Condo buyers: How to protect yourself
If your finances are in good shape and you're looking for a long-term investment, this could be a good time to buy. Just use extreme caution and our tips for finding the smartest buy.
Depending on your expectations, your financial picture and your location, the current condo-market woes could make for good bargain hunting. Just forget any fantasies of a quick profit. It could be years before prices rise again.
But if you're crazy about a place and you expect to stay put for some time, shop away. Just keep the following tips in mind so you don't mistake a money pit for the deal of the century:
Make a down payment. Don't opt for 100% financing (even if you can still find a lender who will approve it). If your home value drops and you need to sell, you'll be required to come up with extra cash to cover the difference between the selling price and your mortgage, plus an agent's commission and any other fees.
Look for hidden debts. If you're buying a distressed property, whether in a "short sale" (when the seller owes the bank more than the house is worth) or a foreclosure, find out if you'll inherit liens or debts attached to the property — unpaid homeowners association fees, for example, says Brandon Bickel, a San Francisco Bay Area attorney specializing in condo association law.
Brace for scrutiny from the homeowners association. Some Florida associations hard-hit by foreclosures are demanding that new buyers make a down payment and demonstrate a minimum level of income.
Look for trouble. Get the homeowners association board's minutes for the last two or three years — the more information the better. Also get any audited financial statements, if available. (State laws govern whether this is required. For example, Nevada requires homeowners associations with more than $150,000 in annual revenue to be audited annually.) Look at the "assessments receivable" to see how much it is still owed in homeowner fees each year. If that amount increases from year to year, the association is having trouble collecting dues, says Tim Cleary, Associated Management's chief financial officer.
Read. Get a copy of the association’s bylaws or CC&Rs (covenants, conditions and restrictions). Even if it's big as a city phone book, take the time to understand them. Get a lawyer to interpret what you don't understand.
Meet the managers. Although property managers can't discuss individual homeowners' finances, they can discuss association business. A reluctance to share could cue you to a bad situation. Ask:
- What is budgeted, if anything, for bad debt? Look for 2% to 10%, depending on the property.
- How many units are in foreclosure or are overdue on homeowners association fees? 10% to 15% is a bad sign.
- How many units are bank-owned? Some associations are forced to take banks to court to get them to pay their delinquent fees.
- How many are rentals? Speculators are more prone to foreclosure, experts say.
How much is in the association's reserve account? View account records to see if it has been tapped to cover operational costs. Has a reserve study been done? A lot of states require them. Read it to learn the condition of the property and how much should be set aside. If no study has been done, ask why not.
- How many special assessments, if any, have been levied over the years and what has the money been used for? Special assessments may indicate a lack of good planning by the board and managers.
Give new developments fierce scrutiny. The lowest prices right now are in brand-new communities still owned by desperate developers stuck with lots of unsold units. You might score a screaming deal. Or you might get stuck holding the bag for the unsold units' fees when the developer goes bankrupt. Your safest bet is an older association with a good financial track record.
Build in wiggle room. Don't get leveraged to the limits of your income, even if a lender lets you. Be prepared for special assessments and condo fees that could double, triple or rise even more. Here's how bad it can get: In Florida, some counties are demanding special assessments to bring neglected older developments up to code. "All of a sudden you may get a letter in the mail that says that within three weeks you need to come up with $18,000," says Bill Raphan, the state's condo ombudsman. In many cases, those same condo associations already were struggling to pay special assessments to fix damage from the disastrous hurricane seasons of 2004 and 2005.
Reviewing a professional Reserve Study will generally not tell you:
a) What items are not being reserved for (those expected to last over 30 years).
b) Specifics of materials or quality assumed in calculations.
c) Which items are over valued - doors unlikely to require replacement.
d) Which items are under values - mature landscape, roofing.
e) A cost benefit analysis of maintenance alternatives.
f) Has required scheduled maintenance been completed or deferred.
Developers may use all legal means to understate the needs in order to present low due to attract new buyers. Only those planning to stay long term will argue to increaes dues to meet
IMO the advise offered to prospective condo purchasers is well intended, but generally weak.
There is no way I'm aware of for a buyer to discover hidden defects in either a new or old condo
building as opposed to a single unit or home that can be thoroughly inspected. And gaining
access for a complete inspection is not always practical. Studying years of HOA Board minutes will not tell you what was left out on purpose, and you have no way of learning what the Board has dealt with in it's private executive sessions. Even the most glaring of major
problems can be effectively hidden for years, and may not become public knowledge until after
you've made your purchase. Different states and geographic locations do present their own specific additional problems - some were noted. The constants appear to be these: condos are self governing non profit corps., and how they run depends greatly on who volunteers to serve on the Board. Even in the worse financial situations, people who are highly ethical, compassionate, and creative may ease the pain of ownership somewhat compared with those
who are ultra conservative unwilling to do anything unless it is blessed by a highly paid professional.
The only way to be sure that condo ownership will not be a problem for you, is to be sure that
money is of no concern to you. If nothing bothers you, including irresponsible pita neighbors,
then go for it, otherwise, think more than twice. Renting in a condo association provides most
of the benefits without most of the aggrevation.
Interviewing existing owners may be difficult, but owners who are not bound by the restrictions
fo Board members are the only people who are able to tell you what's really going on in their