Condo complications: The issues behind ownership

If you have never bought a condominium, you may be surprised at all of the different issues to consider. Buying a condo is not the same as buying a house. Not only could you have adjoining walls with your neighbors, as well as other physical elements that are different from a freestanding home, the entire process that you need to go through to make your decision and obtain a loan may also differ.

One of the first things you need to ask yourself is: Are you the condo type?  What exactly does that mean? Being a city-dweller, for one. Many condos are located in the urban setting. In real estate, the phrase "location, location, location" means a lot. Condos are springing up in many urban downtowns, and some are even building items of convenience right into the development, including grocery stores, bank branches and other businesses. With that convenience may come more noise and congestion. If you are thinking about a certain location, check it out at different times of the day and night to see how loud or brightly lit it is. If noise or light is an issue for you, this may not be the right choice.

One of the things that come with condo ownership is the Homeowners Association (HOA). It sets out a declaration of covenants, conditions, and restrictions (CC&Rs) that lists things that you, as the condo owner, must comply with in order to live there. Should you not comply with these conditions, you could be fined, forced to comply or even sued.

Condos may be a suitable choice for a certain type of person, like a first-time homeowner who cannot afford a more expensive single family home. Condos also offer the advantage of low maintenance. This can be an attractive feature to older folks who are looking for less of a home to physically manage. Condos can also be an attractive choice for the person who wants to be centrally located in a big city.

Purchasing a condo may be more difficult than purchasing a house. Lenders are very careful when giving out loans for this type of residence. They usually require that a certain percentage of the units have people living in them, or are, as they call it, "owner occupied." Another restriction may be how many condos are allowed to be owned by one investor. Usually, lenders do not want one person to own more than 10% of the units in a building. Many times, lenders will also have regulations relating to the building's occupancy rate. Some lenders require at least 90% of the units to be sold in order to offer financing.

Lenders may also have tougher loan-to-value ratios and restrictions for those buying condos. A loan to value (LTV) is how much the condo is worth versus how much is owed on it. For example, if you put 20% down on a home, your LTV would be 80%.

Federal Housing Administration (FHA)-backed mortgages for condos do exist, for up to 30 years; they're known as Section 234(c) loans. While the terms for borrowers are similar to those on housing loans, the restrictions on the condos are many; the building must have over four units, to begin with.

There may be other costs involved with owning a condo. Even though the HOA offers insurance, you may need to carry additional homeowners' coverage as well. Carefully read all documentation, to be sure that the insurance offered by the HOA doesn't shift risk to you to maintain lower premiums.

One of the most important things you can do to protect yourself when buying a condo is to research the HOA and sit in on a HOA meeting. As well, talk to the neighbors to see if they are happy with how the condo is managed. Review the bylaws to determine what is covered by the HOA. You can also ask to obtain the minutes from recent board/member meetings, and find out how much the HOA dues have increased in the past few years.

Another area to research is the board's litigation history, both for taxes and other general issues. You may find that there are lawsuits involved that you may not want to become part of, should you purchase. Some condo associations have been forced into bankruptcy for unpaid HOA dues. Should they fall behind on receiving dues, lenders may also stop offering financing on the units, which could affect resale values.

Review financial records for delinquencies and reserve funds. A good association should have at least 25% of gross income in reserve for emergencies and repairs. If they run out of money, you may get hit with an assessment. Also, be sure to check out recent property tax assessments. If your condo sale price is low, but the tax assessment is high, you may be in store for a higher tax bill than you have anticipated. Be sure that taxes are in line with true values of the property.

Condominiums can be a good investment for the right buyer in the right location when times are tough, though they can be harder to buy and sell than a detached house. Before purchasing a condo, be sure to do your due diligence and check out the HOA, CC&Rs and any tax and insurance situations. Also, be sure to get a real estate agent and a loan officer that has a lot of condo sales experience, as the issues surrounding such a purchase are not as simple as those with a traditional single-family home.