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.
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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. |
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