On July 27th we launched a 12 week campaign consisting of some of the most important, and often times unanswered, questions condo buyers should have answers to before making a commitment. Questions sellers should also be prepared to answer with the help of their broker.
Below are the questions and their answers.
Is the building professionally managed or owner managed?
Talk to the residents about management and the processes used to manage the building, also interview the actual manager if possible. Poor management can make the experience extremely challenging. A self-managed building can be less expensive when it comes to HOA fees, but be cautious in your consideration, do you want to live next door to your new business partner, the person who is co-managing your home with you?
What are the monthly HOA fees and what do they cover?
HOA fees are based on the cost to maintain and manage the property, with an additional amount that is held back for potential litigation and major repairs. Make sure you review these fees, understand exactly what is included, and talk to your banker or financial planner to ensure you can afford the additional payment each month when considered with your mortgage payment. This fee is not tax deductible like the interest on your mortgage might be.
As mentioned, a portion of the HOA fee is put aside for major repairs. The amount of the fund is usually based on the age of the condo development. Review this fund carefully. If the development isn’t setting aside the appropriate amount, and a large repair is needed, the residents could be responsible for that bill and faced with special assessments.
Understanding the HOA balance sheet. Is it healthy?
Ask for a record of monthly payments received from existing homeowners. The association usually won’t give a buyer a copy of the budget, but the seller can request it and provide it to the buyer. You will want to ensure the delinquency rate is 15% or less, or you and your neighbors will end up having to cover the shortage to pay the expenses. Buyers have little chances of getting financing in a building with a high percentage of owners who are delinquent on dues. Fannie Mae, Freddie Mac and the Federal Housing Administration, which buy or insure most mortgages, do not approve condos with delinquency rates above 15 percent.
This delinquency rate may not seem like a big deal if you are paying cash, but remember, when an association is short on cash, it has to make cutbacks. Those cutbacks could be to upkeep of the grounds, security, fitness room…
Some associations also may charge unit owners special assessment fees to make up for a budget shortfall that results when dues aren’t paid.
The most important parts of that budget include the total amount of outstanding debt owed to the association and the percentage of owners who are not paying their dues.
What are the HOA rules?
Every condo development is different. Some allow AirBNB rentals but most don’t or if they do, they require a minimum 30 day rental. Many allow pets, but only a certain type and size. Some only allow patio furniture of a certain type and for certain hours of the day, with no bikes or flowers on that balcony. Review these rules in detail to make sure they fit your lifestyle.
What does the HOA master policy insurance cover?
Your lender will ask for a copy of the associations master insurance policy. It is not their responsibility to advise you on what is covered and not, but they will let you know if coverage isn’t sufficient enough for their loan and it could affect your opportunity to borrow. If you are not using a lender, please make sure you still obtain a copy for yourself. You will want to make sure the estimates stated to rebuild are not outdated and are accurate. It might be a good idea to ask your personal insurance agent to review with you. Your agent will help you obtain your personal policy based on what is and isn’t covered in the master policy, since the master policy usually only covers the structure of the building and usually nothing within your walls. Another expense to consider.
Are there outstanding or past lawsuits?
Understanding the history and current status of any lawsuits the community has been involved in is important. Colorado’s construction defect laws have shifted somewhat, but it’s important to understand to what extent and how it can potentially affect your condo living experience. If there is a current lawsuit or potential for one, it could prevent an owner from selling or a buyer from purchasing.
Are there storage units available?
Some developments offer storage with your purchase. Most charge extra for this additional space. Make sure you confirm storage is available and where it is located and what rules apply.
Who owns the balconies?
Many condos offer residents balconies with their units. Make sure you review your specific deed, and the Master Deed, very closely. The balcony may be attached to your unit, but do you truly own it, meaning is it your responsibility to repair it as it ages or breaks? Or, do you own it in the sense that it’s yours, but the community actually maintains it?
How many units are owned by investors and why do I care?
The percentage of investors who own units in a project may also impact a buyer’s ability to obtain a mortgage or sell the unit. If a condo project has more than 49% of its units owned by investors, FHA will not approve that project so conventional loans will not be available.
What type of loan can I get?
If the building is non-warrantable (as in the example above, and for other reasons FHA may decide) you will have to find a bank that will portfolio, or “hold,” your loan. That means you will need 20-30% down payment usually.
Lenders actually view the condo development itself as collateral and will need to underwrite the entire project and obtain approval from their corporate office to lend in that building. If the bank’s corporate office approves, they will usually put a limit on how many loans/units they will allow within that one project, to avoid overconcentration of risk within one project.
Many lenders don’t realize their bank won’t approve the deal because they may not understand the process their corporate office requires. Even the best of clients can’t be approved if the development itself is not approved.
What is the building made of? Steel/Concrete or Wood frame?
This matters! Many apartment buildings are built with a wood frame and meet the minimum standards for sound. Think how often you can hear your neighbors in an apartment. Buildings built with steel and concrete provide a much more quiet living experience, generally. The quality and lifespan of the building are better as well, which means your potential repairs should be delayed longer than your traditional wood framed building which matters when you consider the overall HOA budget and potential for special assessments.
What type of parking and transportation options are available?
Things to consider:
- Parking. Do you get a space with your condo? How much does the space cost? Is it leased or deeded? Is it reserved or general parking?
- Is there a valet?
- Where will my guests park?
- Does the building offer “house car” transportation?
- Is the building set up to host power for electric cars?
- Are there any partnerships with local car share or bike share programs?
- Distance from public transportation and type of transportation
- Is there special space for scooters and bikes? If so, what is the fee, if any?
How many units in the building and how many elevators in each building?
For some people this is a big deal. Example; take into consideration a building that has 400 units. If it only has 4 elevators, it could take quite a while for an empty elevator to reach the 30th floor. Are you coming and going during peak times of the day? If not, then it may not matter.
Are there on-site security guards, a front desk concierge or manager, can anyone access my floor from stairs and elevators or do we each have a special fob that only allows access to our floors? Is the parking garage secure? Are there security guards in the garage and if so, what hours?
What do the residents say?
Talk to current owners and obtain copies of the minutes from at least the last 6 months of condo board and Homeowner’s Association meetings. What are the discussions and the methods and timing of resolutions.
What’s the developer’s track record?
Before you make a deal, find out as much as you can about the developer. Are they involved in any lawsuits? What other buildings have they completed? Have buyers generally been happy. Be sure to look up the managing entity—which is the legal entity building the condo, often affiliated with a development firm—as well as the principals of the firm, who will be listed in the plan, and their past projects.
What building extras am I willing to pay for?
In an effort to lure buyers, some developers have packed their projects with over-the-top amenities. If your heart is set on that doggie swimming pool, go for it —but you’ll be paying for it in the form of monthly common charges, so be sure it’s worth it. Be thoughtful of the services offered versus the services you will truly use. If you won’t use the swimming pool, just be aware you are paying for it, but also be aware that there are plenty of developments without that pool. Maybe a wine cellar is a better perk for you! Something like this doesn’t cost as much since there is little maintenance required and the developer may just be using that space wisely.
Does the design fit my lifestyle?
If you rarely cook, a small kitchen with limited cupboards may be just the kind of sleek, space-saving layout you’re after. But for the gourmet family of five, “you may want to make sure you have small conveniences like a place to put a pull-out trash can or enough drawers.
Also, pay particular attention to light. A lot of buyers are not sensitive enough, they just want to know that when you turn them on, they work. But you should also be judging whether there is the right amount of light, that there are lights in the bathroom, or under the counter if that’s what you want. With concrete slabs up above, lighting isn’t going to move, so you need to be okay with what you have. You may also want to visit the condo at different times of the day to track the amount and location of natural light available to you. Being one unit in a building with many other units can limit your access to natural light, unlike a single family home where the light can enter the home from all angles throughout the day.
When can I move in?
In a new development, it could be 18 to 24 months before the building is ready to close and you can move in. While the sponsor “can give you a target date, even the most experienced developer who runs on schedule can run into delays which are out of their control.”
Don’t expect to close on the target closing date so you don’t find yourself moving out of your old place before the new place is done. If the building has 100, 200 or 300 units, the process of closing all new buyers will take anywhere from 2-5 months. That means you could possibly not be able to close on your unit until 4 months after the building is complete. The developer will work with you on getting the best date scheduled for you and for them. They will also need to work with you on specific dates and times you can use the freight elevators to actually move in or have furniture delivered.
What kind of retail does or will the building have?
Mixed-use buildings, which combine residential apartments with offices, hotels, stores or restaurants, are becoming common. It’s worthwhile to ask what your developer, HOA or owners of the commercial space have planned for any space in the building set aside for commercial use so you don’t get stuck with something noisy, stinky, or otherwise unpleasant. This should be the case even if your building is not a new build. Make sure you understand the commercial occupant’s leases and their timeframes and what the building could potentially allow in those spaces if the current businesses were to leave. In some cases, a building will prohibit less desirable establishments from opening up. In other cases, the developer could use the space for a high-end gym or grocery store, which may feel like another amenity. But it’s possible you’d get stuck with a fast food restaurant or loud nightclub. Also, keep in mind, the right businesses can possibly increase your value.
Who are the neighbors? What’s the noise going to be like?
Take a look around the building. Are there empty lots? If there are, there’s a high chance you might experience construction during your time there. Be thoughtful about how that will affect your quality of life as well as your resale value. It could ultimately benefit your resale value. In neighborhoods that are gentrifying, this may be even more of an issue. Do your homework and walk around the project at different times to get a feel for the area, what’s happening, who’s there, and what businesses might be moving in. You and your realtor should ask as many questions as possible about the neighbors…who lives next door? Is it the owner or a renter? What about things like dry cleaners and supermarkets, are they close by?
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