Buying a condominium can be more involved than buying a single family home. This is because you have to review and worry about both the condo itself and the condominium complex as a whole.
7 Questions smart buyers should ask before buying a condominium.
A somewhat ambiguous saying highlights potential problems with buying a condo…”not all condominiums are created equal.” Some condominiums are very well run; some are quite poorly run and underfunded. Buyers interested in purchasing a condominium unit must do their homework: not only about the condition of the individual unit they are interested in purchasing, but on the financial health and governance of the condominium as a whole. Remember, you are buying into the entire project as much as you are the unit, and your decision will impact your daily living and your ability to re-sell.
Here are the 10 questions buyers should ask when deciding to purchase a condominium unit:
- What is the monthly condominium fee and what does it pay for? The monthly condominium fee can range quite dramatically from condominium to condominium. The fee is a by-product of the number of units, the annual expenses to maintain the common area, whether the condo is professionally managed or self-managed, the age and condition of the project, and other variables such as litigation. For budgeting and financing you need to know the monthly fee and exactly what you are getting for it. Are part of the fees going to cover the Master Insurance Policy? And what does the master insurance policy actually cover? Ask questions- if my roof leaks and the interior of the condo is damaged- how much coverage does the complex carry and will it cover repairs or replacements for internal damage. Ask for a copy of the master insurance policy and if you’re not sure- have your insurance agent review the coverage. Never ever forget to check the fine print of the by-laws.
- What are the condominium rules & regs? Condominium rules can prohibit pets, your ability to rent out the unit, and perform renovations. Make sure you carefully review the rules and regulations before buying. The second question – are the condo rules actually enforced? While rules sound like a pain-not having and/or enforcing rules also causes problems.
- How much money is in the capital reserve account and how much is funded annually? The capital reserve fund is like an insurance policy for the inevitable capital repairs every building requires. As a general rule, the fund should contain at least 10% of the annual revenue budget, and in the case of older projects, even more. If the capital reserve account is poorly funded, there is a higher risk of a special assessment. Get a copy of the last 2 years budget, the current reserve account funding level and any capital reserve study.
- Are there any contemplated or pending special assessments? Special assessments are one time fees for capital improvements payable by every unit owner. Some special assessments can run in the thousands and must be paid. The seller should notify potential buyers of pending assessments but you need to investigate if major repairs are on the schedule and understand the costs.
- Is there a professional management company or is the association self-managed? A professional management company, while an added cost, can add great value to a condominium with well run governance and management of common areas. You need to understand that both arrangements need oversight from the Board representing the home owners -the best way to stay informed to is be an active member.
- Is the condominium involved in any pending legal actions? Numerous pending, active or recently settled legal disputes between owners, with developers or with the association often signal trouble ahead.
- Finally in the day and age of more and more buyers using FHA financing ask how many units are owner occupied? Many lenders require a high percentage of owner occupied units before approving a loan. Occupancy can also raise re-sale and financing issues as lending rules become more restrictive. Check if it is a Fannie Mae approved condo or an FHA approved condo.
Buyers should never assume anything if you have a question-ask and then make sure you get an answer. Purchase contracts usually provide a set number of days to review the HOA documents and paperwork-use the time wisely.