What You Should Know About Buying a Condo
There's a lot to like about life without yard upkeep, or worrying about what color to paint the front door, or what to do if the roof leaks. Such is life in the typical condominium.
Although the maintenance headaches of owning a single-family home are pretty much nonexistent when you own a condo, this headache-free lifestyle comes at a cost: homeowners association dues.
When you've found the condo of your dreams, these dues are typically the first thing you'll ask about. After all, $1,800 a month in condo fees on top of a mortgage payment may be prohibitive for many homebuyers.
The devil, however, is in the details: a huge stack of paperwork known as the HOA Documents, or Covenants, Conditions and Restrictions. It is within these documents that lurks the hidden costs of owning that must-have darling condominium.
The CC&Rs outline the limitations and rules that dictate how you can use your home. These are put in place by the developer, the builder, neighborhood association or homeowners association.
Suffice it to say, you'll be handed a huge stack of documents, and, as challenging as it may seem, you need to read every word of every page. Or, have your attorney review the paperwork and advise you accordingly.
What to Look For in the HOA Documents
Restrictions
The rules and regulations are typically the first place the condo buyer's eyes will roam in the HOA documents. Depending on your personal needs and preferences, this is where you'll find the answers to such questions as:
Can I rent out my unit?
Are pets allowed?
Can units be rented out?
Can I install a satellite dish?
Keep in mind that if you find the rules excessive, it may be expensive and time-consuming to fight them in court.
Pending Litigation
One of the first items to determine is whether the association is involved in any pending litigation. It's not at all unusual to learn of an association in litigation with the developer or even an individual owner. If the litigation is over construction defects, you may not find a bank willing to lend you money to purchase in the complex, so it's important to determine if there is litigation and what the case is all about, sooner rather than later.
Reserves
Check the association's reserve funds. This is money that is held aside for maintenance that may be routine, but also costly. Replacing roofs and sprinkler systems are two items paid for out of the HOA reserve funds.
What happens if there is insufficient money in the fund to cover a maintenance emergency? Expect a special assessment to be levied on all the homeowners.
To ensure that the HOA has sufficient reserves, check its budget. The reserve fund should equal at least 10 percent of the annual budget, according to financial expert Suze Orman.
Special Assessments
A report on WSVN TV's "Help me Howard" program tells the story of Patricia Morrissey, whose HOA levied a $4,962 special assessment. She was ordered to pay it, or lose her condo. Morrissey understands the occasional need for extra money, but her HOA had levied seven special assessments over the past year.
Check the HOA docs carefully for assessments – both the amount and the volume of them. Excessive levying of assessments should raise a red flag.
Then, look for evidence of any major improvement or maintenance projects planned for the next year and whether there will be enough money in the reserve fund to cover the projects. If not, there may be an upcoming special assessment.
Orman suggests checking the age of the roof and the home's major systems. If they are "closer to 15 years old than they are to 5," you may be looking at a looming special assessment shortly after moving in.
Meeting Minutes
The HOA should supply you with the minutes from their meetings held over the past year. These contain a gold mine of information, so take the time to read all of them. Of special interest to you as a purchaser are the complaints from homeowners voiced at the meetings. Repeated complaints may hint at an unresponsive association. You may also find information on upcoming projects in the minutes.
Tip: If you don't find comments from homeowners in the association's meeting minutes, ask why. Many associations are omitting them from their official minutes to be able to claim a lack of knowledge when an issue isn't rectified.
Insurance
If you don't understand how to read an insurance policy, you're not alone. Have your insurance agent or attorney review it to determine whether:
The policy accurately reflects how much it costs to rebuild.
The policy covers bringing the complex up to code if rebuilding is required.
The policy states what your responsibilities are in case of loss.
The homeowners association has the power to create and enforce rules and govern how much extra money you may be required to pay for repairs.
For this reason, consider that you're not just buying a home when you purchase a condo, but you're buying into a form of government that may dictate how you live. Read the HOA documents thoroughly and carefully before making the decision to purchase.