Condo Complications: The Issues Behind Ownership

If you have never bought a condo, you may be surprised at all of the different issues to consider. Buying a condo is not the same as buying a home. Not only could you have adjoining walls with your neighbors, as well as other physical elements that are different from a traditional home, the entire process that you need to go through to make your decision and obtain a loan may also differ.

Who Should Own a Condo?

One of the first things you need to ask yourself is: Are you the condo type, and what exactly does that mean? Many condos may be located in the urban setting. In real estate, the phrase "location, location, location" means a lot. Condos are springing up in many downtown urban areas, and some are even building items of convenience right into the development, including grocery stores or other businesses. With that convenience may come more noise and congestion. If you are thinking about a certain location, check it 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. There may be conditions, covenants and restrictions or CC&Rs that list things that you, as the condo owner must comply with in order to live there. Should you not comply with these conditions, you could be held legally accountable.

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 maintain. Condos can also be an attractive choice for the person who wants to be centrally located in a big city.

Loan Issues

Purchasing a condo may be more difficult than purchasing a typical home. Lenders are very careful when giving out loans. 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 units in a building. Many times, lenders will also have restrictions on how many of the units have already been sold. Some lenders require at least 90% of the units sold in order to offer financing.

Lenders may also have tougher loan-to-value ratios and restrictions for those buying condos. A loan to value (LTV) is how much the condo is worth vs. how much is owed on it. For example, if you put 20% down on a home, your LTV would be 80%.

When considering your condo loan, FHA offers insurance through FHA Section 234(c). This program insures loans up to 30 years. In order to receive this insurance, the building must have over four units. With the current popularity of converting apartments to condos, it is important to check out restrictions within the 234(c) program.

Other Costs

There may be other costs involved with owning a condo. Be sure to carefully read all documentation. Even though the HOA has insurance, you may need to have additional coverage as well. Talk to an insurance agent before signing any papers, and be sure that the insurance offered by the HOA doesn't shift risk to you to maintain lower premiums.

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 a HOA meeting. As well, talk to the neighbors to see if they are happy with how the condo is managed. You can ask them about noise and other issues. Review the bylaws to determine what is covered by the HOA. You can also ask to obtain the minutes from recent board 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 tax and other litigation history. You may find that there are lawsuits involved that you may not want to become part of, should you purchase. Some condo associations have been forced into bankruptcy for unpaid HOA dues. Should they fall behind on receiving dues, lenders may also stop lending on the units, which could affect resale values. Review financial records for delinquencies or money in reserve for maintenance, etc. 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 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 have anticipated. Be sure that taxes are in line with true values 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 standard single-family home. 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.