My backyard swing set is about to be dismantled. My kids are too big and no longer interested.
As this milestone passes, I can’t help but think about downsizing and the seemingly maintenance free existence of the condominium. No yard work. We could just pull the door shut and travel around the world.
Naturally, this is not quite as simple as it seems. Condos are not individual cocoons. They are, in fact, group living situations and come with all the benefits and complications that entails.
Think Like An Investor
Minimizing potential associated financial risks would be first and foremost. When looking to purchase a condo, there are essential questions to ask that do not come into play when buying a single family home.
First, before you fall in love, call the management company. There are several key issues regarding condos that may affect mortgage financing on both your purchase and eventual sale.
What percent of the units are owner occupied? If there are too many rental tenants, banks may consider lending too risky and getting a mortgage could be tough.
Is the complex FHA approved? The Federal Housing Administration will insure mortgage loans for buyers with smaller down payments or past financial distress. The program has been used since 1934 to stimulate the housing market and is open to all buyers widening the potential pool.
Are there any foreclosures or short sales in the complex? When bank appraisers look at comparable sales in the community, they may include distressed sales, which could lower the value of the unit, and limit the amount of money financial institutions are willing to lend. In other words, your agreed offer to purchase may not ‘appraise out’.
Are there any lawsuits pending against the homeowners association? When you buy into a condo complex, you become a member of the Homeowners Association and thus part of any financial or tax liabilities they incur.
With that in mind, ask the management company when the last major capital improvements were done. You could buy in only to find out that there will be an additional assessment for new roofs, windows, pool or other major upgrades.
Joining the Sorority
Once buyer and seller have signed contracts, the resale packet should be given to the buyer. The homeowners association releases the latest budget and meeting minutes approved by their accountants.
Take note if there is an accrued Reserve or Repair Fund or if the association imposes special assessments when capital needs arise. Depending on the age of the complex, the accrued fund should be adequate to cover planned capital expenses but if the association relies on special assessments, you could be in for a surprise.
Also, if the common charges seem lower than comparable communities, ask why. The complex could be well managed or they could be short-shrifting maintenance or living beyond their means. Try to get a sense when you tour the property or better yet, if possible, ask current residents.
Look at outstanding debt owed to the association. If a significant number of owners are delinquent on their monthly fees, not only could your costs increase but, this could be a signal of general hostilities among the association.
Check the Certificate of Insurance, which details the association’s coverage on the replacement cost of assets. Also, check to see if this policy has a ‘building ordinance’ clause to cover the cost of bringing the facilities up to code.
Rules and Restrictions. Again, condos are group living situations and this time, cohabitation is more complicated than who is picking up the keg. Make sure that the rules and restrictions of the homeowners association allow you to live as you plan; like having a pet or gardening on your back patio. Can you rent your unit and how close is the complex to the owner occupied requirement? If you have a complaint, how is it handled by the association?
In Connecticut, buyers have 5 days to look over the resale packet and decide if they want to continue with the purchase.
Having a good local real estate lawyer handling your purchase is essential. This is no time to use Uncle Joe’s business lawyer in Mamaroneck. Regulations and practices are different in every state and sometimes in every community. Go local.
Condos can be great options for first time buyers, people who want to be in a bustling downtown area or anyone looking to maintain less house. Once you have done your due diligence, relax and enjoy!