Condos are great…most of the time
Buying a condo can be a great idea. You often get more for your money than with other sorts of homes.
And if you’re at a stage in your life when you don’t have the time or ability to do yard and building maintenance, a condo can provide a (literally) low-maintenance environment.
Meanwhile, many condos provide access to on-site amenities: from pools and gyms to door staff and landscaped outdoor space.Check today's condo mortgage rates with a loan expert. (Jan 29th, 2020)
Know before you buy
But before grabbing your pen to sign up for a condo, you need to recognize some potential downsides. You may well still decide it’s the right choice for you. Millions have.
However, it’s important to know what you’re getting yourself into.
What is a condo?
When you’re buying a condo, you’re taking ownership of a unit within a larger building or development. You’re going to own your unit and be responsible for its internal repairs and maintenance.
But the building itself and any surrounding land will belong to someone else. That’s usually a legal entity owned and controlled by you and the owners of the other units.
So you have a legal interest in your building and surroundings. And you’ll have “easements” that give you specified rights of access to — and fair usage of — those. But you’ll only own your own unit outright.
That’s not necessarily a disadvantage. Indeed, it usually works well for all parties. So let’s get on to our five potential downsides …
1. Costs of a condo
Two things may have piqued your interest earlier. We said that you often get more for your money with a condo than a typical single-family home. And we mentioned extra amenities (those pools, gyms, door staff and so on) that many condos provide. Let’s address those separately.
More for your money
Why might a condo cost less than a single-family home? Part of the reason is the homeowners association (HOA) or condo dues or fees you’re going to have to pay every month.
You won’t have to vacuum the common areas, tend the grounds or climb up a ladder to paint the exterior of the building. But someone has to. And you, along with all the other unit owners, will have to pay them. You’ll also have to chip in for other costs, such as buildings insurance.
When you add your monthly HOA or condo fees to your mortgage payment, you may well find you pay less for a single-family home, even when you account for home and yard maintenance costs.
For instance, you see two properties:
- Purchase price: $250,000
- Payment with 10% down: $1,377
- HOA dues: $200/mo
- Total: $1,577/mo
- Purchase price: $275,000
- Payment with 10% down: $1,553
- HOA dues: $0
- Total: $1,553/mo
In this case, the house is about $20 per month cheaper than the condo. So do the math before you buy.
You pay for amenities
Similarly, if you opt for a condo with lots of fancy amenities, you need to be aware you’re going to pay your share for them all — whether you use them or not.
So that pool and gym in the brochure may be sure to impress your visitors. But, if you’re never going to use the facilities, there may be cheaper ways to buy yourself some prestige.Verify your new rate (Jan 29th, 2020)
2. Financing challenges when buying a condo
Let’s not get carried away with the idea that it’s hard to finance a condo. Again, millions already have.
But lenders do look especially closely at condos to make sure they comply with their requirements. And some condos don’t.
Is your condo mortgageable?
Indeed, your condo development will have to be on an approved list for you to get a mortgage backed by the Federal Housing Administration (an FHA loan). Luckily, HUD’s website has a lookup tool that lets you find out whether your condo is approved.
Freddie Mac mostly provides information for professionals about its condo rules. But Fannie Mae provides a great resource for homebuyers: “Condo Buyer’s Guide — What you need to know when buying a condo.”
You should ask your real estate agent or lender about whether the home you want to buy complies with your lender’s rules.
Of course, if you’re borrowing without government backing or that of Fannie or Freddie, your lender may have fewer concerns. But remember: there’s sound reasoning behind those public bodies’ caution.
Two questions Fannie wants you to ask
At the end of that last link, Fannie suggests:
You’ll want to evaluate the condo carefully before finalizing your purchase offer. You’ll want to know:
- Are there any special assessments (such as for capital improvements to the condo property) that will affect your cost to own the condo unit, or the building’s value, in the long term?
- Are there any major lawsuits pending against the condo association or developer that could limit your ability to obtain financing to purchase the condo? This is a question to discuss with your lender.
If there’s a problem with either of those, you should probably move on. And if you’re unsure what “assessments” are, you’re about to find out …
3. What’s that about “assessments?”
A well-run HOA or condo company should normally have a pile of cash saved up. It should charge each owner a bit more than it needs each month so that it builds up reserve funds. That way, it can pay for big-ticket repairs and maintenance when those become necessary.
But not every HOA or condo company is well managed. So when the roof needs replacing or the central HVAC breathes its last or the windows have to be changed out, there’s insufficient in the bank to cover the costs.
Thousands or tens of thousands of dollars
That’s when “assessments” rear their ugly heads. These are huge bills that suddenly land in unit owners’ mailboxes demanding big sums of money for unavoidable repairs. That can be thousands or even tens of thousands.
When you’re buying a condo, you’ll be given a chance to look over the HOA’s books.
When you’re buying a condo, you’ll be given a chance to look over the HOA’s books. Take it. Really, you must. If you’ve no idea what you’re looking at, ask a friend who does or pay a professional. Assessments are no joke.
Of course, if you discover big assessments are in the pipeline, that will dramatically reduce the value of the condo. So see if the owner will take liability for those or get a price reduction that reflects the threat. Otherwise, walk away.
4. You have to abide by the rules
When you’re buying a condo, you’ll be given a copy of your HOA’s or condo company’s Covenants, Conditions, Restrictions and Easements (CC&Rs).
This is must-know information. To start with, they’ll tell you what belongs to you within your unit and what’s the HOA’s responsibility.
For example, windows and external doors may or may not be your property, meaning their maintenance may or may not be down to you. And central air is usually a common amenity but individual air conditioning units often aren’t. Your CC&Rs will spell those things out.
Rules that protect or oppress
They’ll also spell out the rules by which you must live. There may be restrictions on pets, noise levels, hanging out laundry, parking or even internal improvements you want to make to your unit.
Mostly, these are fair and reasonable and exist to protect the majority. But occasionally an HOA tries to impose its vision of utopia in a way some members find oppressive. So be sure you’re happy to go along with your HOA’s rules. They’re not optional. And some HOAs can be highly litigious.
5. Building issues and law suits
Your shared interest (part-ownership) of your HOA may see you share liability for its issues. So, if it signed off on a building that was full of defects, you could end up paying for some of the remedial work.
Or, if it’s suing the shoddy developer to make it accept liability, you could have to contribute to its legal costs — and bear some risks if it loses in court.
Indeed, you’re effectively an unnamed party in any legal action it’s involved in. Fannie wasn’t kidding when it warned you about major lawsuits.
So you may prefer to steer clear of one that’s currently involved in serious litigation or that seems to bring suits at the drop of a hat.
How do you feel about buying a condo now?
Have those five potential drawbacks put you off buying a condo? Don’t let them.
Most condo dwellers are probably more than happy with their choice. And you could be, too. And now you know what to look for and what to avoid. So your chances of picking your perfect place are better than most people’s.
Get today’s condo mortgage rates
Connect with a lending expert to get your rate quote and eligibility status for your condo.
There’s no obligation if you don’t qualify. Rates are low and it’s a fantastic time to shop for your home financing.Verify your new rate (Jan 29th, 2020)