Condo Buying Guide: Condominium Fees
As a condo owner, you’ll have to pay HOA fees, which are typically based on the percentage of the development you own. For example, if you own a three-bedroom, 2,000-square-foot unit you’ll pay more than someone in the two-bedroom, 1,500-square-foot unit next door. Fees can also differ based on each unit's view, where the unit is located (e.g., which floor, is it an end unit?), and so forth.
The fees are used to cover maintenance for the common areas, property and liability insurance for the building's exterior and common areas, and certain utilities, such as the water or electricity used in common areas. The fees generally don’t cover insurance for individually owned units; you’ll have to buy your own policy for that. (For more, see Have the Right Condo Insurance?)
It’s important to review the HOA bylaws, board meeting minutes and newsletters and other documents to find out about any building issues and unit violations that might affect your decision to buy. These documents usually become available once you’ve signed a purchase contract for a unit in the HOA. Even though that’s late in the process, take the time to review them with an experienced real estate attorney before making any final decisions.
HOA fees vary based on the development and market. Developments with swimming pools, tennis courts and fitness centers may have higher maintenance and liability costs and therefore higher fees. Large, multi-level developments – with elevators, fire-suppression systems, and extensive HVAC systems – may also have higher fees. One surprise: If you’re in a large development with many owners paying in, your HOA fees could actually be lower than you expect.
Before you make an offer, it’s important to investigate the development's HOA financials and fee history. The seller or HOA treasurer should be able to provide several years of history so you can review trends and find out how much the association has in its reserve fund. You should also compare the development's fees to others in the area. If the fees seem too low, the development could be in disrepair, or it might not have enough reserves to handle unexpected maintenance expenses. Fees could also be low to entice buyers while the developers sell all the units. Once the property is turned over to the condominium association, however, the fees could increase significantly.
In certain developments, fees may be equal to or greater than the mortgage itself. It’s important to find out why the fees are so high and determine if the property is being efficiently managed. Costly repairs and replacements, for example, can often be avoided by simple preventative maintenance. Additionally, property managers may not be taking a cost-effective or direct approach to contracting maintenance tasks. For example, a property management company might hire a property manager, who contracts with a pool-maintenance company, which hires a foreman, who supervises the person or crew that cleans the pool. Each layer costs the association (read: you) more money.
Reserves and Special Assessments
A percentage of your monthly fees typically goes towards your development's reserves. These funds are used to pay for non-routine expenses such as replacing the roof, painting the exterior or renovating a lobby. If the reserve fund is not large enough to cover these expenses, all unit owners may be charged a special assessment to help cover the costs.
Special assessments can range from about a hundred dollars to many thousands of dollars, depending on the project. Rising insurance costs, too, can deplete reserve funds, forcing the association to levy a special assessment. This is increasingly becoming a problem for areas prone to natural disasters such as coastlines that are hit by frequent hurricanes.
Non-Payment of Fees
All HOAs – whether for condos, townhouses or single-family subdivisions – face the possibility that an owner or several owners will default on the payment of fees. The problem became so widespread following the 2008 economic crisis that certain states enacted new legislation to help associations collect unpaid fees. Associations can seek a lien in court against a property based on any unpaid fees, and either the association or a bank can initiate foreclosure proceedings.
In some states, the association can demand that rent payments on delinquent units be handed directly to the association instead of to the unit owner. In Florida, for example, an association can evict a delinquent homeowner, find its own tenants to occupy the unit or find new renters for an abandoned unit, and collect the rent directly. (To do this, the association must first foreclose on the unit ahead of the bank, taking title to the property.) (Read more in The Pitfalls of Buying a Foreclosure House.)
When an association forecloses on a property, lenders may be averse to making future loans on properties in the development, which can make finding new owners a challenge. Both non-payment of fees and unoccupied units can cause monthly dues to rise for all other unit owners.Condo Buying Guide: Finding Good Deals on Condos