What You Need to Know Before Buying a Condo

Condo buyers should complete their due diligence on the homeowners association (HOA) and attend a meeting before making a purchase.

windowpanes at the building

By

Bridget Houlihan

on

Jan 21, 2021

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Condominium (sometimes abbreviated "condo") purchases include a number of factors outside your control if this is your first time doing so. Condominiums are not like single-family homes in any way and should not be treated as such. Unlike in a detached house, you and your neighbors may share walls and other structural elements.

The process you must go through to arrive at your decision and secure a mortgage may also vary widely. For the elderly who want to downsize their home's physical maintenance, this can be a selling point. 

If you're looking to live in the heart of a major city, a condo may be a good option to consider. Here are a few things you should consider before exploring your options for condo sales:

Is Condo the Right Choice For You?

If you're thinking about buying a condo, one of the first questions you should ask yourself is, "Are you the condo type?" One of the main ones is the fact that you live in the city. It's common to find condos near busy city centers. 

Condominium developments are cropping up in city cores, with some incorporating necessities like supermarkets and bank branches into the complex itself. That added convenience may lead to greater traffic and noise.

Take Los Angeles, for instance. In 2022, the L.A. housing industry is similar to the markets in other parts of California and the United States in various ways. The housing market is seeing rapid price increases, inventory depletion, and rapid turnover. However, compared to other California cities, the housing market in Los Angeles is in far better health. 

As of February 2022, the median amount of time a house spends on the market before being purchased is 36 days. It’s a decrease of 28% from the median amount of time a house spent on the market in February 2021, when it was an average of 50 days.

Examine the neighborhood during various times of the day and night if you're considering buying a condo there to get a feel for the noise level and the amount of light pollution. You might want to look elsewhere if excessive noise or bright lighting bothers you.

The Homeowners Association is a standard feature of condo living (HOA). A declaration of covenants, conditions, and restrictions (CC&Rs) is included, outlining the rules and regulations that you, as a condo owner, must follow. Condo living may not be for you if you cannot or will not agree to comply with the covenants, conditions, and restrictions. 

If you don't follow the rules, you can get sued, get a penalty, or be forced to follow the rules. For some people, like first-time buyers who can't quite afford a single-family house, condos are a good option. Condos also have the benefit of requiring little in the way of upkeep. 

Difficulties With Borrowing

A condominium purchase could be more challenging than a house purchase. It's because getting a loan for a home like this can be difficult. A specified percentage of the units must be occupied, or "owner-occupied," as is commonly stipulated under such regulations.

It can potentially limit the number of condos that can be held by a single investor is still another limitation. Lenders prefer that no single investor possess more than 10% of a building's units. 

Lenders often have restrictions based on a minimum percentage of occupied units. A minimum of ninety percent of the units must be sold by some lenders before they will provide any financing.

More stringent loan-to-value (LTV) ratios and limitations may be imposed by lenders on condo buyers. The LTV ratio measures the proportion of a condo's value to its mortgage. Section 234(c) loans, which are insured by the Federal Housing Administration (FHA) for up to 30 years, are available to condo buyers. 

Condominium loans have borrower requirements that are comparable to those of single-family mortgages, but buildings must have a minimum of five units to qualify.

Other Expenses

Condo ownership may have additional expenses. If you're concerned about potential losses, it's a good idea to carry your own homeowners’ insurance in addition to what's provided by the HOA. Check the fine print to be sure that the insurance provided by the HOA doesn't put the onus of risk on you in order to keep rates down.

There is a monthly condo fee that must be paid as well. The common spaces of a condominium complex are maintained and repaired thanks to the monthly assessments paid by all owners. The common amenities of an apartment complex are often maintained as part of the monthly dues, including the lobby, elevators, swimming pools, leisure rooms, parking lots, and landscaping. 

Money set aside for major maintenance, like a new roof or exterior paint, may be needed down the line. The monthly costs of a condo can range from very low to very high, depending on factors like the size of the building and the number of amenities it provides.

Beware of Investing in Troubled Condos

Condo buyers should complete their due diligence on the homeowners association (HOA) and attend a meeting before making a purchase. You could also inquire with the condo's neighbors as to whether or not they are satisfied with the management. 

Before making any assumptions about what the HOA covers, it's a good idea to read the rules. You can also inquire about the growth in HOA fees over the previous few years and request minutes from recent board and member meetings.

In addition, you should look into the board's past court cases, both tax-related and otherwise. You should investigate any pending litigation to make sure you're comfortable joining them. 

Due to unpaid Homeowners Association fees, some condo organizations have been forced to declare bankruptcy. Lenders may also cease providing financing for the units if they are not timely paid, which could impact resale prices.

Check the books for overdue payments and emergency money. At least 25% of the association's annual profits should be set aside for maintenance and unexpected expenses. You can be assessed if they run out of money. 

You should also look at the most recent tax assessments of your home. You may be in for a larger tax bill than you bargained for if the sale price of your unit is significantly lower than the tax assessment. Ensure that the assessed value of the property accurately reflects the tax burden.

Condos are more difficult to buy and sell than single-family homes. But for the right buyer in the appropriate area, they can be an excellent investment during rough economic times. 

Examine the condo's HOA, CC&Rs, and tax and insurance problems before committing to a purchase. The challenges involved in buying a condo are not as simple as buying a single-family house, so it's important to work with a real estate agent and a loan officer with extensive experience with condo transactions.

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