Buying a condo in today’s real estate climate is a great way to own a spot of your own while still enjoying the perks of renting. Having someone else take care of the mundane tasks like mowing the lawn or getting the trash out can be well worth the small monthly condo fee you’ll pay. But wait, what’s this about fees? Why are there fees with condos? Are there other questions to ask when buying a condo that you should know?
Before purchasing a condo, be sure to look over the Homeowners Association’s rules, regulations, and financial history that will be maintaining your shared spaces. Ask questions about how they handle large expenses, when votes happen, and how you’ll be expected to act as a condo owner in their building.
So let’s talk more about what to look for in those docs because they hold the key to knowing how your new building is run. Plus I’ll talk a little more about what you should keep an eye out for that may affect your ability to use the condo as an investment property.
What is a Condo?
Condominiums, also known as “condos” (or sometimes “co-ops”) are homes that share a common space together. Single-family homes are usually standalone structures that have space between each neighbor. Condos, however, are usually joined in some way. Quite often, they’ll share walls or, at the very least, a roof.
Apartments that are owned instead of rented, townhouses, and row houses are also sometimes referred to as a condo.
Another thing which sets condos apart from single-family homes is that they will be part of a Homeowners Association and pay monthly dues into it.
What is a Homeowners Association?
Homeowners Associations, or HOAs, at their most basic level are a collective that all condo owners pay into on a regular basis. The HOA funds will go towards things like routine maintenance like paying for landscaping, trash removal, or in-house handymen (known as a “Super” or “Superintendent”).
In addition to the routine costs, the HOA will also take a portion of everyone’s fees and put it into a reserve that’s to be used for major repairs, like if the building needs a new roof. If there isn’t enough money in the reserve, the Association will do what’s called a “cash call.”
Cash calls happen when there isn’t enough to cover emergencies or extensive repairs. When this happens, all condo owners will need to put up extra money on top of their normal dues to cover the cost.
It sounds like a lot of hassle, doesn’t it? Why would someone want to pay monthly dues for a home they already own? It comes down to convenience and aesthetics. With a Homeowners Association, you don’t need to worry about mowing the lawn, painting the outside, or fixing things on your own. If you’re handy and like your home to be a little more unique, then an HOA probably isn’t for you. If, however, you’d prefer to just focus on living your best life and letting the details get taken care of by someone else, an HOA might be right up your alley.
Homeowners Associations will have a Board and a President who oversee how the HOA is run. These are elected positions, and if you’re a partial owner of the building, you’re eligible to run for office. Even if you’re not interested in the responsibility, you as a condo owner can still have a say in how things are run due to your voting power. Good HOAs will cast votes before making decisions on contractor bids, repairs, upgrades, and anything else that might affect the condition of the building.
You have probably heard horror stories about HOAs kicking people out of neighborhoods for the wrong color door or a mailbox that’s 6” too high. Thankfully, these nit-picky Associations aren’t the norm, which is why the outlandish ones always make the most noise. In truth, the majority of Associations run smoothly and leave their respective condo owners alone (as long as they’re acting within reason).
What Should I Know Before I Buy a Condo?
“Within reason” is an important thing that I want to make sure we cover, as the definition of “within reason” can make or break your ability to use your condo as an investment property.
Before closing on a condo, there are a few documents you should look at ahead of time. Be sure to get these before your due diligence deadlines so that you have plenty of time to ensure you have a good understanding of how your future HOA runs.
The first set of documents is the collection of HOA rules and regulations. These docs will lay out things like:
- how much your fees will be
- how your fees will be used
- what happens in case of a big problem (like needing a new roof)
- The way your HOA handles disputes or grievances
- The way elections are held
And so on.
The rules will also clarify how you, as a condo owner, will be expected to behave. Will you be able to park on the street? Some HOAs don’t allow street parking. Can you have a barbecue grill on your patio? What about renting the condo, will they let you do it?
It’s especially important that you get clarity regarding what you can and cannot do with your condo as a real estate investor. Some Associations outright ban renting of the condos, while others will cap the number of rentals to be 10% of the total homes. That 10% is usually a first-come, first-served basis, and that’s something that could put a big dent in your real estate portfolio.
Other Questions You Should Ask When Buying a Condo
Not only will you need to look at the HOA regulations, but you’ll also want to get the past two years of financial records from the HOA President. This financial history will help you understand how much money is held in reserve, whether the HOA is budgeting cash for repairs and upgrades, and an overall impression of how well the Association is run.
How Does Your HOA Cover Large Expenses?
If the money in reserve won’t cover significant expenses, the HOA may need to apply for a bond to cover these expenses. Bonds will happen if a cash call cannot cover the amount required or if some condo owners aren’t able to put the extra cash up quickly.
A bond issued will put a lien against the building until it’s paid off in full, plus interest. Condo owners will then see an increase in their monthly dues to cover the monthly principal + interest until the bond is paid off. As a potential homeowner, you need to know if your HOA is diligent enough to handle large expenses or if you’re going to be hit with an unexpected four-digit bill every so often because of their poor budgeting.
Talk to the HOA President (and Board) Before Buying a Condo
In most cases, you’ll be required to go in front of the Homeowners Association Board for an interview before you can buy a condo in their building. While it may be intimidating or feel a little demeaning, this is also your opportunity to interview them. Make sure to ask about things that affect you as a homeowner. Even if you’re planning to live in the condo yourself, you might want to rent it out later down the line, so be sure that you know how that might play out.
Also, be sure to find out when HOA meetings are held so that you’ll know when you can vote for budgetary or regulation items. Be sure to attend those as much as you can, especially if you plan to run for a seat on the Board.
Final Thoughts
Condos can be great homes and investments for those looking for a spot to call their own, minus the tedious maintenance tasks. But before you close on your new property, take some time to read over the fine print and ask questions about the points above. That way, you’ll know whether this building is the right place for you and your real estate portfolio.
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