Your approach to a condo purchase should be different from a traditional real-estate purchase, since it involves factors like maintenance fees, public amenities, and an association that runs the whole apparatus. A well thought-out purchase can help you get the most for your dollar while eliminating any problems along the way.
Condo Association Budget
Request a copy of the condo association budget from the owner if you're interested in making a purchase. The budget will reveal the condo association's expenses and revenues and will show whether the association is in good standing. If the expenses are higher than the revenue, the condo is accumulating debt due to defaulted member payments or mismanagement. If more than 15 percent of all condo residents have defaulted on their loans, lenders may not be willing to approve any more mortgages for units within the property. Even if you don't need a loan, the association may reduce tenant amenities to make up for lost revenue in a bad situation.
Foreclosures & Renters
Ask your agent or the association representative how many foreclosures have taken place in the building overall. If the amount is higher than the national average for all homes, it may be an indicator that the building does not hold its value and that the tenant base is leaving. As of July 2012, the national average for foreclosures is 1 per every 686 homes, but the rate is always changing, so check the current figures. Ask what the percentage of renters to owners is amongst the units in the complex. The more owners are present, the better, since they have a true stake in the property.
The condo association should build a certain amount of cash reserves into its annual budget. These reserves are accumulated through the payment of maintenance fees and are meant to be a safety net for unforeseen circumstances and general repairs. If the association doesn't have at least 10 percent of the total annual maintenance fees on hand as a reserve, tenants may have to pay a catch-up or assessment fee at some time during their residence to bring the account upto date. You don't want to get stuck paying this or any other additional fees.
Before buying, ask whether the condominium is insured by the association. If it isn't, the property may not be covered in case of fire, flood, break-in or other circumstance. This leaves the tenants vulnerable for a partial or total loss in case of incident. Some associations eliminate insurance on the property to make up for lost revenue due to lack of member maintenance fees. If this is the case, move on. If the condo is insured, get the advice of your personal insurance agent to see whether supplemental coverage is necessary.
All condos come with maintenance fees, but it's important to gauge the steadiness of those fees and what they are projected to do in the future. For example, if the fees have been raised three times in the past 5 years, the odds are they will go up again before too long. Ask the owner or agent how often the fees have been raised in the past and by how much. The past record is no guarantee of what's to come, but it can give you a basic guideline to operate by.
- The Wall Street Journal: Should You Buy that Condo?
- Bank Rate: How Does a Condo Differ from a Coop?
- Newsday: How to Buy a Condo, Confidentially
- Bank Rate: What to Know Before You Buy a Condo
- The Chicago Tribune: A Checklist For Smart Condominium Buying
- Bank Rate: July 2012: Top 10 States for Foreclosure
Robert Morello has an extensive travel, marketing and business background. He graduated with a Bachelor of Arts from Columbia University in 2002 and has worked in travel as a guide, corporate senior marketing and product manager and travel consultant/expert. Morello is a professional writer and adjunct professor of travel and tourism.