As we stated in Part One
, buying a condominium is different from buying a house and there are questions that need to be asked, documents that must be reviewed, and information that should be obtained before you commit beyond redemption to a purchase.
In Part One, we outlined a series of inquiries that should be presented to the professional manager or the president or a board member of the Home Owners' Association (HOA) if professional management is not in place.
However, you can ask questions, you won't always get satisfactory answers.
That's ok. It would be nice to know all of that stuff before you waste your and your agent's time on a potentially untenable situation. But, if you think the condominium is right for you, go ahead and make an offer, just guarantee yourself the right to get this information.
Your offer will, of course contain all of the contingencies you would put into one on a single family home:
- A mortgage commitment to allow you to complete the purchase;
- Satisfactory inspections by a qualified professional for:
Structure and major systems;
Lead paint if the property was built prior to 1978;
Radon gas in air or water if appropriate in your area;
Pests (or proof of an HOA maintained termite/pest contract);
Plus any other contingencies specified by your attorney or dictated by personal circumstances.
Given the nature of condominium ownership and management, however, you should also make your offer contingent upon a satisfactory review of:
- All condominium documents and bylaws
Condominiums are an exercise in community living, and the majority rules. You need to know if any of the restrictions in the by-laws will hinder the way you hope to live in your new home. There can be some very restrictive rules.
Even when something is permitted, there can be underlying restrictions. For example, a development might allow pets, but strictly limit ownership. It is very common for condos to restrict cats to one per unit or limit dogs by weight, i.e., only dogs under 20 or 30 pounds. This can effectively ban any dog much larger than a Miniature Poodle or a Pekinese.
If you are buying a condo because of amenities such as the club house, tennis court, pool or gym, make sure that they can be used when and how you want to use them, and that they have not been abandoned by the HOA because of insurance or other problems.
- Current and previous year's condominium budget and year-to-date actual expenditures.
Get a professional to review these. Are expenses appropriate to the size of the complex? Are adequate amounts budgeted for routine maintenance, on-going capital expenditures, and reserves? Are fees for management and outside contractors in line with local standards? Are there any expected line items that are missing? How do budget projections match actual expenses?
- Balance Sheet for several years
Are reserves adequate for generally expected expenses? Roofs need to be replaced every 25 to 30 years, is the HOA planning for the next roof, or for a new HVAC system? There are guidelines for reserves. Again, consult an expert.
- Minutes of the last year's HOA meeting minutes;
These are a treasure trove of information. Is there a problem looming with a major mechanical system? Are the owners battling over one or more issues? Is the HOA dictatorial? Are owners in open revolt against the association? Are there changes being discussed that may alter the bylaws in a manner you will find unsatisfactory?
If you were unable to obtain this information earlier, you may well ask, why will you be able to get it now that you have real money riding on the answers? First of all, you are no longer a nosey shopper; you are now a potential owner and member of the HOA. Second, the seller and the seller's agent will be more than anxious to keep you happy and will pressure the HOA to provide the requested information. Third, when your attorney calls the Manager or President of the HOA, that person is much more likely to respond than when you or your agent places the call.
And speaking of your attorney, you may or may not feel you need one when you buy a single family home. But please, please employ one for any condo purchase, and pick one who specializes in real estate. Reviewing the recommended documents as well as the eventual sales contract is what real estate attorneys do. Don't pay to educate a trust or a personal injury lawyer in the intricacies of real estate. Also, attorneys operating out of their area of expertise tend to be overly cautious (who knows better than they the likelihood of a lawsuit) and may overreact to things that are either routine or of no consequence.
You might also ask a CPA who is familiar with condominiums to review the budget and balance sheet, maybe even the HOA minutes. If your attorney handles a lot of condominium purchases he can probably do this review or he may keep a CPA on retainer for this purpose. Just make sure somebody goes over them carefully to make sure you are not buying a pig in a poke. Then, ask for a short tutorial so that, next year, you can keep track of what your HOA is spending and if they are spending it appropriately.
Your mortgage bank will insist that their closing attorney inspect the Master and Unit Deeds and probably issue a Title Insurance policy. This attorney (remember he is the bank's attorney, not yours) will also make sure there are no outstanding condo fees for the unit (unpaid fees can trigger 'super liens' in some states) and that there is adequate insurance on the complex. You will have to provide proof of insurance from your insurance agent on the interior of your unit. Don't forget to also insure your personal property because this will not be covered by unit owner's insurance.
If you are in the market for a condo, don't let the foregoing overwhelm you. Like most aspects of real estate, the professionals know what to do. You just have to give them a little shove, and then make sure they do it.
There is one more precaution you should take to protect your condominium investment. The minute you are handed the keys, ask when the next HOA meeting will be held. Attend it and every subsequent meeting you can. If possible, volunteer to work with the HOA or run for election to the board. You are a new member of a tiny democracy, and just like the larger democracy in which we all live, if you don't vote you don't get to complain.
Read Part One - Buying A Condo Is Not Like Buying A House