6 Things to know before you buy a CondoSeptember 30, 2009
This post was written by Erika Eaton and originally published on her blog, SearchingInAtlanta.com. Please be sure to visit!
Condos offer a hassle-free lifestyle that owning a home just can’t provide. Depending on the services available, you can have everything from on-site security and concierge services to a swimming pool and health club. While there are many great benefits to condos, there are also some potential pitfalls. There are a lot of great deals out there, sometimes I feel like there is an Atlanta condos sale going on. Having worked with many condo buyers and sellers, and serving on a condo board myself, I’ve thought of 6 key things to investigate:
- How much of the dues are allocated to a capital reserve account.
Many buyers can be extremely focused on condo dues without scratching the surface and understanding how the dues are allocated. There are condo associations that take advantage of these buyers and play a condo dues shell game. Some associations keep their dues artificially low by not allocating any money for future capital projects and repairs. They purposely ignore future roof replacements, paint jobs and parking lot resurfacing and assess for all capital expenses. It won’t do you any good to have low monthly dues while constantly getting hit with surprise assessments.I think this is extremely irresponsible and unethical, but you’d be surprised how many associations have this attitude. You should request the current financial statements during your due diligence period; or before you even make an offer. You’ll be able to see if the condo board has been a responsible steward.
- What percentage of the units can be rented.
This can be important for two polar opposite reasons. You might want to rent your unit at some point or you want to make sure there won’t be a bunch of renters living in your complex. Usually the association will have a maximum percentage of units that can be rented, probably somewhere around 10%. The percentage has less to do with the board’s arbitrary tolerance for renters and more to do with the ability to get financing on individual units.If a certain percentage of condos are rentals, new purchasers will be unable to get conforming loans at the complex. Usually, when a borrower is trying to get financing, the condo association has to fill out a form called a “condo questionnaire”. Some of the questions can include, “what percentage of the units are rentals” or “does one owner own more than 10% of the units in the complex.” I expect, in this difficult financial climate, that lenders have become even bigger sticklers for this rule.The real estate slowdown, and the disproportionate drop in condo values, has caused a lot of bitterness and rethinking of the rental caps. For various reasons, many owners have to leave their units, but are unable to sell due to owing significantly more than the condo is worth. Unless you can write a check to make up the difference, an owner’s only options are waiting the market out or foreclosure. In order to “wait the market out”, an owner would need rental income to pay the mortgage. Community associations are faced with the difficult choice of deciding if their lifestyle and property values are better off with increased rentals or a bunch of foreclosures and the resulting fire sales.
- What’s been going on for the last year.
Condo associations are supposed to keep minutes from their board meetings. During your due diligence period, you should ask for copies of the last 12 months of minutes. If the association is objectively recording the minutes, the copies should help you smoke-out concerns, issues, problems and litigation.
- How old is the building.
Although the individual unit may have been gutted with new paint, floors, cabinets and fixtures; if the building is 75 years old, then the pipes, electrical and infastructure could be in need of a huge upgrade. For instance, if the plumbing is made out of galvanized steel (a common problem in older buildings), the pipes are probably starting to dissenegrate and they will need to be completely replaced. Ripping the building’s walls out to replace plumbing will be very expensive. If there is no money in the capital reserve fund, then you’ll be responsible for your share through an assessment. (see point #1)
- How much parking is there for me and my guests.
Space is always an issue, espeically in urban settings. Find out if there are assigned parking spaces and how much is allocated for guest parking. If there are only a few spaces, you’ll have parking problems, especially on the weekends. It can be little like finding a parking spot at Lenox Mall the week before Christmas.
- How many units are behind on their dues.
In a normal market this probably isn’t a concern, but during this downturn, it should be investigated. When you request financial statements (see point #1), you’ll see how much is in accounts receivable. The following scenario is currently playing out all over Atlanta.The owner is behind on their mortgage payments, so they are probably even further behind on her condo dues. The association doesn’t have many options when it comes to collecting the dues, the only real weapon is a lien. Normally, when the unit is sold, all liens are paid and the association is made whole again. But in this market, the owner might not be able to sell because she owes more than it’s worth, so the unit eventually goes through foreclosure and the owner is evicted. During foreclosure all liens are wiped off the books, so the association is out all uncollected dues for that unit. The remaining owners will be stuck paying for the uncollected accounts receivable.
Good luck with your condo search. One of my specialities is Atlanta luxury condos, so please feel free to call me if you have any questions or would like to see a home.
Posted in First Time Home Buyer, Living in Atlanta, Metro Atlanta Information | Tagged atlanta condo market, atlanta luxury condo, capital reserve account, condo amenities, condo assessment, condo association fees, erika eaton, how to buy a condo, tips for buying a condo |