What to Look for When Buying a Condo

Do you know the risks of buying a condo or town home? Many people believe owning a condo or town home is easier than owning a single family home. You don’t have to worry about yard maintenance, roof repairs, etc. There are specific concerns, however, when buying a condo versus buying a house (not to mention additional risks of the current market). When purchasing a condo you are not only buying your unit, but also an ownership interest in the common areas of the condominium project such as the lobby, grounds, building exterior, etc.

Common ownership comes with risk. You can, however, mitigate risk by conducting thorough due diligence before you buy. The following is a brief guide to buying a condo. It doesn’t cover everything you need to know. Plus, conventions and regulations will vary by state and by market. This article is only meant as a starting point for protecting yourself when buying a condo. A condominium is a large purchase and therefore seeking legal counsel may be worthwhile.

HOA Fees

HOA fees or homeowners’ association fees (sometimes called condo fees) pay for expenses such as maintenance of the common areas, insurance (property and liability), non sub-metered utilities, if any (such as water or electricity), reserves and more. Typically property and liability insurance does not cover your unit, but rather the exterior of the building and common areas. You may need to buy your own insurance to cover your interior space.

Be sure to ask what is included in the HOA fees. Compare the association fees to those found in similar nearby developments. Are they too high or suspiciously low? Keep in mind that developments with pools and gyms may have higher maintenance and liability insurance costs. Additionally, high-rise buildings have more complex mechanical systems such as elevators and HVAC systems that will require extra reserves and maintenance fees. Yet, low-rise suburban developments may have extensive grounds that require landscaping.

Ask to see two to three years of fee history so that you can see how they are trending. Have they gone up significantly? Will they continue to go up? These are questions to ask of the seller or of the HOA treasurer. If the fees are low in comparison to nearby developments, ask why. In newer developments, builders will sometimes charge lower fees to entice buyers. Yet, once the units are sold and the property is turned over to the HOA, the fees will increase significantly in order to cover the costs of maintenance and reserves.

One thing to be careful of is that the HOA may place liens on units for non-payment of fees and seek a deficiency judgment against any of the unit owners for non-payment. You could be on the hook for the seller’s delinquency. A title report should disclose any liens placed on the unit you are buying. Don’t assume, however, that the condo association will put a lien on all outstanding fees, and that it will therefore appear in the title report. You must get a guarantee from the seller that all fees are paid as agreed.

Reserves and Special Assessments

A portion of your HOA fees should be designated toward reserves. You should learn what portion is allocated to reserves and further, you should review the balance. Are reserves sufficient to cover things like roof repair and replacement, mechanical systems, façades, and other large capital improvements? Ask if an independent assessment of reserves was completed and if so ask to see copies of the report. Newly finished projects pose a risk since an adequate reserve fund might not be established to handle unexpected repairs, particularly if few of the condo units have sold. In such cases, you will want to know who the developer and construction company was on the condominium project. Are they reputable or are they known for shoddy construction? Additionally, just as you would for a home purchase, you should order an inspection for a condo purchase.

If reserves are insufficient to pay for large expenses or capital improvements (or if reserves have already been designated for another planned expense) the HOA will assess an additional fee on the condo owners, called a “special assessment.” The seller should be able to tell you if any special assessments are planned, but do not rely solely on this information. Ask to see all board minutes within the previous 12 months and ask to talk with the HOA treasurer. Additionally, ask if there is any pending litigation either by the HOA or against the HOA as these can often result in a special assessment.

Declarations, Bylaws and Regulations

Each state requires condo developers to file a declaration with the local county, which will describe the condominium project, establish a homeowners association and either refer to or include the bylaws. The bylaws govern how the association should be run, such as the number of meetings per year, required votes, and the election of directors and officers. The declaration may contain covenants, conditions and restriction s (CC&R’s) which are rules specifying how condo owners may use their property and the common areas. These rules are binding on all purchasers. Once the developer hands the project over to the HOA, additional rules can be added through voting (according to the bylaws established).

CC&R’s and condo regulations limit the rights of property owners, but with the intention of improving the value of the property in the subdivision or project. Possible restrictions could be pets, holiday decorations and home businesses.

You should be sure to get a copy of the declaration, the bylaws (if not included) and all rules and regulations established by the condo association to make sure you are aware of any restrictions that will conflict with your intended use of the unit.

Resale Value

Not only should you make sure you can live with the restrictions imposed by an HOA, but you should also ensure that the rules are sufficient to maintain the livability and resale value of the units. Of particular concern is the number of rental units allowed at any given time. Since renters are not owner-occupants, they will not have a vested interest in maintaining the value of the project. More importantly, a lender may consider all units in a condominium project that allows too many rental units to be investment property. For example, if the project's rules allow 30% or more units to be rented (even if they aren’t actually rented) lenders could deny potential buyers a home owner’s loan and will instead offer an investment property loan that entails a lower loan-to-value ratio and a higher interest rate. If a rental restriction is not in place, or if there is room for the HOA to adjust the level of rentals, your ability to sell the unit later could be impaired.

Condominiums and town homes offer many benefits to the home owner such as on-site amenities, low maintenance and convenience. Moreover, condominiums often offer a desirable lifestyle for many given their tendency to be located in pedestrian-friendly neighborhoods or urban environments.

Buying a condo or town home may seem easy compared to buying a single family house. But in many ways, it carries a higher level of risk and requires more due diligence on the part of the purchaser. Your real estate agent, title company and inspector will serve as good resources and will guide through the process. You may even want to consider having legal counsel review the documents.

You will, however, have to do your own homework, read all paperwork provided to you and ask questions on anything you do not understand fully. Just because you overlook an undesirable trait when you buy your condo unit, doesn’t mean that any subsequent prospective purchaser will be the “greater fool” and do the same. Especially in a down market, you could be stuck with your condo for a while. Buy wisely.

^{The writer of this article is not a legal practitioner and the information contained herein is not intended to serve as legal advice. Readers should not rely on the contents of this article without first consulting a qualified legal expert.}

^{Copyright 2010 Margaret W. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.}