While some favor the added space and seclusion of buying a single-family home, there are many who prefer the feeling of community within a condominium, as well as the amenities they often feature—private parking, clubhouses, swimming pools and hot tubs.
Let’s say you’ve been checking out the housing market, done your research, and decided to purchase a condominium. It’s just like purchasing a home, right? Well, not exactly.
Because many condominium associations went under during the housing crisis a decade ago, there are many new requirements placed on condo buyers.
The recession of 2008 brought about the end of many businesses and the foreclosure and repossession of many properties. Condos were especially hard hit, primarily because the various condo owners within a building or development are connected to one another through a condominium association.
In a single-family home scenario, your neighbor’s default and foreclosure doesn’t affect your property. With a condo, however, your neighbor’s default causes a shortage in the dues available for maintenance, repairs, improvements and insurance.
During the recession, these shortages often caused associations to become insolvent to the point that special assessments were placed on remaining members to cover necessary costs. Despite the use of these assessments, there were usually insufficient funds to operate, and the units entered a state of disrepair, affecting the values of the entire complex. On top of this, the reason that condominiums suffered a higher percentage of default was the fact that, unlike single-family homes, they were often secondary or vacation homes. In times of financial hardship, homeowners are less likely to default on their primary residences. With these two factors reinforcing one another, it’s easy to see how condo owners were especially impacted by the recession.
To protect future buyers and lenders from the woes of the past, new requirements were placed on condo purchases to ensure that associations would remain solvent and have the necessary reserves to operate in the case of another serious market downturn.
Today, sellers must provide a Condominium Certificate to the buyer and their lender as a safeguard. They also have to produce financial statements and statistics regarding the number of rental units in the complex. Some financing programs will require a review and approval of the condominium complex prior to consideration. Buyers are advised to check with the seller, listing office, condominium association and lender to determine if the unit can be obtained using the financing available to them.
While occasionally buyers of single-family homes are hit with HOA dues and other fees, the corresponding fees associated with condos are often much more costly.
Buyers understand that there are certain standard costs associated with the purchase of a single-family home.
A typical mortgage payment includes principle, interest, taxes and insurance. There will also be utility costs, maintenance, and possibly private mortgage insurance (PMI). Some neighborhoods also have a homeowners’ association (HOA), with dues that may or may not include fees for additional amenities. In most cases, the dues are relatively small on a monthly basis, oftentimes no more than hundreds of dollars per year.
With condominiums, however, the dues can be hundreds of dollars per month. This must be considered in the overall payment calculations and debt-to-earning income (DTI) ratio calculations.
Thus, prospective condo owners are advised to budget accordingly. The total cost of a condo may well be significantly higher than a single-family home with a comparable sales price.
If you’re planning on renting out your condo after you’ve bought it, you’ll need to check with the condo association first.
Buyers who intend to lease their condo unit—whether only occasionally, or for the long-term—will need to consult with the condominium association prior to their purchase. Some condo associations have restrictions on rental units in the complex, and when rentals are allowed, the duration of leases may be limited.
This means that buyers who are considering buying a condominium as an investment must be particularly careful of not running afoul of condo association rules in order to avoid extremely costly mistakes.