Is condo ownership for you? We’ve got 5 tips to help you find out!
There’s been a lot of talk that 20-somethings are the generation of renters, but 25 to 34 year olds make up the largest share (32 percent) of homebuyers, according to the National Association of Realtors (NAR). A 2015 BMO Harris Bank survey also supports this statistic, finding 62 percent of millennials expect to buy and another 31 percent would like to within two years.
Are you one of them?
If so, you may be considering a condominium, as they can offer great benefits — a manageable size to keep clean; an association to take care of common areas (no yard work needed!); and proximity to public transportation, work and a variety of extracurricular activities (especially if you’re looking in a big city).
But while a condominium may seem to have similar benefits to the apartment you’re currently renting, ownership is a whole different ball game. Need help thinking this through? Take these 5 key steps before determining if a condo is right for you:
- Assess the assessments — carefully: You may be prepared to pay a monthly assessment to the condominium or homeowners association (HOA) that goes into the “reserves” to maintain the common areas. Did you know these assessments can be increased? Or that you could get hit by a special assessment for unexpected repairs? (For example, a new roof. This could require an extra monthly payment from you to the association, should the project not be covered by the reserves.)
Action: You (or an experienced real estate attorney) should review the HOA’s bylaws, budget and meeting minutes for the past couple years (if it’s an existing condo) to see what’s available in the capital reserves, how special assessments are determined, and if there are any lawsuits or ongoing issues. Ask the following:
- Is the association well-organized and solvent?
- Are any of the owners not paying their assessments?
- Does any part of the monthly assessments go toward the reserves? If yes, how much? The older the building, the more cash there should be in reserves. RealtyTimes.com suggests 25 to 35 percent of HOA fees should be dedicated to reserves earmarked for large projects like painting or roofing. HOA fees should increase slightly each year to keep up with inflation.
Remember, you may love having the charm of an older building, or the amenities of a newer building, but not so much when costly repairs need to be made that the reserves can’t cover — resulting in that dreaded special assessment.
Note: There may be a reserve study you can ask for. Kiplinger says associations are supposed to do them every three to five years, so be suspicious if there isn’t one.
- Risk more with low density: While you may think you’d like to buy in a building with just a few units, should something big go wrong, there will also be fewer units to split a large repair bill. You also may have to be more active in the association than you care to be (for example, hold a title as Vice President or Treasurer), and have more contact with your neighbors than you’d prefer.
Action: Be honest with yourself about the level of responsibility and financial risk you’re willing to assume, and be sure you know what’s going on behind a charming facade. Hire a home inspector (in 2015, the cost of inspectors typically range from $200 to $400) and learn what you should consider before making an offer on a unit in a renovated building. Research the minutes of the condo association to check on the building’s repair history. Look closely at the percentages of ownership in the building. If one owner has the lion’s share, are you OK with not having as much control? Lastly, be sure you understand how the association is managed by the residents, and if you’d be required to play a role on the association’s Board of Directors.
- Rule on the rules before buying: When you buy a condo, you are agreeing to be a member of the HOA and abide by its rules. Every condominium building has a document called Covenants, Conditions & Restrictions (CC&Rs), which include restrictions such as a prohibition on pets (or the number and size of them), as well as set parameters around your ability to rent out your unit and perform renovations. Can you live by them?
Action: Read up on what to look for in the CC&Rs, and don’t assume you can get the HOA to pass a future amendment once you’re an owner.
- Meet the neighbors: When you buy into a condominium, it’s important to know how many units are owner-and renter-occupied for two important reasons:
- Renters have the potential to be noisier and less respectful of private and common property they don’t own.
- Too many renters in a condo building can impact your ability to finance (or resell) your unit, particularly when your future buyer may want to secure a Fannie Mae or FHA mortgage.
Action: Search HUD’s FHA-approved condominium database by location, name or status to determine eligibility for a Fannie Mae or FHA mortgage. Ask to meet your neighbors and learn what they like, and may not like, about living there.
- Care about coverage: According to legal advice website Avvo.com, an HOA should have up to $1M or more in insurance coverage under its master condominium policy (and any building over 20 units should have fidelity insurance to protect against embezzlement). In the event of a burst pipe or some other problem in a common area that damages your possessions, don’t assume your stuff will be covered.
Action: Check the fine print in the HOA’s master policy and bylaws to see just what’s covered, or ask an insurance agent for help. You’ll need to get your own policy, too (your lender will insist on it) — RealEstateABC.com provides guidance on what your condo insurance should include.
Need more help? Learn how to buy without regrets and watch our video to determine what kind of home is right for you.