Condos are a popular option with first-time home buyers, mainly because they are more affordable and you like the idea of someone taking care of all the maintenance hassles! There is no question that buying a condo is a lot different than purchasing a home. There are a tremendous amount of details that every buyer faces when purchasing a home from getting a home inspection, to procuring a mortgage, to purchasing home insurance. Buying a condo typically involves all of these things plus a whole lot more. These are questions that every buyer should ask before buying a condominium.
#1 WHAT ARE THE MONTHLY HOA DUES AND WHAT'S COVERED?
When you buy a home, you are responsible for all your own repairs plus covering the cost of them. When you own a condo, you will be required to pay monthly Home Owner Association (HOA) dues. These monthly fees can vary a lot from one development to another and just like property taxes, they always go up over time. You'll want to ask what you are getting for that chunk of monthly money. Usually items like common area maintenance and trash pick up will be covered but you will probably have to pay for your own electricity and water. It's a good idea to ask by how much the dues usually go up each year. Part of your monthly dues also go into a reserve fund that's used by the HOA for repairs and upgrades.
When determining how much you can afford to buy, make sure to take into account the HOA dues.
#2 IS THERE A CONDO SPECIAL ASSESSMENT?
A condo special assessment is the bane of condo owners and happy are those who don't have to endure them. Special assessments are levied on all the owners of a condo development when the HOA has insufficient funds to cover the cost of needed repairs and upgrades.
For example, say Old Town Condominiums needs a new roof and the exterior is deteriorating and needs tuck-pointing. It's going to cost $100,000. However, the HOA only has $20,000 in its checking account. Well, the money has to come from somewhere and that somewhere is you, the condo owner!
The HOA will raise the required funds by either asking all the individual owners to make a one off lump sum, single payment, for example. $10,000 or divide that $10,000 over say 3 years with increased monthly dues. That can be difficult for many of the owners to come up with. Sometimes, it can be a lot more than $10,000.
So when you are considering making an offer on a condominium, you will want to ask the following questions:
• Are there any current or upcoming special assessments?
• What is the special assessment for?
• When was the last one, how much was it and what did that cover?
If the special assessment is already in place and requires a one off payment, then you can request that the sellers pay for it at closing from the net proceeds of the sale.
#3 WHO FIXES WHAT
You are going to want to know exactly what you are responsible for regarding maintenance expenses. For example one of the gray areas in many condo developments is who is responsible for replacing the windows? This is obviously a significant cost when the time comes. Is this something the condo association is responsible for or is it yours?
Another example of a gray area is balconies and decks. In some condo’s you are given the option of having a balcony or deck. Make sure you look at the master deed as well as the unit deed to ensure who owns the deck. The deck may be attached to your unit but do you truly own it? In other words are you the one who will pay for repair and maintenance or is that the condo associations responsibility?
#4 IS THE CONDO DEVELOPMENT FHA-APPROVED?
Condos are a good foot in the real estate door for many first-time home buyers, many of whom rely on FHA loans. These loans are popular because they only require a buyer to have a 3.5% downpayment.
If you are relying on one of these loans you will need to ask if the condo developments is approved to accept FHA loans. Some developments will be but many will not. If you are relying on an FHA loan, your condominium options will probably be more limited compared to if you were using a conventional loan with a bigger downpayment.
#5 IS THERE A RENTAL CAP?
This is an important question to ask when buying a condo. When you own a house, you can do as you please, run off to Hawaii for 2 years and rent out your home. When you buy a condo however, you have to abide by the rules and regulations of the association.
A rental cap is the maximum number of units in a condo development that can be rented at any one time. All other units must be owner occupied. For condominiums with caps, 20% is common.
If the ability to be able to rent out your condo is important to you, then it is critical to inquire about the HOA's rental policy. If the condominium is already at its cap, then you will not be able to rent your unit. You will have to go on a waiting list. Last in goes to the bottom of the list.
If you suddenly need to relocate for a new job, don't have enough equity to break even if you sell and can't rent your unit, then you are in a bit of a pickle.
Condo developments with no rental caps can be appealing but there are pros and cons. The peace of mind and flexibility of knowing you can rent your condo at anytime is nice. These kinds of condos are attractive to investors who want to be able to rent out the condo. They have no intention of living there.
#6 WHAT'S THE CONDO ASSOCIATION'S PET POLICY?
We love our pets and we'll do anything for them. But pets can't speak so you'll need to talk up for them.
The last thing you want to do is get the keys to your new condo and then discover Rex and Fido are not welcome.
Different condominiums will have different rules when it comes to pets. Some developments can be like zoos with little or no limits while others will have very strict rules. Some will allow zero pets, some will allow just cats and some will allow cats and dogs.
For those that do allow pets, the HOA will usually set a limit on the number of each, the size of the pets (under 50lbs for dogs is common)
#7 DOES THE CONDO COME WITH DESIGNATED PARKING OR ANY PARKING FOR THAT MATTER?
Especially in big cities like Chicago, parking is a precious commodity. Having your very own designated parking spot is a thing to be cherished. Never assume that the condo comes with an allocated parking spot. Ask! Sometimes on the online listing it will list the number of the parking spot if they go with the condo.
If you need more than one parking space, ask if you can lease a second spot from an owner who's not using theirs.
In some condominiums, it might be a first come, first served set up and won't have enough parking spaces for everyone. If all the spaces are gone, will you be able to find parking nearby on the street?
#8 WHEN WAS THE LAST TIME A RESERVE STUDY WAS DONE?
Condo buildings, like any home, always need maintenance, repairs and updates. And that costs money.
So how does a Home Owners Association know if they have sufficient cash on hand to be able to take care of unexpected repairs, plus have enough to address big known repairs down the road?
Answer: they hire an independent company to conduct what is known as a Reserve Study. The company goes over/audits the condo building and property with a fine tooth comb and then writes up a big report. This is done every few years. Reports that are more than 5 years old are outdated and unreliable.
The Reserve Study report will come back with a list of all the repairs that need to be addressed NOW. It will also list all the expected repairs and upgrades that will need to be addressed over the next 5, 10 and 15 years. For example, the exterior will need painting in 4 years but the decks needs to be brought up to code ASAP.
The report will then have some scary math showing how much all of this work will cost and compare it to how much money is currently in the HOA's kitty. If there's a big discrepancy between the two numbers, then the auditor will recommend that monthly HOA dues be increased, or worse, instigate that special assessment, we discussed earlier to speed up the process.
A well run condo association will have healthy financial reserves and be able to cover the recommended updates without having to start tapping the individual owners. A badly run association will probably be scrambling to make up the needed funds and likely have a history of one special assessment after another. These are the condominiums you want to avoid or seriously reconsider before making an offer.
#9 THE CONDO BUYING CATCH-22: IS A COPY OF THE RESALE CERTIFICATE AVAILABLE BEFORE I MAKE AN OFFER?
Many of the answers you seek lie within a voluminous PDF known as the Resale Certificate. The sellers must provide you with a copy as part of the condo purchase process. This comes at a price.
The Resale Certificate is a giant file containing buckets of information on the condo development and the HOA and includes the following items (most important ones):
The Rules and Regulations
The Covenants, Conditions and Restrictions (CC&R).
A copy of the most recent Reserve Study. Copies of the meeting minutes (always a good source for the latest issues, infighting and petty grievances). A financial statement.
All the juicy information you need is usually contained within the Resale Certificate. A buyer's offer will usually be contingent on approving the contents of the wordy document and a review of the HOA.
#10 ARE THERE ANY LAWSUITS AGAINST THE CONDOMINIUM?
You should make sure there are no pending lawsuits which could in some way impact you financially somewhere down the road. There could be any number of reasons why there may be a lawsuit. Shoddy developer construction which has caused some issues comes to mind.
As you can see, there are lots of questions to ask before buying a condominium. It makes sense to do your home work, so you are not only happy the day you buy but years into the future!
If you are thinking of buying or selling a condo in the future, I welcome the opportunity to interview with you!