If you have never bought a condominium—usually shortened to just condo—you may be surprised at all of the different issues to consider. Buying a condo is not the same as buying a house. You'll likely have adjoining walls with your neighbors, as well as other physical elements that are different from a freestanding home.
Additionally, the entire process you need to go through to make your decision and obtain a mortgage may also differ significantly.
- Before buying a condo, it's important to understand the differences between living in a condo versus a single-family home and to determine if the condo lifestyle is right for you.
- Condos are usually less expensive than single-family homes and have lower maintenance requirements, making them good options for homebuyers on a budget or people looking to downsize.
- Loans can be harder to get for a condo because some lenders have strict requirements regarding owner occupancy and loan-to-value ratios.
- Condo owners will have to abide by the covenants, conditions, and restrictions (CC&Rs) of the complex or risk being fined, forced to comply, or sued.
- Condo owners pay monthly fees that cover the cost for ongoing maintenance and repairs of common areas within the complex, such as the grounds, pools, lobbies, elevators, and recreation rooms.
Who Should Own a Condo?
One of the first things you need to ask yourself is, "Are you the condo type?" What exactly does that mean? Being a city-dweller, for one. Many condos are located in urban settings. Condos are springing up in urban downtowns, and some are even building items of convenience right into the development, including grocery stores, bank branches, and other businesses. With that convenience may come more noise and congestion.
If you are thinking about a certain location for a potential condo purchase, check the area out at different times of the day and night to see how loud or brightly lit it is. If noise or light is an issue for you, this may not be the right choice.
One of the things that come with condo ownership is the Homeowners Association (HOA). It sets out a declaration of covenants, conditions, and restrictions (CC&Rs) that lists things that you, as the condo owner, must comply with in order to live there. If you find that you won't be able to abide by the CC&Rs, condo life might not be for you. Non-compliance could mean you could be fined, forced to comply, or even sued.
Condos may be a suitable choice for a certain type of person, like a first-time homeowner who cannot afford a more expensive single-family home. Condos also offer the advantage of low maintenance. This can be an attractive feature to older folks who are looking for less of a home to physically manage. Condos can also be an attractive choice for the person who wants to be centrally located in a big city.
An Introduction to Buying a Condominium
Purchasing a condo may be more difficult than purchasing a house. Lenders are very careful when giving out loans for this type of residence. They usually require that a certain percentage of the units have people living in them, or are, as they call it, "owner-occupied."
Another restriction may be how many condos are allowed to be owned by one investor. Usually, lenders do not want one person to own more than 10% of the units in a building. Many times, lenders will also have regulations relating to the building's occupancy rate. Some lenders require at least 90% of the units to be sold before offering any financing.
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).
Lenders may also have tougher loan-to-value (LTV) ratios and restrictions for those buying condos. An LTV ratio is how much the condo is worth versus how much is owed on it. For example, if you put 20% down on a home, your LTV would be 80%.
Federal Housing Administration (FHA)-backed mortgages for condos do exist, for up to 30 years; they're known as Section 234(c) loans. While the terms for borrowers are similar to those on housing loans, the restrictions on the condos are many; the building must have over four units, to begin with.
There may be other costs involved with owning a condo. Even though the HOA offers insurance, you may need to carry additional homeowners' coverage as well. Carefully read all documentation to be sure that the insurance offered by the HOA doesn't shift risk to you to maintain lower premiums.
Also, be aware that you'll need to pay a monthly condominium fee. All owners in a condominium complex pay fees to cover ongoing maintenance and repairs of the common areas within the complex. Fees typically cover maintenance of areas such as lobbies, elevators, pools, recreation rooms, parking lots, and the grounds within the complex. Some funds might be held in reserve to pay for large repairs, such as a roof replacement or exterior painting. Condo fees vary greatly depending on the size of the complex and the amenities offered.
Avoiding Condos With Problems
One of the most important things you can do to protect yourself when buying a condo is to research the HOA and sit in on an HOA meeting. You may also want to talk to the neighbors to see if they are happy with how the condo is managed. Review the bylaws to determine what is covered by the HOA. You can also ask to obtain the minutes from recent board and member meetings, and find out how much the HOA dues have increased in the past few years.
Another area to research is the board's litigation history, both for taxes and other general issues. You may find that there are lawsuits pending that you may not want to become part of, should you purchase. Some condo associations have been forced into bankruptcy for unpaid HOA dues. If they fall behind on receiving dues, lenders may also stop offering financing on the units, which could affect resale values.
Review financial records for delinquencies and reserve funds. A good association should have at least 25% of gross income in reserve for emergencies and repairs. If they run out of money, you may get hit with an assessment. Also, be sure to check out recent property tax assessments. If your condo sale price is low, but the tax assessment is high, you may be in store for a higher tax bill than you had anticipated. Be sure that taxes are in line with the true value of the property.
The Bottom Line
Condominiums can be a good investment for the right buyer in the right location when times are tough, though they can be harder to buy and sell than a detached house. Before purchasing a condo, be sure to do your due diligence and check out the HOA, CC&Rs, and any tax and insurance situations.
Also, be sure to get a real estate agent and a loan officer that has a lot of condo sales experience, as the issues surrounding such a purchase are not as simple as those with a traditional single-family home.