information. Is there a problem looming with a major mechanical system? Are the owners battling over one or more issues? Is the HOA dictatorial? Are owners in open revolt against the association? Are there changes being discussed that may alter the bylaws in a manner you will find unsatisfactory?

If you were unable to obtain this information earlier, you may well ask, why will you be able to get it now that you have real money riding on the answers? First of all, you are no longer a nosey shopper; you are now a potential owner and member of the HOA. Second, the seller and the seller?s agent will be more than anxious to keep you happy and will pressure the HOA to provide the requested information. Third, when your attorney calls the Manager or President of the HOA, that person is much more likely to respond than when you or your agent places the call.

And speaking of your attorney, you may or may not feel you need one when you buy a single family home. But please, please employ one for any condo purchase, and pick one who specializes in real estate. Reviewing the recommended documents as well as the eventual sales contract is what real estate attorneys do. Don't pay to educate a trust or a personal injury lawyer in the intricacies of real estate. Also, attorneys operating out of their area of expertise tend to be overly cautious (who knows better than they the likelihood of a lawsuit) and may overreact to things that are either routine or of no consequence.

You might also ask a CPA who is familiar with condominiums to review the budget and balance sheet, maybe even the HOA minutes. If your attorney handles a lot of condominium purchases he can probably do this review or he may keep a CPA on retainer for this purpose. Just make sure somebody goes over them carefully to make sure you are not buying a pig in a poke. Then, ask for a short tutorial so that, next year, you can keep track of what your HOA is spending and if they are spending it appropriately.

Your mortgage bank will insist that their closing attorney inspect the Master and Unit Deeds and probably issue a Title Insurance policy. This attorney (remember he is the bank's attorney, not yours) will also make sure there are no outstanding condo fees for the unit (unpaid fees can trigger ?super liens? in some states) and that there is adequate insurance on the complex. You will have to provide proof of insurance from your insurance agent on the interior of your unit. Don't forget to also insure your personal property because this will not be covered by unit owner's insurance.

If you are in the market for a condo, don't let the foregoing overwhelm you. Like most aspects of real estate, the professionals know what to do. You just have to give them a little shove, and then make sure they do it.

There is one more precaution you should take to protect your condominium investment. The minute you are handed the keys, ask when the next HOA meeting will be held. Attend it and every subsequent meeting you can. If possible, volunteer to work with the HOA or run for election to the board. You are a new member of a tiny democracy, and just like the larger democracy in which we all live, if you don't vote you don't get to complain.