Buying a Condominium
A condominium project is usually a building which looks suspiciously like an apartment building or complex. The apartment-like units are usually sold individually. Buying a condo unit gives you ownership interest in the 3-dimensional space that is your unit. It also gives you partial ownership interest in the "common areas" and, if you're lucky, a parking place.
01. Homeowners Associations
As the owner of the unit you are agreeing to be a member of the Homeowners Association. The Homeowners Association provides for the maintenance of the common areas and the structure itself. This would include open spaces, pools, roofs, staircases, balconies, etc.
There was a humorous X-Files episode about a Homeowners Association for a planned unit development in which the owners pay the ultimate price for painting their mailbox the wrong color. While that might be extreme, there are cases where the homeowners association meetings can get quite contentious. It's always ugly to fight with your neighbors.
This "common interest" has its advantages and disadvantages. The advantages are that you don't have to fix the roof, paint the outside, or mow the lawn. The Homeowners Association has it done for you. The stuff inside your unit is your problem. While their roof may leak it's your sink that leaks and your carpet that needs replacing.
The Homeowners Association provides for the insurance of the entire structure and liability insurance for the common areas. You will need personal property insurance for your stuff. Your personal property insurance will pay you if your TV is stolen but their insurance will pay you if your unit burns down. If someone falls down the steps, the Homeowners Association is liable, and their insurance takes care of it.
02. CC&Rs
Your rights to your unit come with Covenants, Conditions and Restrictions (CC&Rs), This is generally a gigantic document that spells out in the tiniest of details what the rules are. While on the surface, this may seem absurd, its purpose is to diminish the possibility of expensive litigation.
These CC&Rs sometimes prove annoying because you might not be aware of the details. You may not be able to put Christmas lights around your window. You are likely unable to modify the color or hardware on your front door.
03. Who are condominiums for?
Condominiums are suitable for at least 3 groups of people:
- Young couples who would like their own house but cannot yet afford one. Ownership of a condo affords many of the advantages of homeownership without the steep price.
- A young single person who may not want the maintenance responsibilities but does not want a landlord and wants the economic advantages of homeownership.
- Older folks who no longer need their 4-bedroom home and the maintenance problems associated with it.
04. Urban Condominiums
In addition to the usual apartment building condo there are some areas that have what one might call "urban condos". New York City has many buildings that were built for manufacturing, commercial, or warehousing purposes. During the 1980s it became apparent that they were no longer economically valuable for commercial purposes, but that younger people wanted to live in them.
New York City created a loft law to specify how these units would be converted to residential use. These small condo projects also have their own CC&Rs. They also have arbitration agreements that specify what is to be done in case their is a dispute among tenants.
05. Townhouses
Another type of property is the townhouse. Generally, townhouses are similar to condos but are not stacked. You own the land under your unit. Many are attached on one side to another unit.
06. Insurance on Condos
Make sure that you are absolutely sure what you own and what the Homeowners Association owns. Make sure that between you, you have insurance on the complete structure. Many condo documents are drafted to shift the risk to the individual unit owner and not the association. That way the association's insurance premiums are lower and so is the condo fee.
If everybody understands what's going on and the individual owners purchase the appropriate insurance, this is not necessarily a problem. The problem is that insurance agents don't really understand that different condos have different legal descriptions of the dividing line between the individual owner's interest and the association's interest.
07. Problems with Condominium Loans
Sometimes there are some problems with getting mortgage loans on condos. Lenders feel that there is greater economic risk associated with condos. Lenders are not as secure with a condo as collateral for a loan because there have been times in the past when condos have depreciated in value faster than single-family homes.
Issues for Lenders:
- Loan-to-value ratios: There are, in some cases, slightly tighter restrictions on loan-to-value (LTV) ratios on condos.
- Owner-occupancy ratios: If the percentage of owner-occupied units in a condo project falls below 70% you will not be able to get a FHLMC or FNMA conforming loan. This will translate into a higher interest rate.
- This may, in the future, result in restrictions on the sale of your unit. The Homeowners Association may see that the owner-occupancy ratio is in danger of falling below 70% and decide that you can only sell to someone who will occupy the unit as their principal residence.
- New projects: It can be very difficult to get the first few loans on a new condo project. Generally, mortgage lenders need to go to a local Savings & Loan and even then the S&L might only give a limited number of loans on a given project.
- Litigation: Some lenders are tough on this and some are easy. There are two areas of concern: slips and falls and builder defects. Slips and falls may give the lender a concern if there are too many personal injury suits against the project. The issue is that the Homeowners Association may not have enough insurance and the individuals may become liable.
- Builder defects usually result in lawsuits where the Homeowners Association is the plaintiff and the builder is the defendant. The most common things are leaky roofs and faulty decks. These are typical problems that might not be evident until the building has been out of the hands of the developer for a couple of years.
- The problem with these is that they indicate that something is wrong with the building. If the Homeowners Association makes the repairs and sues the builder it may be to its legal disadvantage to indicate that all is fixed.
08. Before You Buy
Find out these things about a condo project before you make an offer on a unit:
- What is the owner-occupancy ratio?
- Is the Homeowners Association involved in any litigation either as plaintiff or defendant?
- Make sure that you can live with the CC&Rs. If you need to put an NRA poster in your window to be able to sleep at night and the CC&Rs prevent it, you may regret it later.