5 Questions Everyone Should Ask Before Buying a Condominium

Important questions to be asked before buying a condominium unit

How many times have we heard the term "caveat emptor" when buying real estate?  Well, condominium ownership in today's market is truly a "buyers beware" scenario.

Take for example the following real-life situations:

• Client A had been looking for weeks to buy and take advantage of the first time homeowner tax credit.  As the deadline rapidly approached, the choices became fewer and fewer.  The Realtor told Client A that they may not get everything that they were looking for, but "now is the time to buy" and that they needed to "squeeze the trigger" on making an offer.  Because of time constraints to secure the tax credit, Client A waived the 3-5 day right to receive all condo documents for review prior to signing the P&S.  Client A relied, in part, on his conveyancing attorney who said that he had a "stack of old condo docs laying around somewhere in the office" and would get to them after the purchase and sale was signed.
  
  Fast forward to closing date on February 15.  Papers were passed and the condo became Client A's.  On March 19, Client A received a bill from the Trustees for his 14% share of a $250,000 "special" assessment that was announced to all owners of record on February 15.

• Client B had been waiting for months to purchase a condominium unit in a highly desired gated community just on the outskirts of Boston.  Finally one Sunday, she saw an open house advertised for a corner unit in her price range.  Not having worked with any Realtor previously, Client B attended the open house which was hosted by the listing agent.  "Oh yes, I can help you Sweetie" said the charming listing agent.  "In fact, there has been so much interest in this unit already, that I'd suggest that we write up an offer right away...."  Five days after the offer to purchase was accepted, the lawyer began to review the condo budgets and asked Client B "did you know that the condo association has had special assessments in the range of $5,000 to $18,000 per year for this unit in the past 5 years because the association doesn't budget for capital improvements?"  Upon further review, the lawyer discovered that the listing agent was also a Trustee for the condominium association and discussed the conflict of interest before advising his client to terminate the offer.

• Client C bought a two-unit condominium conversion in South Boston.  For the first year, the two neighbors got along great - each helped with the landscaping, snow removal, and general maintenance. Unfortunately, the neighbor got divorced the following year and shortly thereafter, lost his job because of a drinking problem.  Destitute, he fought foreclosure, but eight months later, the neighbor's unit was foreclosed upon.  During the foreclosure process, the neighbor stopped paying his share of the master insurance on the building and fought with Client C such that C took on all responsibility for the landscaping and maintenance.  About two weeks after the neighbor's eviction, the roof started to leak from all of the rain that we experienced in March 2010 and the clogged gutters began to overflow and water leaked into both units. C, who had been paying his share of the condo fees to the neighbor, found out that the damages were not covered since the policy had been canceled for non-payment nine months back. Not knowing what to do, C contacted an attorney who told him that he was now responsible for the cost of all maintenance, repairs and insurance for the building until a new owner assumed the ownership interest in the condominium that the neighbor previously had - and that he could not invoice the new neighbor for costs incurred prior to his ownership.  C's final cost until a new owner could be found...going on $10,000 and still waiting for the upstairs unit to be sold.

How Many of These Situations Could Have Been Mitigated if the Right Questions Were Asked Prior to Purchasing the Condominium?

Here are Five Questions Everyone Should Ask Before Buying a Condominium: 

 1. Is the Condominium Professionally Managed?

Be careful with condo conversions in multi-family homes and small complexes whose owners manage the property themselves. As illustrated above, when things run smoothly and all owners cooperate, this is a very cost-effective form of management.  However, when someone absconds with the condominium fees and reserves, or when situations are encountered where all owners do not agree to fund expenditures, you have little recourse and are often stuck holding the bag. 

If you find that you are looking at a self-managed building, ask how many of the other owners actually live there.  Owner occupied buildings tend to be managed more more efficiently.  Also, trying to track down an out of town owner during an emergency could be difficult. 

2. How Effectively is the Condo Association being Managed?

Just as important that there is effective management, you want to ensure that your condo fees are being spent wisely.  Look carefully at condominium budgets, expenditures, and reserves.  Many lenders now require that a condominium association put aside at least 10% of all condo fees into a reserve account.  Ask to speak to the property manager directly.  Get a feel for how they will treat you as a new owner.  Inquire about upcoming capital expenditures, talk with other owners about how the property is managed.

Be smart also.  If you are looking to purchase a condominium in an older building, you should specifically ask about the age of building systems, roofs, decks, road surfaces and other common areas and determine whether any assessments may be possible for these items, or if there are adequate reserves for these items.

3.  What is the overall tone of the condominium association?

Inquire whether there is any litigation against the condominium association or the trustees.  What is the nature of the litigation?  How long has the litigation been around?  How is the litigation being handled and who is bearing the cost?  What are the possible outcomes (financial and otherwise)?  As alluded to in the first scenario, Trustees that are also Realtors who represent sellers or buyers at the condominium have an inherent conflict of interest. Strong condominium associations prohibit Trustees from selling real estate located within the complex.

4.  What does the Master Insurance Policy Cover?

Is the policy an "all-in" policy?  What are the replacement cost values and are they keeping up with actual costs to rebuild your home in the event of a total loss?  Are you responsible from the walls-in ?  What about window and door replacement?  Do you have exclusive use of otherwise common areas that you will be required to maintain?  Do you have to pay any supplements for exclusive use areas?

Carefully review the condominium's master insurance binder with your lawyer and insurance agent.  Read the insurance sections of the by-laws to determine what levels of casualty (loss) and liability insurance you need to carry.

5.  What do the Rules Really Say?

Do you have the most up-to-date and complete set of all condominium documents?  If you have copies of amendments 1-9, has anyone asked if there is an amendment number 10?  Don't rely on your attorney to have the most current documents on hand.  It is well worth the $25 cost to have a complete set of documents provided to you directly by the property manager or Trustees.

Once you have the documents, look carefully at the rules and regulations of the condominium association.  Do you like to barbecue?  Well, most fire codes prohibit fuel-based barbecues on decks and balconies.  Even if the fire codes don't exist, condo rules may disallow this.

Do you have pets/do you want to own a pet?  Many condo regulations are quite restrictive.  Know now before it's too late - and don't just rely on verbal representations by your Realtor.  Same with rentals.  Do the condo docs allow owners to rent out their units?  Are there any restrictions on the number of units that can be rented?  How do you feel about living next to renters?  Will you be able to obtain financing or will your ability to sell the property down the road be impacted by the number of rental units?

The above 5 questions should be asked by any serious buyer of a condominium before going too far into the transaction.  If you can't get answers, or if the management and/or Trustees are difficult to deal with, how do you think it will be once you become an owner.  Use your leverage now and go into this purchase transaction with "eyes wide open" and do what it takes to get comfortable with condominium ownership.