A condominium allows you to wade into homeownership without plunging into the responsibilities of a single-family home.
You pay dues to a condo association, which typically handles exterior building maintenance and landscaping. So you may find you don’t have to worry about painting your window frames or mowing a lawn.
You may also find trouble — if you don’t ask the right questions.
“Ideally you want to buy into a stable, well-run community,” says Donna Berger, a condo law attorney with the Becker and Poliakoff law firm in Fort Lauderdale, Florida.
“If the price is a steal, it may still be a good investment, but you want to make an informed choice,” she says.
Here are six things you’ll want to know before you buy a condo.
1. How is the condo association being run?
Buyers need to think of purchasing a condo as signing a business agreement with all others who own in the project they are buying into, says New York attorney Rafael Castellanos.
As with any other business venture, learn how the place is managed and inquire about its financial stability.
“You really have to be very careful,” Castellanos says. “Don’t be emotional about it.”
2. How does the budget look?
“Most condo buyers don’t think of it, but you need to ask for a copy of the association’s budget,” Berger says.
The association is not likely to give a prospective buyer a copy of the budget, but the seller — as an owner — can request a copy and provide it to the buyer.
The most important parts of that budget include the total amount of outstanding debt owed to the association and the percentage of owners who are not paying their dues.
3. What’s the delinquency rate?
Buyers have little chances of getting financing in a building with a high percentage of owners who are delinquent on dues.
Fannie Mae, Freddie Mac and the Federal Housing Administration, which buy or insure most mortgages, do not approve condos with delinquency rates above 15 percent.
In buildings that don’t meet that requirement, it can be extremely challenging to get a mortgage or refinance, says Orest Tomaselli, CEO of National Condo Advisors in White Plains, New York. That firm helps condominium projects obtain FHA and Fannie approval.
For buyers who can pay cash and don’t plan on selling their unit anytime soon, the delinquency rate may not seem like a big deal. But keep in mind that when an association is starved of cash, it has to make cutbacks.
“Depending on how long the high delinquency has been in place, that beautiful pool may not stay beautiful for very long,” Berger says.
Some associations also may charge unit owners special assessment fees to make up for a budget shortfall that results when dues aren’t paid.
4. How are the cash reserves?
The lower the cash reserves a condo association has and the older the building, the higher the chances that owners in that building will be hit with a special assessment at some point.
Fannie, Freddie and FHA require condominiums to put aside 10 percent of their annual revenue for emergencies and capital expenditures.
“Eighty (percent) to 90 percent of them do not have appropriate reserves in their budget,” Tomaselli says, based on projects he has worked with, including existing and new buildings.
5. Are there a lot of absentee owners?
The percentage of investors who own units in a project may also impact a buyer’s ability to get a mortgage or sell the unit soon.
Lauren Stark, who specializes in condos as a real estate agent with The Stark Team in Las Vegas, says about 95 percent of her deals are cash. “There’s virtually no financing (for condos),” she says.
Stark says Las Vegas condo buildings are heavily owned by investors, as has been the case in other hot markets, such as Miami and New York. The FHA does not approve condo projects in which more than 49 percent of the units are owned by investors.
Generally, units in buildings with financing issues lose value because they have to sell mostly for cash, at discounted prices.
6. Is the building insured?
Another important factor that condo buyers often overlook is the community’s insurance coverage.
Many condo associations have reduced or dropped the community’s insurance coverage to cut costs, Berger says. That jeopardizes the investment of all the owners in those projects.
“New purchasers should ask the seller to obtain a copy of the building’s master (insurance) policy,” she says. “Then take it to your own insurance agent and ask, ‘Is this enough coverage?’”
Insufficient insurance coverage can hurt a buyer’s prospects for financing, Tomaselli says.
“Nowadays, lenders view the condo development itself as collateral, not just your unit,” he says.