A Condo: Making the Right Choice
Condominium living has its advantages; however, it poses challenges as well. How can you know if a condo is right for you? How can you be sure to make the best choice?
Condominiums are also called common interest communities. Connecticut common interest communities come in many shapes and forms, from attached townhouses to stand-alone homes to apartment-style buildings. You must determine what kind of environment best suits your lifestyle.
The Advantages
Many developments offer attractive amenities including fitness centers, swimming pools, and community space for group gatherings, all of which offer nice advantages. First, you don’t have to purchase a membership in an independent fitness center, and an exercise facility is only a few steps away, rather than a long walk or drive, which means you’ll save time and money. Group meeting areas allow you and your friends or family members to meet comfortably for a special occasion, and having a pool and patio can’t be beat on a warm day.
Do you get more for your money with a condominium versus a single-family residence? There is no single answer. Pricing varies greatly, depending on location, amenities, and all the rest. Although no hard and fast rule, such as cost per square foot, indicates prices of condominiums are less expensive than houses, keep in mind that pricing will reflect amenities, location, and all the variables that make each building and unit unique. Depending on the market area, you may find the cost of condominium living to be very competitive.
Maintenance is always the first thing that comes to mind for me when I think about condominium living. Most condos offer the big one: “no mowing the lawn.” Others have extra perks, like no taking the trash bins to the street, no need to ever paint the exterior of a house, no worrying about the plumbing, and no shoveling snow. In addition, some major maintenance items are the responsibility of the homeowners association, meaning the costs are shared, which can be a nice reduction in out-of-pocket expense. All these advantages are noted in the documents that come from the association that governs or runs your community, so read the documents carefully if these types of advantages are important to you and your reason for choosing condo living.
The Challenges
The first challenge is partial ownership. When you invest in a condominium, you own the space between the outside walls of the unit. You do not own the entire building or the land.
Community living can also have drawbacks, especially if you are a very private person. You will tend to meet your neighbors more often, especially if the unit is attached.
Theoretically, the condo association is a democracy but that is not, however, always the case. Let’s face it. Most of us are busy with work, family, and the rest of our daily living activities. As such, most of us have no desire to sit on an association board or invest what little discretionary time we have in managing the day-to-day activities of the development. As a result, the same people—the ones with the time to spare—tend to be members of an association board year in and year out. The democracy may become more of an autocracy.
The advantage of a reduction in costs is a two-edged sword. Maintenance of the facility, including all the amenities, is shared, either equally or on a pro-rata basis, assessed by percentage of square footage. Maintenance fees present themselves monthly and/or annually. In the event that major maintenance is required, those costs will be shared among residents. As an example, if major work needs to be done to the building, you will receive a special assessment for your share of these expenses, if the association doesn’t have an adequate capital replacement fund. As an example, you may not use the fitness center or pool but will still pay part of the costs of maintaining those.
The resale value of condos can be highly market sensitive. In an upward market, they are the last to begin increasing in value. In a downward, they are the first to begin decreasing. It is not a hard and fast rule, though, and many things will influence the resale potential and pricing of a unit.
Be Ready to Ask
What are some of the things you want to focus on when thinking about investing in a condominium? With a single-family residence, the major concerns are location, floor plan, price, and quality of construction. A homeowner’s inspection will cover the quality of construction, which is an important issue.
With a condominium, you will have far more to consider and many more areas on which to focus. Here are things to be aware of and questions to ask.
· Quality of construction and the building
o How old is the building? Quality may be an issue if the development was constructed during the condo boom of the 1980s.
o Was it originally constructed as a condominium or converted from something else? If converted, from what?
o When you tour the building, can you hear the neighbors? If so, will it be a problem?
o What have been the major maintenance items (roof, plumbing, common areas, etc.) over the previous five years, and what were the unanticipated fees to individual unit owners? What is the potential for major maintenance over the next five years? Remember, these are costs you will share.
o When you look at the common areas, what do you see in terms of wear and tear? What does this information tell you about the building and the association?
o How many parking spaces are reserved for the unit you are considering?
· Current residents
o These will be your neighbors. Ask to meet with the people who live in the building, especially those near the units you are considering.
o When touring, ask about current residents–age groups, number of children, professions, how long they have owned their units. Are the demographics of the majority of residents consistent with you and how you live?
o Note how many units are for sale. I would recommend determining the percentage of units for sale. If it is more than 5%, you might want to think hard on the building. Why are people selling and moving out?
o What percentage of the units are being rented or leased as opposed to owner-occupied? This percentage could be a factor in obtaining a mortgage–owner-occupied units demonstrate greater stability.
· Security and Amenities
o How important is security to you? Is it one of the reasons you are thinking about condo living? If so, what do you need, to feel secure and safe?
o Make a list of the amenities you want and how important they are to you.
· The Association
o Ask for a copy of the information documents and read them carefully. These are the rules you will have to live by.
o Ask to meet with some Association Board members. In reality, these are the people who manage the building, and they have a great deal of influence on maintenance decisions and the costs involved.
o Ask for a five-year accounting of the fees for the units you are considering–regular monthly fees, reserve fund contributions, and any additional assessments.
o What current maintenance projects are being considered by the board? What are the projected total costs and per-unit costs?
o What restrictions apply should you decide to rent or lease out your condo?
· Other Costs and Considerations
o What are the current property taxes?
o What is the cost of homeowners insurance?
o Contact the utility companies and find out the history of gas and electricity bills. If they seem high, find out the reason.
The point of these questions is not to scare you away from condo living as an option, but rather to help you be a smart buyer and a smart consumer. It is to help you know as much in advance as possible, so you can make the best decision for you, because so many more things are involved in condominium investment than in a single-family residence. Buying a home is meant to be one of the best experiences of our lives. Armed with these questions, it certainly can be for you.
Under Development
Another area that warrants discussion is condominiums that are under development. In such a case, the key focus areas include the following:
· The Builder and Construction
o How many developments has this builder constructed?
o What is the company history in terms of sales, resale value, and quality of construction?
o How often does the construction company complete a development on schedule?
o Ask to tour an area that is under construction. Pay particular attention to insulation between walls of units and the exterior. Insulation between units relates to noise. Exterior insulation relates to heating and cooling costs.
· Projected Fees and Costs
o What are the projected association fees?
o What additional “new owner” costs can or will be assessed?
· What If?
o What if the building is not completed? How will you get your money back?
o What moneys are refundable? What are not?
o What recourse do you have in the event that the construction is not completed, and what obligations do the builder and real estate company have toward you and protecting your investment?
Obtaining a Mortgage
The last major difference between purchasing a single family residence and a condominium is the mortgage. Mortgage lending is based on a number of factors that all relate to overall risk. Some lenders perceive a higher risk level with condominiums, compared to single-family residences, so there are fewer lenders for condo mortgage programs. Although the two mortgage investing giants, FannieMae and FreddieMac both have programs for condominium mortgages, the guidelines are stricter for many of the reasons outlined above, which can translate into lower acceptable loan-to-value ratios, larger down payments, stronger credit history requirements, and a thoroughly reviewed appraisal. Where it is relatively easy to qualify a single-family home, condominiums have a multitude of factors and therefore tend to be looked at with a higher-powered microscope. The one piece of advice I will offer is to talk to at least three lenders that offer condominium financing. No doubt you will hear differing thoughts which will help you make an educated and wise decision.
Summing It Up
Only you can decide if condominium living is right for you. There are definite advantages, especially in terms of maintenance, security, and amenities. Fortified with knowledge, you can make the best choice for you and find the best property at the best price.
Patrick Spithill is a speaker and author who focuses on the housing market. Patrick can be contacted at 806-445-9122.