Avoid Buying a Bad Condo

Just in case you haven't been paying attention, condominium sales are booming. No longer are condos the "ugly ducklings" of real estate.



Both brand-new and existing condos are selling extremely well in most communities. Annual condo market value price appreciation now equals or even exceeds that of comparable single-family detached houses.



In summary, the condo market is booming.



Although the majority of condo owners are satisfied, not all condo owners are happy. Some condo complexes are poorly managed. Others have very high monthly fees. Quality of maintenance in some complexes is sub-standard. Still other condo complexes have become mostly occupied by renters, rather than owner-occupants.



WHY BUY A CONDOMINIUM? Legally, a condominium is a "vertical subdivision" where each owner purchases airspace to the inner walls, ceiling and floor surfaces of a specific residence unit.



However, the building structure and land are called "common areas," which are owned by the homeowner's association, to which all condo owners in the complex automatically belong.



But townhouse condo owners often own the land beneath their units; sometimes they also own the structures and are responsible for complete maintenance.



The homeowner association is usually responsible for maintaining condo common areas, such as the structure, parking areas, elevators, grounds, plumbing, wiring and roof. For this reason, the association board of directors must maintain adequate replacement reserves for both scheduled maintenance and emergency unexpected repairs.



The reasons for purchasing a condo are very diverse. Many condos are sold to first-time buyers who can't afford to buy a house.



But the majority of condo buyers purchase for lifestyle reasons, such as recreational facilities, freedom from exterior maintenance, ability to just lock the door while away for extended periods, and enjoyment of luxury facilities at modest cost.



PROS AND CONS OF BUYING A NEW OR RESALE CONDO. Having owned several condos, and being a current owner of a second-home condo, I've experienced most condo ownership advantages and a few problems.



Brand-new condos present special advantages, but there are possible unknowns, such as construction defects, which even the best condo builder often cannot anticipate. The unpleasant result can be defect lawsuits that may hurt resale value, especially when mortgage lenders stop lending in a complex with pending litigation.



Another unexpected problem with some new condo complexes is the developer frequently sets the initial monthly condo fees artificially low to attract buyers. After management of the complex passes from the developer to the homeowners association, reality sets in and the new owner-directors have to increase monthly fees to pay expenses and provide for reserves.



But buyers of older condos often have greater predictability of expenses because construction defects have hopefully been resolved and monthly maintenance fees are predictable. However, a drawback of older condo complexes is the gradually increasing maintenance expenses, which must be paid from monthly fees.



FIVE KEY QUESTIONS CONDO BUYERS SHOULD ASK. If you are considering buying a brand-new or older condominium, here are the five key questions to ask to avoid buying a bad condo:



1. HOW DO THE MONTHLY CONDO FEES COMPARE WITH SIMILAR NEARBY CONDO COMPLEXES? A sharp buyer's agent should have the monthly condo fees for comparable nearby condo complexes easily available. Be sure to ask what services are included for each complex because that can make a big difference.



For example, the condo where I currently own has a monthly fee that includes heat, but not air conditioning and other utilities. Also, we have voted to annually raise our monthly fees by 5 percent to increase our maintenance reserves.



That wise policy came in handy last year when the elevator needed $23,000 of repairs, which we easily paid from the reserves without a special assessment.



2. WHAT IS THE FINANCIAL CONDITION OF THE HOMEOWNER'S ASSOCIATION? Before making a purchase offer for a specific condo, the seller or the listing agent should give each serious prospective buyer a copy of the CC&Rs (conditions, covenants and restrictions), the by-laws, rules, recent financial statement, and minutes of the board of directors meetings for the last six months.



Prospective condo buyers should ask lots of questions, such as, "Are any special assessments or increases in the monthly fees under discussion?" Also inquire about the maintenance reserves.



There is no absolute minimum replacement reserve guideline, but two standards are (a) at least two to three thousand dollars per condo unit, and (b) 25 percent of the annual gross income for the homeowner's association should be in the reserve account.



3. IS THE CONDO ASSOCIATION PROFESSIONALLY MANAGED? Except for very small condo complexes, the best condo complexes have professional outside managers. Be very wary of buying in any condo complex where one of the condo owners is the manager.



Ask how long the professional manager has managed the complex; the longer the better. For example, the condo complex where I currently own a condo has had the same management company for more than 25 years.



Professional managers usually save the association the amount of their fees by obtaining low bids on quality services and by offering expert advice based on their experience managing similar condo complexes.



4. WHAT IS THE PERCENTAGE OF RENTERS AND THE PERCENT OF OWNER-OCCUPANTS? If the answer is more than 10 percent renters, that's not a good sign. When there are more than 20 percent to 30 percent renters, most mortgage lenders either refuse to make mortgage loans or they charge above-market interest rates. The result is condo resales can be hurt.



5. ASK SEVERAL CURRENT RESIDENTS "WHAT DO YOU LIKE BEST AND LEAST ABOUT LIVING HERE?" Most condo owners are very friendly. They don't mind telling prospective buyers what they like best and least about their condo. Better yet, ask current condo owners, "Would you buy here again?"



If you receive satisfactory answers to these five key questions, plus others you want answered, it's time to make your written purchase offer.



However, be sure your condo or townhouse purchase contract includes a professional inspection clause. That means, after the seller accepts your purchase offer, you have 10 to 15 days to obtain a professional inspection of the specific condo and the visible common areas.



When buying a brand-new condo, be cautious of any builder or developer who refuses to allow such a professional inspection. Perhaps the builder is concealing defects or serious construction mistakes, which a professional inspector will discover.



SUMMARY: Buying a condo is not as easy as purchasing a single-family detached house. But it can be very rewarding experience owning a condo if you ask the right questions and receive the right answers.



By-Bob Bruss