How to buy a condo with confidence
Condo prices are on the rise, which means those great post-recession deals on luxurious properties in the heart of the city are probably gone.
But mortgage rates remain low, so you can still score a reasonable deal.
The median price for an existing condo was $191,400 in the first quarter of 2014, a 10.8% increase from the first three months of 2013, according to the National Association of Realtors.
Sales are up, too. More than 600,000 units changed hands in 2013, an increase from 528,000 in 2012.
Buying a condo is trickier than buying a house, since you’ll be sharing living space and financial responsibilities with other condo owners.
It’s not enough to choose a good location and an affordable price point.
You also have to consider homeowners association fees and rules, special assessments and the financial health of the condominium complex.
These 8 smart moves can help you choose the right condo with confidence.
Let’s assume you want to buy a $200,000 condo with a 30-year mortgage.
A conventional loan could require a down payment of as little as $10,500 or 5%.
You’d need to pay private mortgage insurance until your equity increases to 20%, which would take about 8 years. With a credit score of 720 to 759, PMI would cost about $98 per month.
The average 30-year, fixed-rate loan costs just 4.32%, according to our most recent weekly survey of major lenders.
But condo financing costs a bit more than a mortgage on a single-family home (add about 0.125%) and is subject to risk-based pricing, says Joe Parsons, senior loan officer and owner of PFS Funding, a Dublin, Calif., mortgage bank.
Of course, the loan's interest rate and PMI are adjusted based on the borrower's credit score.
Despite their risk-based pricing, conventional loans are cheaper than FHA loans for everyone except borrowers with poor credit, who probably won’t qualify for a conventional loan anyway.
You'll want a loan that can be sold to Fannie Mae, one of the big government-owned companies that provide most of the home loan money in this country.
That will make it easier for you to qualify for a mortgage at the lowest possible interest rate.
Conventional lenders usually demand:
- A cap on commercial space of 20% of the complex's square footage.
- At least 10% of association dues be deposited in reserves.
- At least 51% of the units in a new building be owner-occupied.
- No current litigation regarding safety, structural soundness, habitability or functional use.
- No single entity can own more than 10% of the units.
- Not more than 15% of association dues can be more than one month late.
- The building be properly insured.
"Every lender has to abide by the same rules for condo eligibility," says loan officer Hillary Legrain of First Savings Mortgage in Bethesda, Md. "However, some lenders take the Fannie Mae guidelines and make them more restrictive."
You’ll find a list of Fannie Mae-approved condos by state here.
In a condo development, individual unit owners are jointly responsible for common maintenance, operations and repairs.
Owners pay monthly homeowners association (HOA) fees for these expenses.
An association that doesn’t collect enough might be deferring maintenance and failing to build reserves for future needs.
The result can be a special assessment, an unexpected bill sometimes in the tens of thousands of dollars.
Insufficient monthly dues can also mean a large future increase in HOA fees.
Buyers should carefully review the complex’s recent board minutes, replacement reserve study and financial statements for potential issues, says Eric Solomon, associate broker with Century 21 Redwood Realty, which serves the Washington, D.C., area.
The right monthly HOA fee pays for monthly operating costs and creates a reserve fund that can cover 70% to 100% of anticipated major maintenance costs, like a new roof.
Be wary of complexes where less than 30% of the anticipated costs are funded.
Condo buyers should also note the building’s overall condition, as aging systems, worn-out amenities and deferred maintenance could all be signs of a future special assessment, Solomon says.
While you’re reviewing the condo board’s meeting minutes for signs of financial problems, look to see if other problems are being resolved quickly and effectively.
Taking care of maintenance issues is one of the board’s essential responsibilities.
Any repair should show up in the notes twice: first, when the board discusses it and decides what to do, and again when the bill is paid and the issue is resolved.
Maintenance issues reappearing month after month are a sign of an ineffective or dysfunctional board.
Frequent disputes with residents are another red flag.
Talk to people who live in the building. Find out if their needs are being met and issues are being resolved in a reasonable amount of time.
Neighbors can also provide an idea of the character of the complex.
Condo living means less control over your property and lifestyle. The homeowners association has a say.
Make sure you’ll be happy living by its rules before you buy.
"All too often you see someone buy a property that has strict pet rules and buyers now have a huge problem on their hands when their pets are not allowed to move in with them," says Ed Kaminsky, CEO of the SportStar relocation firm in Manhattan Beach, Calif. "If you are a buyer and accept and sign those documents, you are accepting responsibility for what is in them."
In addition to pets, HOAs typically have rules about:
- Exterior modifications and seasonal decorations.
- Overnight guests.
- Common area use and conduct.
- Trash disposal.
- Allowable vehicle types, on-site vehicle repairs and parking.
- Use of private balconies.
- Repair and delivery hours.
- Interior modifications and structural changes.
- Unit maintenance and upkeep.
- Window coverings.
- The HOA’s right to enter your unit.
- Renting out your unit.
- Enforcement and penalties for rule violations.
Condo insurance is different from single-family home insurance.
The condo building will have a master policy, which may only cover the primary building and common areas.
You’ll need a unit-owner’s policy to provide coverage for physical loss and liability for your unit, including appliances, flooring and cabinetry, and contents like your furniture and clothing. You may even need coverage for the structure, as if you were buying a single-family home.
Your insurance also can cover special assessments for certain lawsuits related to a judgment or property damage that the HOA’s insurance or reserves don’t fully cover.
Aside from getting a quote from an independent agent who can shop at many companies on your behalf, the factors that most affect the insurance premiums you’ll pay on a condo are building age, interior sprinklers, distance to the nearest fire department and claims history, says Ronald Jetmore, principal of Jetmore Insurance Group in Lusby, Md.
A condo may be in a high-risk flood zone, and the bank can require owners to purchase flood insurance, says Ronald Jetmore, principal of Jetmore Insurance Group in Lusby, Md.
Even second-floor units may require coverage in some locations.
High-risk flood insurance can be expensive, and premiums can increase annually. You’ll have to pay the premiums every year for as long as you have a mortgage.
Rates among flood insurers can differ slightly, Jetmore says, but rates are almost identical no matter which company you use because the federal government regulates the rates.
Choosing the highest deductible and opting out of contents coverage will help you get the lowest premium and make it easier to qualify for your loan, he says.
Use the search tool at floodsmart.gov to see the flood risk for any address, and contact an agent for a quote on a particular unit.
You don’t have to settle for anything less than your ideal condo.
Make sure the level of maintenance meets your standards. You might not agree with what the condo association considers well-maintained.
If the golf course is a big reason you want to buy there, play a round or two to see if it matches your game and is as well cared for as you would expect.
If you’re expecting to spend a lot of time at the condo’s pool or beach, ask whether you can spend a day or two lounging by the water. Is it a relaxing retreat for other residents or a beer-and-boom-box party kind of place?
Condos are close quarters, so issues like blaring music, screaming kids and barking dogs can become unbearable. Spend some time in the condo itself to see how much noise comes from surrounding units.
Do the upstairs neighbors stomp around like elephants? Can you hear the baby next door crying?
These are nasty surprises you want to avoid.
You'll soon discover that when you were a renter, you had the easy life. Owning a home is a lot of work.
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Our guide will turn you into a savvy borrower so that owning your home will be a joy, not a burden, and will help you achieve long-term financial security.
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