Top questions to ask when buying a condominium
What are the condo association rules? More importantly...
My respected Remax colleague Bill Gassett shares very good condominium purchasing tips below. Before we review his recommendations of questions to ask before purchasing, it is very important for First-Time Buyers to do their financing homework first before touring condominiums.
Since most First-Time Buyers are more likely to procure FHA financing, they should first inquire if the Condominium Association has submitted their paperwork to HUD for approval to allow FHA financing.
It frightens me to share the following information because it reads like a possible violation of fair housing laws.
Many Condominium Associations prefer to attract Buyers who procure conventional financing because the Buyers are generally required to invest a minimum of 10% towards their down-payment, and possess a higher credit score to procure their financing.
Condominium Associations tend to believe attracting these Buyers insure more financial stability for the Association. They tend to believe these Buyers will be less likely to allow their individual condominium unit to fall into foreclosure, and more likely to pay the monthly association dues consistently, and on time.
This is the primary reason Condominium Associations do not take the time to get themselves approved to allow FHA financing. Plus, because these Associations comprise Owners who volunteer their time to help manage the complex, they simply either don't have or are not willing to give the time to prepare the mountains of paperwork to get approval to allow FHA financing.
Not to say FHA Buyers won't do the same as Conventional Buyers when it comes to honoring their neighborly fiscal duties, the difference is FHA Buyers invest far less as a down-payment when they purchase, resulting in far less initial equity than conventional Buyers.
Equity is the difference between the mortgage debt owed on the condo unit and the unit's potential value. The general perception in these Associations is Owners who have more equity in their condo unit are far less likely to allow them to go into foreclosure if life presents an economic challenge to an individual condo Owner.
The Chicago southern suburban Condominium market-place is really being challenged in these economic times because most of these Associations are not FHA approved in a market-place where most of the pool of First-Time Buyers generally either don't have the down-payment and/or credit score requirements to purchase with conventional financing.
The sad part is most of these condominiums on the market are price so affordable, their mortgage payment would be less than rent of comparable apartments.
Now as Bill reports...
There is no question that buying a condo is a lot different than buying a home. There are a tremendous amount of details that every buyer faces when purchasing a home from getting a home inspection, to procuring a mortgage, to purchasing home insurance, to deciding whether Real Estate title insurance is a good idea. Buying a condo typically involves all of these things plus a whole lot more. There are questions that every buyer should ask before buying a condominium.
One of the biggest things buyers fail to understand about buying a condo is that they will usually be buying into a community where there are rules and regulations that must be followed. It is not like owning a home where the majority of the time you are able to make improvements such as adding shrubbery, planting a garden, or putting up a fence if you like.
Unlike a home, with a condo you own from the walls in. The outside of a condominium is owned by a democracy where you must abide by the rules. The point here is that you are not the king of your castle when owning a condo. Many condo communities either have an outside condo association with a management company involved or a direct home owners association where all the home owners decide what can and can’t be done.
Investigating the condo rules and regulations are an important consideration especially if you are used to the freedom of not having to answer to anyone else. I can tell you first hand there are some condo neighborhoods where the people that make up the rules do so just to make your life miserable. Just picture that crotchety old person that has nothing better to do than complain about every little thing they see. Their self importance is on display at every turn. This is not to say that every condominium community is like this but it sure pays to find out before making a purchase!
If planting a garden is important to you, ask before buying. Think you might want to add a patio? Be sure to ask if this is even possible. One the things that I have heard from some of my past buyer’s is how surprised they are about the stringency of the rules at the condo community in which they live.
Besides finding out what can be done aesthetically to your townhome, one of the major considerations for many folks is the condominiums pet policy. Some condo developments do not allow pets at all. Some have restrictions on the number and size of the pet you can have. The last you want to find out is that Fluffy is not allowed to come with you!
Lastly, you will also want to make certain there are no amendments to the condo by-laws up coming which may deter you from wanting to purchase.
How much are the condo fees?
Another key question is how much are the condo fees and what exactly do they cover. Condominium association fees are typically based on how many homes there are, what it costs to run the community, whether there is a professional management company, and if there are funds set aside for major repairs or an unforeseen lawsuit.
The condo fees from community to community can also cover vastly different things. Some of these things may or may not be important to you. Possible considerations of what could be included in the condominium fees are the following:
- Exterior maintenance of the building
- Grounds maintenance including landscaping, lawn mowing, and snow plowing
- Master insurance
- Water and sewer services
- Road maintenance
- Trash pick up
In some condo neighborhoods you may find that there are frills that you end up paying for in the condo fee that you may not need or want such as a pool, tennis courts, or recreation center that may also include a gym. If you do not have need for such things this could factor into your buying decision.
Is the complex professionally managed?
There are some condominiums that are under professional management and others that are run by a home owner’s association (HOA). You should find out which is the case at the neighborhood you are considering.
If it under professional management you will want to get the contact information for them and give them a call. Often times they are a great information source for anything you could possible want to know about the complex.
If the neighborhood is not professionally managed you will want to speak to the head of the home owners association. This person will should also be well versed as to the goings on of the complex.
How much money is in the reserve fund?
One of the more important questions to ask when buying a condo is how much money is contained in the reserve fund. This becomes important because it establishes the financial health of the association. You want to know if the association has budgeted enough money in the event that an unforeseen expense arises.
As a general rule a repair/reserve fund should contain about 10% of the annual revenue budget if the complex is under ten years old. If the neighborhood is older than ten years, the budget should be closer to 25% or more on hand for major expenses. Just like anything else the older the buildings are the more maintenance they will require.
While some condo neighborhoods may seem to have super low condo fees, you need to find out if they are funding their reserves properly so you are not stuck with a major expense at some point down the road.
Finding out how much money is in the reserve fund will help partially determine the financial health of the neighborhood. There are also a couple other questions you will want to ask as well when considering buying into a particular condo neighborhood.
One of them is what is the delinquency rate of the owners paying condo fees? You obviously don’t want to be caught in a neighborhood where a large number of owners are not paying their condo fees. Another key financial question is whether or not the condo complex is on the FHA approved list for financing eligibility.
FHA which stands for The Federal Housing Administration which is a government entity that backs loans. The FHA program is one of the most popular out there for home buyer’s due to the reduced down payment requirements which are only 3.5% down. It is of great benefit for a condo complex to be FHA approved because this is the financing route many buyer’s prefer to take!
Are there any special assessments coming up?
A special assessment is typically a one time fee that will cover a large expenditure needed in the neighborhood. For example maybe all the roofs need to be replaced on all of the buildings. This obviously would be a very large expense.
Sometimes rather than taking it out of the reserve fund a special assessment will be made where it becomes a short term expenditure. If your condo fee was normally $350 per month it may jump to $400 for a certain amount of time. Of course if you are considering buying into the neighborhood you will want to have this information for budgeting purposes.
Are there any lawsuits against the condo complex?
Maybe the home owners have a lawsuit going against the developer for not completing something in the complex or shoddy construction which has caused some kind of issue. Most of the time this is not a major consideration but at least worth investigating.
What is the condominium rental policy?
Finding out the rental policy is a very important question to ask when buying a condo for a couple of reasons. A high number of renters within the complex can have a few negative effects. Condo’s that are not used as the primary residence of the home owner often are more likely to default on a loan than an owner occupied residence.
Many lenders are therefore more reluctant to loan on a condominium that has a high percentage of renters. Renters also do not always have the same pride of ownership. As a result, the property may not be kept as well as if the owner were present. There is also the possibility they may not follow the rules as closely as the owner would.
Fannie Mae and Freddie Mac, the two mortgage giants, may not finance in a complex where there are too many non owner occupied units. The typical owner occupancy rate that lenders look for is at least two thirds. Over the years Fannie and Freddie Mac have learned that when the real estate market turns sour there are far more units foreclosed on in complexes where there is high investor ownership.
When foreclosures are taking place, condo fees often times are not paid so associations have to defer maintenance. Innocent owner occupants can then find themselves held hostage in units which are getting run down, losing value, and stigmatized in the eyes of Realtors and home buyers.
The ability to get a mortgage on a property is not only important when you are a buyer, but also later, when you are trying to sell your home. The last thing you want is to own a non mortgageable property in the future.
On the other side of the coin what if you find you need to move but the condo has lost value since you purchased it. You may want to rent it instead of selling if you are going to take a big financial hit. You may find out you can’t rent if there is a rule on the amount of units that can be rented at any one time.
What is the parking situation?
The parking situation from one condo complex to another can vary greatly. This is an important consideration especially if you have lived in a home before and are used to having guests over quite a bit. There are some condo complexes where you may be granted one or two “deeded” parking spaces in which you become the legal owner for such space.
This means you are the only one who is entitled to park in that designated spot and another owner could not legally park there. They are typically located right in front of or in close proximity to your unit. There are other condo communities where you do not have a deeded parking spot and it is “first come first serve”.
Many condo complexes also have areas where there is dedicated guest parking. People who come and visit are directed to park in these specific areas.
Who fixes what?
You are going to want to know exactly what you are responsible for in terms of maintenance expenses. For example one of the grey areas in many condo developments is who is responsible for replacing the windows? This is obviously a big expense when the time comes. Is this something the condo association is responsible for or is it yours?
Another example of a grey area is balconies and porches. In some condo’s you are given the option of having a balcony or porch. Make you look at the master deed as well as the unit deed to make sure who actually owns the porch. The porch may be attached to your unit but do you truly own it? In other words are you the one who will pay for repair and maintenance or is that the condo associations responsibility?
Will I need to move in the near future?
There are s0me excellent reasons to own a condo such as affordability, the need to downsize, or possibly not wanting to have the maintenance headaches that are associated with owning a home. You do however, want to keep in consideration that condo’s typically do not appreciate at the same rate that homes do.
I know in my area of Massachusetts the appreciation rate of condominiums has certainly not kept pace with single family homes. Condominium values have also dropped a lot more in the last Real Estate correction than single family homes as a whole.
While it can be hard to predict what will happen in the future, if things follow previous trends, what you realize in appreciation may be a smaller figure than a home. This makes it even more important to figure out if you really want to live in a particular condominium development.
As you can see there are lots of questions to ask when buying a condominium. It makes sense to do your home work so you are not only happy the day you buy but years into the future!
If you are thinking of buying or selling a condo anywhere in the Metrowest Massachusetts area, I would welcome the opportunity to interview with you.
Other Real Estate articles worth a look: Top Metrowest MA Realtor Bill Gassett can be reached @ 508-625-0191 - he service Real Estate sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northboro, Northbridge, Shrewsbury, Southboro, Sutton, Wayland, Westboro, Whitinsville, Worcester, Upton and Uxbridge MA