So you’ve decided that condo living is right for you. Before you take the plunge and sign that contract here are a few things you should check out.
1. Understand the associations financial situation and how it is governed
When you buy a condo you become a “co-owner.” This means you share an ownership interest with everyone else in the condominium complex. As a group you are responsible for the financial operations, governing and even the maintenance of the entire property. No this doesn’t mean you will have to mow the lawn or trim the hedges a few times a year. The condo association will typically hire a management company to oversee items like that.
It is important that before you buy a condo that you verify the condo associations yearly budget and latest financial statement. Make sure that the reserves are at least 20% of the total operating budget and that they are not operating with a loss. If they are operating at a loss guess who has to make that up? You will in the form of an assessment.
Sometimes this information is not easily acquired so make sure that any offer you make to purchase a condo allows you to review and approve this information.
2. Read the bylaws
How boring right? Don’t be intimidated by that huge book of legal jargon there are really only a handful of pages that actually would affect your day to day living. These are the most important part of the bylaws to know and understand:
a. Know what the association covers and what you are responsible for. Beyond the basics of grounds maintenance and snow removal you should know what you are responsible for. Do they replace windows, take care of the deck, etc.?
b. What utilities are you responsible for paying? Many associations cover water and some cover gas as well. Know what’s covered.
c. What are the rules regarding pets? Do you have large dogs over 25 pounds? 3 cats? Know the weight limits and rules.
d. Know the rules regarding renting and subletting
3. Is the condo FHA approved?
If you are an FHA buyer this is one of the most misunderstood and frustrating issues in purchasing a condo. This is really where you need to lean on the experience of your Realtor so you do not end up in a heap of trouble. If you want to view a list of condos in your area that are FHA approved the link is here: https://entp.hud.gov/idapp/html/condlook.cfm If you really love a condo and you are an FHA buyer I would explore some other loan options such as a 3% or 5% down conventional. Just make sure the property is warrantable before you go down that road.
Because a complex is not FHA approved doesn’t mean that it’s a bad buy. There is a lot of paperwork that the condo association has to complete in order to get approved and many do not have the resources to keep up with this which is required every 2 years.
4. Do they allow rentals and is there a maximum number?
If you are an investor or plan on keeping your condo as a rental unit this is essential information to understand. This is also the biggest mistake amateur investors make which gets them into a lot of trouble and ends up costing thousands.
The majority of condo complexes have strict rules on renting out the units because as co-owners they do not want the complex to become apartment complexes or short stay hotels. As a co-owner that occupies the property as a primary residence you will learn to appreciate these rules.
The most common rules you will find regarding renting out the condo are: Leases must be at least one year in length and approved by the association (there also may be a fee that applies for this), the condo must be approved for rental by the local government (Township, City, etc.), all tenants must follow the same rules and bylaws as co-owners, a cap on rentals in the complex or building of 25% or 50%.
The last one is the most important if you are an investor. If you purchase a unit with a 25% cap and that cap has been met than you will have to go on a waiting list to rent out the unit. I have seen waiting lists as long as 5 years.
One last note on this: The rental rules can change at any time! If you buy a condo to live in for a few years and then plan on renting it out understand the bylaws can be amended at any time and this may significantly alter your plans. This is a very common practice in the Ann Arbor area where I work. Many medical residents or graduate students come to the University of Michigan or Eastern Michigan University to live for a few years. Once they see how high the rental rates are a condo purchase is a no-brainer. For many it turns out to be a great investment but it’s important to understand the risks.
5. What’s the noise factor
Many buyers spend only a few hours between showings and inspections in a home or condo before spending tens of thousands of dollars. Don’t be afraid to ask the other residents and neighbors what they like or dislike about the condo complex. If you are living on a lower unit and your upstairs neighbor loves tap dancing or has a rock band this could be an issue. If there’s attached garages that your unit sits over maybe open and close them to see how loud it is. If you have a neighbor that likes to come home at 2:00 am every night this could be an issue.
6. Are there any pending assessments?
Condos require just as much work as a home such as new roofs, driveways, roadways, pool repair, etc. Part of your association dues go to cover these improvements but sometimes there is poor budgeting or an unforeseen repair that needs to be made. If there is a budget shortfall and an improvement that needs to be made this will be divided up between all the owners in the form of an assessment. Make sure that as part of any offer you are made aware of any pending assessments to the property.
7. Warrantable vs. Non-Warrantable
A Warrantable condo is a development that can be financed by Fannie Mae or Freddie Mac. What does this mean to you? If a condo is non-warrantable then most lenders will not finance the property and it could be very difficult to sell in the future. There are several reasons why a condo may be non-warrantable including: Over 50% of units are rentals, one owner owns more than 10% of the units, more than 15% of owners are delinquent on their association dues and several more.
As an investor a non-warrantable condo is not necessarily a bad purchase if you plan on holding it long term. If you only plan on living in the condo for a few years than you should probably stay away from non-warrantable condos.
Dan’s bottom line: Condo living is easy, comfortable living for many people. Not having to worry about all of the maintenance and repairs that come with a single family home is a great benefit. Educate yourself before you buy and enjoy the condo lifestyle!