Important Questions to Ask
before Buying a Condominium (Part 1 of 3)
By: Bernice Ross
If you’re thinking about buying a condominium, investigate carefully before you purchase. Failure to do so can cost you plenty.
Condominium living can be a great lifestyle choice. For some first-time buyers, it’s the only choice. Condos also make great second homes or retirement properties. They are also great for those who don’t want to cope with exterior maintenance. Before you purchase a condo, it’s important to know the benefits as well as the potential pitfalls.
1. What type of ownership are you purchasing?
The term “condominium” normally refers to the style of ownership. For example, when you purchase a single-family residence, you normally take title to both the land and the improvements. In contrast, condominium ownership normally involves more than just the unit you will occupy.
The most common style of ownership grants you an undivided interest in the entire property, a right to occupy a specific portion of that property, and shared use of the common areas. “Common area” refers to the shared public areas in the condominium project. This can include a pool, recreation, room, gym, dock area, or other amenities. Thus, if you purchase a condominium in a ten-unit building, you will have the right to occupy one of the ten units. You will also have a ten percent ownership in the entire property and the right to use the common areas.
Another style of condominium ownership grants you the land on which your unit is built. Depending on how the Homeowner’s Association (HOA) is set up, you may be responsible for the exterior maintenance of the property or the HOA may handle it for you. When this style of ownership includes single-family residences plus the ownership of the streets, this is called a “planned unit development” (PUD). In a PUD, the owners are often responsible for maintaining the streets.
A third type of ownership is called a “Co-op.” In this case, the property is owned by a stock cooperative. When you purchase, you buy stock in the building. Instead of receiving a deed, you will receive a stock certificate.
Consequently, one of the most important questions to ask is how you will take ownership. The answer to this question will determine the type of insurance you will need to purchase, the type of improvements you can make to the property, plus the availability of financing. For example, a PUD will be fairly easy to finance since it is similar to a single-family residence. In terms of most condominiums, there can be challenges obtaining lender financing if the number of owners actually occupying the property drops below a certain level. Co-op financing can be quite difficult to locate.
2. What obligations and restrictions do the CC&Rs place on me?
A Homeowner’s Association (HOA) normally governs most condominiums. The rules that govern the HOA are known as “Covenants, Conditions, and Restrictions” or CC&R’s. According to Realtor.com (http://www.realtor.com/BASICS/condos/ccr.asp):
“The covenants, conditions and restrictions (CC&Rs) are the governing documents that dictate how the homeowners association operates and what rules the owners -- and their tenants and guests -- must obey. These legal documents might also be called the bylaws, the master deed, the houses rules, or another name. These documents and rules are legally enforceable by the homeowners association, unless a specific provision conflicts with federal, state or local laws.”
Whenever you purchase a condominium, it’s critical that you include a contingency period for the approval of the CC&Rs. Take the time to read them carefully and look for restrictions that may conflict with your lifestyle. For example, some HOAs may prohibit you from leasing your unit. Others prohibit pets or impose a maximum weight limit. If you violate this restriction, they can force you to get rid of your pet. Other HOAs enforce age restrictions. This is particularly true in retirement communities. In fact, some CC&Rs are so restrictive that you cannot have children under the age of 16 spend the night.
Sometimes the HOA’s administration of the CC&Rs is punitive. In some townhouses, the HOA assesses a $100 fine if you put your trash can out early or don’t put it back in your garage the same day as your trash collection. Other HOAs will fine you for leaving your car in your driveway overnight. They may prohibit you from parking a boat, trailer, or RV in front of your property. One HOA in Florida fines their homeowners if they don’t wash off their driveway regularly.
While these may seem unfair, it is your responsibility to read the CC&R’s and to determine whether you are comfortable with these restrictions. If not, look elsewhere. It’s virtually impossible to change the CC&Rs.
These aren’t the only issues that you will need to address if you buy a condominium. Look for Part 2 for more important questions to ask if you are purchasing a condominium.
Before buying a condominium, one of the most important areas to investigate is the financial health of the Homeowner’s Association (HOA). It’s important to know, “Is the HOA healthy financially?”
Part 1 of this series looked at two important questions to ask if you are purchasing a condominium: (1) “What type of ownership are you purchasing?” and (2) “What obligations and restrictions do the CC&Rs place on you?” A third equally important issue deals with your Homeowner’s Association (HOA) Dues.
3. Is the HOA healthy financially?
All condominium associations assess a homeowner’s association fee. In some Planned Unit Developments, (PUD) owners have the title to their land and improvements. The city maintains the streets. The homeowner’s association fees go for the maintenance of the tennis courts, pool, recreation room, and the landscaping of the common areas. The owner’s fees are low since the HOA doesn’t maintain the streets or the structures.
In some guard-gated PUDs, The HOA is responsible for maintaining the streets, the common areas, plus paying for the 24-7 guard service. That means that owners have to maintain the guard shack plus two patrol cars. The fees are substantially higher. The budget includes “reserves” for car maintenance, guard shack facility maintenance (electric, AC, water, etc.), plus money for brush clearance. Owners also must maintain the electric gates. This is an on-going problem that could result in a special assessment. A “special assessment” is a fee voted by the HOA over and above the monthly maintenance fee that each homeowner pays. Once the HOA approves a special assessment, each homeowner is sent a bill to cover the additional expense.
If the HOA has done a good job planning and managing their money, then special assessments should be rare. For example, an HOA might vote to provide earthquake survival kits for all residents. The CPA could analyze the budget and determine that they did not need to raise association dues to cover the additional expense. The HOA could then add this as an additional budget item for the following year.
HOA fees increase substantially when your Association is responsible for maintaining the exterior of all condominium structures. In most states, the HOA is required to put money aside to pay for repairs ahead of time. As you look through the Association budget, make sure there are funds for such items for roof replacement, pest control, painting, and other maintenance items.
Difficulties arise when some
homeowners default on their fees. This is one of the most important items to investigate prior to purchasing a condominium or PUD. One HOA in California was aggressive about pursuing people who were delinquent on their dues. The owners’ CC&Rs granted them the right to institute a foreclosure proceeding against the delinquent homeowner. Since the area was still being built out, several builders decided they weren’t going to pay their dues. After numerous requests and attorney letters without any result, placing a lien on their properties worked. This meant that in order for the builder to sell the property, they had to pay the back HOA fees.
This system worked when the market was in an upswing. Today, it’s a different story since so many owners have “negative equity” (i.e. the condominium or house is worth less than the liens against it.) If an owner is going bankrupt, facing a foreclosure sale, or the property is bank owned, there’s a high probability that the association dues are not being paid. The HOA could lien the property, but if there’s no equity, there’s no money to collect. Besides, IRS, state, and local property tax liens normally have priority over association liens. The existing loans on the property may have priority as well.
If you are purchasing a condominium or PUD, ask for a copy of the budget, the reserves, as well as how many owners are delinquent. It would also be smart to investigate how many foreclosure or bank-owned properties are for sale on the local Multiple Listing Service. Also check other online resources such as real estate company websites, Realtor.com, Foreclosure.com, RealtyTrac.com, plus Trulia and Zillow.
If you find a number of owners are delinquent, the HOA may be in trouble. If this is the case, it could translate into higher costs for you. For example, most HOAs are required to have a certain amount of cash in reserve. If the reserve level dips due to non-payment of fees, then the HOA may have to do a special assessment to cover the shortfall. This translates into more money out of your pocket. It could also mean that the HOA elects an insurance policy that provides less coverage for owners or that it cuts back on the maintenance of the property. Both of these decisions can negatively impact your property value.
Need more questions to ask prior to buying a condominium or PUD? If so, see Part 3 of this series.
Are you considering buying a condominium? This column looks at three additional pitfalls that can trap an unsuspecting buyer as well as how to avoid them.
The first two parts of this series provided three important questions you must ask before purchasing a condominium or Planned Unit Development (PUD). Those three questions are:
1. What type of ownership are you purchasing?
2. What obligations and restrictions do the CC&Rs place on you?
3. Is the Homeowner’s Association (HOA) healthy financially?
Here are three additional questions that you must also address.
4. Who is responsible for maintenance and what is the process?
For example, if a pipe breaks inside your unit, who is responsible for the repair? Do you call the plumber or does the Management firm? (Many associations have a management firm that handles the maintenance, bookkeeping, and bill paying on behalf of the HOA.) As a rule of thumb, if the issue occurs in the common area, it is the association’s responsibility to fix, not the homeowner’s.
While this arrangement may seem like a good one, it can cause problems. For example, a client was selling his townhouse. There were six two-story units per building. Each unit shared a common attic. The termite report came back saying there were termites in the attic and that the building would have to be fumigated. The HOA called their pest control service to do an inspection. If there were termites, the terms of the HOA’s agreement required the pest control company to pay for fumigation. The pest control company said there were no termites. The seller was convinced that the pest control company was trying to avoid paying for fumigating the building. Since the seller was desperate to close, he offered to pay to have his portion of the attic treated. The HOA said “No,” because the attic was common area. Without a clear pest control report, they couldn’t close. Furthermore, both inspections had to be disclosed to the buyer. The seller was persuaded to obtain a third termite inspection from a different company. The third inspection showed evidence of dead beetles, but no termites. This scenario illustrates how hard it can be to resolve issues regarding the common area. If there had been a termite issue, the next step would have been for the seller to sue the HOA to live up to their obligations as outlined in the CC&Rs.
5. What does the master insurance policy on the property cover?
In most condominium associations, you will pay your pro-rata share of the master insurance policy that covers the entire building. You will have to purchase a separate policy to protect the interior portion of your unit, including your contents. The question you must address is what is covered under each policy. For example, if the building were to burn down, would your built-in refrigerator and appliances be covered? It’s important to know exactly so you can order the correct amount of coverage.
One of the stickiest issues deals with earthquake and hurricane insurance. These policies generally have high cost and high deductibles. If you live in a high-risk area for this type of event, you can usually obtain this coverage if you live in a PUD since you have the title to both the land and the improvements. If you own a condominium or co-op, however, you will probably have to rely on the HOA to order this insurance. If the HOA decides not to obtain coverage, then you have to decide if you want to live in a building that is not insured for these hazards.
6. Are there noise issues?
Regardless of what type of property you purchase, it’s smart to visit it on different days and at different times. Is there heavy traffic at certain times due to a nearby school or business? Is there airport noise?
Even more important, how much noise will you experience when you move in? Is your unit near the pool or spa? Does the HOA enforce limits on when these facilities can be used and who can use them? Does the building have double-paned windows that reduce exterior noise?
One of the most widely reported issues with condominiums results from noise from neighbors. Be particularly wary of any condominium property that allows upstairs units to install hardwood floors. Depending upon the quality of the construction, if your upstairs neighbors have hardwood floors, you may end up listening to them every time they walk across the floor. It’s also important to check how much noise comes from your neighbor’s bedroom and bathroom. Needless to say, you don’t want to be stuck owning a unit where your neighbors keep you up at night.
Finding the right condominium, PUD, or co-op for your lifestyle takes some work. If you ask the right questions ahead of time, you will avoid many of the pitfalls and have a lifestyle that you can truly enjoy.