Walking in and around a condominium that you’re considering buying is a good way to tell if it’s somewhere you want to live. You can check out the grounds and see if the unit is big enough to fit your needs.
A deeper investigation of what you’re considering buying is available in documents from the Homeowners Association, commonly called an HOA. Buying a unit in a condo complex is more than just the unit itself. You’re also buying into the association’s rules, fees, potential for lawsuits, operating budget, liens and personalities that shape all of it, among other things.
Here are eight areas to check out before buying a condominium:
Read the rules
Your real estate agent should be able to at least get you a list of the basic rules of the HOA. You should also ask for a full copy of the full HOA rules, also called covenants, and read them carefully. Some restrictions can be overbearing.
They can include limits on pets, age (only residents 55 and older, for example), political signs, and where you can park a boat, trailer or RV or if you can park one at all, says Stephen Lesavich, an attorney in Kenosha, Wis., who is also a registered agent for several HOA associations. Planning on washing your car or planting a tree in the front yard? You’d better check with the HOA first.
“Many HOA agreements also allow the HOA to place liens and foreclosure on the condo owner’s property if they do not pay their HOA dues,” Lesavich says. “So read those portions of the HOA agreement carefully ahead of time.”
Fees and special assessments
Condominium mortgage requirements are strict enough, but there are other fees you’ll likely be paying as a condo owner.
Monthly fees will be charged to cover a variety of expenses by the condo association: landscaping, painting the exterior of the units, insurance, maintenance and upkeep, among others.
It’s also worth checking if the HOA plans to add a special assessment in the next year or two, Lesavich says. If so, what’s it for, what is the cost for a condo owner and how long will it last?
He gives the example of a 20-story condo building in Chicago needing window replacement. “A hard and expensive thing to do on such a tall building,” he says. Each condo owner was given a special assessment in the $20,000 range.
Reserve fund and budget
Ask how much money is in the HOA’s reserve fund. The fund is used for general maintenance and special assessments. A small reserve may lead to a special assessment or higher HOA dues somewhere down the road, Lesavich says.
Low HOA fees can lead to low reserves and fees that are too high can lead to high reserves that are unnecessary, says William Aronin, a real estate attorney and real estate broker in Manhattan.
“Then it looks like somebody doesn’t know what they’re doing to manage this,” Aronin says.
Also ask to look at the HOA budget, Lesavich says. See what it’s spending money on now and how that affects its reserve fund.
Owner occupancy levels
A low owner occupancy rate can lead to difficulty getting a condo loan from a mortgage lender, and could affect the HOA’s ability to get hazard and liability insurance, Lesavich says.
The higher the ratio of owners to tenants, the better for you as an owner. Some condo owners rent out their condos, and a low owner occupancy rate of around 40 percent is worth investigating, Aronin says.
Fannie Mae, Freddie Mac, FHA loans and VA loans all have minimum owner occupancy rates for condominium mortgages, so that if a development doesn't meet those standards, you may have to seek alternative financing if you wish to buy there.
If possible, attend a meeting of the condo association’s board of directors. Meet them and check their reputation with other current owners.
“Many times HOA board members have personalities that cause significant headaches for condo owners,” Lesavich says, “especially if the HOA board members’ personal values and viewpoints are different than yours.”
Talking to a few condo owners should also give you a sense of what it’s like to live there. It can be difficult to see if something as egregious as embezzlement is on the horizon, but talking to owners can give you an idea of how the HOA is run, Aronin says.
“You’re much more likely to get incompetence than criminality,” he says.
Hazard and liability insurance should be covered by the HOA, Lesavich says. If not, the condo owner could be personally responsible for problems at the complex in some instances, he says.
Make sure there are no liens on the property from the state or local government or by utilities, Lesavich says.
“If a person is buying a condo that was abandoned, on a short sale, bankruptcy or foreclosure, there may be liens against the previous owner for such fees as unpaid taxes, water and electricity,” he says.
There may also be non-occupancy liens or code violation liens by the state or local government that need to be removed, especially if the condo hasn’t been occupied for a long time, he say. A title search or call to the government property office should answer these questions.
If the HOA uses a management company to collect HOA dues, do maintenance and other tasks, ask for its name and check out its reputation with the Better Business Bureau and other agencies.
“In many complexes the management companies are terrible and this causes the condo owners significant trouble as the management company loses checks, does not properly record HOA dues and provides poor quality maintenance services,” Lesavich says.