If you’re shopping for a condominium, you’ll see enticing prices, landscaped grounds and shimmering pools that you don’t have to sweat every weekend to maintain.
You may even find a condo listed for $20,000 or $30,000 less than you’d pay for a house of the same size. But buying a condominium without doing your research first can lead to unexpected financial burdens or trouble reselling.
The actual unit isn’t the only thing you’re buying, says Mindy Jensen, community manager for BiggerPockets, a real estate investing social network. “You’re also buying into the whole building and the entire complex. You will be a part owner of the entire place, and you are partly responsible financially for anything that needs to be repaired.”
Below are 8 questions to ask before purchasing a condominium:
1. What information is the seller required to provide?
Condo seller disclosure laws differ from state to state. For example, Illinois law requires that the condo seller provide the buyer numerous documents, including the declaration, bylaws, a projected operating budget, a description of any provisions made in the budget for capital expenditures and the basis of such reserves. You can look up your state’s laws at Condo.com or CondoAssociation.com.
2. Is there an adequate reserve fund?
In addition to having funds to cover day-to-day expenses, the condo association should also be setting aside money in a separate account for large capital expenditures like repaving the parking lot or replacing the roof, said Jensen.
Ask the seller for a copy of the association’s reserve study, a budget planning tool that identifies the status of the reserve fund and its funding plan for future expenditures. Ideally, the association should have a minimum of 10% of the capital budget in its reserve fund. For example, if the capital budget is $200,000, there should at least $20,000 in the reserve fund.
Neither Fannie Mae nor Freddie Mac, which purchase most of the loans on the open market, will purchase a condo mortgage if the condo association or management company has less than 10% in its reserve fund.
3. Are there recent or planned special assessments?
It’s wise to investigate financial documents for any history of special assessments, a fee levied on condominium owners to cover the cost of repairs or other issues, said Ivan Ciraj, a Toronto real estate broker. Residents can sometimes be hit with fees of thousands of dollars, he said.
4. How many units are investor-owned?
After a complex hits a certain number of units owned by investors, the complex becomes unwarrantable, which means that Fannie Mae and Freddie Mac won’t purchase the loan, said Jensen. Neither Freddie Mac nor Fannie Mae will purchase a mortgage on a condo in a complex where more than 10% of units are owned by an individual or single investment entity.
“If they won’t purchase it, the banks won’t issue a loan because they want to be able to sell the loan on the secondary market,” Jensen said. When you try to sell your condo, a new buyer may have difficulty obtaining a mortgage loan.
5. What are the HOA fees and budget like?
The homeowners’ association fee (HOA) covers costs of maintaining common grounds such as landscaping, swimming pools, lobbies and elevators. A condo association’s budget should indicate whether increases or assessments are projected.
A gradually increasing HOA fee over time simply means it’s rising with market conditions and inflation, said Ciraj. However, if there’s been a sudden jump in the fee, “This is usually caused when there are unexpected repairs, poor financial management or even fraudulent activity,” said Ciraj.
6. Can I see the board meeting minutes?
Look at one to two years of HOA meeting minutes to get the scoop on condo management. Watch for special assessments, power struggles and any mention of pending litigation, a factor that can interfere with obtaining a mortgage.
7. How many units are delinquent on HOA fees?
Most banks won’t loan money for a condo if there are a lot of delinquent HOA fees. Freddie Mac and Fannie Mae won’t buy the mortgage if more than 15% of the total number of units are over 60 days delinquent on HOA dues.
8. Will I enjoy being part of a multi-family community?
“The primary issue with condos is your housing is joined and controlled by the neighbors and the board,” said Bruce Ailion, an Atlanta real estate broker.
Your condo homeowners’ association has the ability to take action where the majority rules. That means if the HOA decides to remodel the clubhouse or refinish the pool, you could have a special assessment fee even if you don’t want the upgrade.
No matter how much you love a condo, issues will pop up if you don’t do your due diligence before you buy.
“It’s far better to wish you would have purchased a property, than to wish you had not,” Jensen said.