5 things to know before buying a condo

Peter Warden
The Mortgage Reports editor

Is buying a condo a good idea?

Buying a condo can be a great idea. Prices are often cheaper than for single-family homes, and many condos come with luxury amenities for their owners.

And if you’re at a stage in your life when you don’t have the time or ability to do upkeep, a condo can provide a (literally) low-maintenance environment.

Of course, there are downsides, too. Condos come with pricey monthly fees and restrictions on how you can use the space.

You may still decide a condo is the right choice for you. Millions have. However, you should know what to expect before you buy.

Verify your condo buying eligibility (Oct 15th, 2021)

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What should I know before buying 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 individual 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 (the homeowners association or ‘HOA’), which is owned and controlled by you and the other condo owners.

So you have a legal interest in your building and surroundings. And you’ll have “easements” that give access and fair usage rights to the property. But you’ll only own your specific unit outright.

That’s not necessarily a disadvantage. Indeed, it usually works well for all parties. But there are both pros and cons to be aware of.

Check your mortgage options (Oct 15th, 2021)

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1. Condos are often more affordable — but not always

There are two distinct advantages to buying a condo:  

  • You may get more for your money with a condo than a typical single-family house
  • There are usually extra amenities: pools, gyms, tennis courts, landscaped outdoor spaces, extra security, and so on

However, those perks don’t necessarily come free of charge.

More for your money

Condo prices are often lower than ‘traditional’ home prices, so a condo could be a more affordable starter home for a first-time home buyer. And you get those extra amenities mentioned above.

However, you’ll want to look at monthly homeownership costs as well as the upfront purchase price.

That’s because the homeowners association fees could potentially make a condo more expensive month-to-month than a comparable house.

You won’t have worry about mowing the grass, cleaning the common areas, or climbing 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.

See: Mortgage calculator with property taxes, PMI, and HOA fees

For instance, look at these two examples.

Condo:

  • Purchase price: $250,000
  • Monthly mortgage payment with 10% down: $1,377
  • HOA dues: $200/month
  • Total: $1,577/month

Single-family home:

  • Purchase price: $275,000
  • Monthly mortgage payment with 10% down: $1,553
  • HOA dues: $0
  • Total: $1,553/month

In this case, the house is about $20 per month cheaper than the condo. And those savings will compound over time. 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.

That pool and gym in the brochure are 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.

If you decide a single-family home is the way to go, for example, you can always get a gym membership, and that would certainly cost you less than a condo and its amenities.

2. Mortgage requirements are stricter for condos

You may have heard it’s more difficult to finance a condo — and it’s true, there are some unique challenges to securing a mortgage for a condominium.

Lenders look especially closely at condos to make sure they comply with special requirements. And some condos don’t.

But don’t let these challenges scare you off — again, millions of people have successfully financed homes this way.

Is your condo mortgage-eligible?

Whether or not you can get a mortgage depends on your specific condo building and the type of home loan you hope to use.

For example, 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.

What if you want a conventional loan? In this case, your condominium complex will need to pass a ‘limited review’ process by which the mortgage lender determines it’s a safe investment.

Fannie Mae — one of the two agencies that regulates these mortgages — provides a great resource for homebuyers: “Condo Buyer’s Guide — What you need to know when buying a condo.”

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, we explain below.

You can ask your real estate agent or lender about whether the home you want to buy complies with your lender’s rules.

Verify your condo mortgage eligibility (Oct 15th, 2021)

3. Condo “assessments” can cost you thousands

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 breaks down or the windows have to be changed out, there’s insufficient money in the bank to cover the costs.

That’s when “assessments” come into play.

When you’re buying a condo, you’ll be given a chance to look over the HOA’s books. You should absolutely do this.

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 of dollars.

When you’re buying a condo, you’ll be given a chance to look over the HOA’s books. This is something you should definitely do.

If you have 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 property value. So see if the current owner will take liability for those or get a price reduction that reflects the threat. Otherwise, walk away.

4. You’ll have to live by HOA 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.

CC&Rs also spell out the rules by which you must live.

There may be restrictions on things like pets, noise levels, hanging out laundry, parking, or even internal improvements you want to make to your unit.

Of course, these are rules and regulations you wouldn’t be required to adhere to if you lived in a single-family home. Since you’re in a shared building, living in a condo complex can sometimes feel similar to renting an apartment.

Mostly, such rules are fair and reasonable and exist to protect the majority. But occasionally, an HOA can create rules 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. You share liability with your HOA

Your shared interest (part-ownership) of your HOA may mean 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 your HOA is suing a developer to make it accept liability, you could have to contribute to legal costs — and bear some risks if the HOA loses in court. Indeed, you’re effectively an unnamed party in any legal action the association gets involved in.

So you may prefer to steer clear of an HOA that’s currently involved in serious litigation or that seems to bring lawsuits at the drop of a hat.

Is buying a condo worth it?

If you like the perks of buying a condo, don’t let the potential drawbacks put you off.

Now you know exactly what to look for and what to avoid — so your chances of picking the perfect place are better than most people’s.

However, if you still aren’t sure whether you’re a good fit for condo living, you can simplify the decision by thinking about three key factors: affordability, location, and maintenance.

Affordability

Earlier we compared the cost of a single-family home to a condo.

At face value, buying a condo may be significantly cheaper. In 2020, the average condo unit sold for $266,300, while the average single-family home cost over $300,000.

When it comes to monthly payments, though, condo costs can shoot up thanks to HOA dues — which are often a few hundred dollars per month.

So if you’re considering a condo versus a standalone home with comparable sticker prices, you’ll want to take a close look at the monthly costs and see how they compare.

A condo might not be too much more than the other available options, and the extra amenities can sweeten the pot.

Location

Do you prefer an urban, suburban, or rural setting? When buying a condo, you’ll often be in or very near a city by default.

With an urban setting comes grocery stores, restaurants, entertainment, and more, often just a few steps from your front door. Living in or near a city could also put you closer to work and reduce commute times. Many buyers will appreciate the convenience this offers.

But if you prefer the peace and quiet a more rural setting can provide, a condo likely wouldn’t make you happy.

In addition, many condos have patios, courtyards, or other outdoor spaces for owners to enjoy — but remember these areas are shared with your condo community. A condo won’t offer the same type of privacy and space that you often get with a standalone home purchase.

Maintenance

Do you prefer a low-maintenance home?  If you live in a condo, you are only responsible for maintaining your interior space. The rest of the building and its exterior are someone else’s responsibility.

That means the maintenance tasks that often burden homeowners, such as landscaping, shoveling, and cleaning out gutters, are not a concern of yours. (Though remember, you pay for these conveniences in the form of HOA dues.)

What are today’s condo mortgage rates?

Condo mortgage rates are typically a bit higher than interest rates on single-family home loans.

That’s because condo loans are considered riskier; the quality of the loan depends on factors other than the borrower’s income and credit score, like how well the HOA manages its funds.

However, today’s mortgage rates are low across the board. So there are good deals to be had for condo buyers. You just have to shop around to find your best offer.

Verify your new rate (Oct 15th, 2021)