Single-family homes are by far the most common property type for first-time buyers, but they aren’t your only option. A condo is a popular choice, especially if you live in a city where affordable single-family homes are hard to come by.
A condo complex is a group of housing units that, although individually owned, share common space. When you purchase a unit, you join the homeowners association (HOA) as a trustee.
In terms of the real estate transaction, buying a condo is similar to that of a single-family home. However, when it comes to ownership, there are some differences due to the nature of being a part of an HOA. Here are the questions you want to ask before you take the plunge.
1. What are the rules and regulations?
Prior to signing the dotted line on any purchase contract, it’s imperative that you review the rules and regulations that govern the association. These guidelines are intended to keep the peace amongst owners and you will be expected to follow them. Therefore, you’ll want to pay particular attention to any rules that may cramp your style. For example, do you have a dog or do you want to get one in the future? Some associations have restrictions on pets and you may not want to limit yourself. Do you see yourself wanting to rent out your space at some point? Make sure there aren’t any major stipulations on leasing.
2. Is the building professionally managed?
Most mid-size and large complexes are professionally managed, many with full-time staff on-site 24/7. How well does the building appear to be managed? Make an assessment of the common areas. Are the hallways clean or disorderly? Has the landscaping been tended to or is it overgrown? A solid professional manager can do wonders to keep a property running smoothly and looking in tip-top shape.
What if the building is not professionally managed? Will you be comfortable working with the other unit owners directly? Try to schedule a meet and greet or phone conversation with the other owners to learn what your responsibilities would be if you became a new owner.
3. What’s up with the HOA fees?
When purchasing a condo, don’t forget to budget for the extra fees! Commonly referred to as “condo dues,” these payments are used to cover the maintenance of areas and amenities, such as the building’s exterior, foundation, roof, hallways, landscaping, parking lot, etc., that benefit all of the owners. They may or may not include maintenance on perks like a pool, fitness center or clubhouse.
Having low fees is generally considered a good thing. That said, you’ll want to get insight on the entire financial picture to ensure maintenance corners are not being cut and that the association has sufficient reserve funds.
4. How is the association’s financial standing? What is in the reserves?
By requesting a copy of the operating budget, you can drill into the flow of monetary spending vs. saving. Is the association adequately covering its expenses while putting money toward reserves? Ideally, the reserve funds should be equal to at least 10 percent of the annual operating budget. A healthy reserve fund will help to protect you from having to pay out of pocket for future improvements. If the reserve funds are low, it could be for a number of reasons and you’ll want to understand why. Perhaps the association is very lean and the owners have agreed to lower monthly fees in lieu of contributing to the reserves. Or perhaps the association is in the process of replenishing after using the funds on a major capital improvement project like a new roof.
5. Are there any special assessments?
A special assessment is an amount of money that an association needs to pay for a project or an outstanding debt that was not part of the annual budget. Try to get your hands on a copy of the association’s meeting minutes to see if any projects have recently been discussed. Most large buildings will have meeting minutes on file. Small buildings may not have a formal meeting process so you will have to find out anecdotally through the seller or by striking up a conversation with other owners in the building.
What if you want to have some control over maintenance and the inner workings of the association? As an owner, you may be able to get more involved in the decision making process by joining the board of trustees. The board helps to facilitate communication and major issues impacting all of the unit owners.
What would be an example of a special assessment? Perhaps the owners recently met and voted to rebuild the building’s decking system. During the meeting everyone agreed to chip in $300 dollars a year over the next three years to pay for the construction. As an incoming buyer, you will want to negotiate with the seller about this expense.
6. What is the unit’s percentage interest in common elements?
A condominium provides individual ownership of a unit with a fractional interest of the common areas. Typically the percentage is determined by square footage. The reason why this is important is because it is used to justify the cost of your fees and your percentage of special assessments. For example, if you’re buying the biggest unit in a complex, you can expect to pay more than everyone else. This also might give you more voting power when it comes to deciding where and how to spend money on maintenance and improvements.
7. How are the utilities separated?
If you were buying a detached singly-family home, you would be solely responsible for the utilities, like the HVAC and water heater. Utilities in condos are not always as straightforward because sometimes these systems are shared amongst owners. If the heat and hot water are shared, the utilities may not be separately metered for each unit. This could mean that your heating/cooling costs are included in your HOA fee and the costs are fixed. However, you may not have as much control as you would like over the systems.
8. How can you insure your condo?
While the HOA fees likely include some form of insurance, it may not be enough for you. Typically the insurance covered in the HOA is referred to as a “studs-out” policy, which applies to the exterior of the units and common areas (the structure outside of the condo units' studs). You may wish to buy additional insurance to address everything from the wall/floor/ceiling studs inward.