Buying your first property can be a financial challenge, so it’s important to consider all your options. A condominium can be a perfect entry point into property ownership before moving onto a single-family home. It’s often more affordable to pay a monthly mortgage payment than expensive rent for an apartment while trying to save for a house.
Condos tend to be smaller and less expensive than single-family homes, plus the maintenance is typically handled by the community association that manages the property. They’re also usually well-located in urban areas.
Buying a condo can be a good way to start building equity in a property, helping you reach long-term goals faster than simply saving money for a larger property and continuing to rent. Before buying a condo, you must understand the differences in the purchasing process and some of the risks involved with condos.
Homebuyer Tip: Your Exclusive Buyer’s Agent can answer additional questions and help you find the best homes or condos in your area.
What Is a Condominium?
A condominium is a single, privately owned unit within a building or community of units. Condo owners own what is inside the walls of their condo and share the maintenance of common elements like hallways, foyers and staircases, roofs, and rooftop decks.
Unique from townhouses or single-family homes, condominiums often have shared walls and amenities and are smaller in square footage, although sometimes walls are not shared. They’re a smart investment for someone who wants to worry less about maintenance and more about building equity in their first property.
Is a Condo a Good Investment?
As mentioned above, condominiums are an easier way to build equity in a property because they have lower maintenance to be responsible for and are usually located in popular areas.
The market conditions and health of the condo building will determine if a condo is a good investment for you. When selling a condo in a good area and in good condition, its value will likely increase over the duration of ownership. However, data shows that they appreciate at a slower rate than single-family homes.
Large families may want to consider a single-family home because of space, as condos tend to be on the smaller side regarding square footage. They also may not be suitable for families with children because they’re not always located near the best school districts due to their popularity with single people and couples.
Depending on the association’s bylaws, condos can also be used as vacation homes or rental units should you decide to move and keep the property. This is appealing because it allows more flexibility in your move. You may have enough money saved to buy a single-family home but want to keep the condo as a backup plan or option for earning extra income. Work relocation could also have you moving in a hurry, not allowing a good timeline for selling your condo.
One of the biggest risks of investing in a condo is their current popularity with builders. If a new condominium development is competing with you when it comes time for you to sell, you may have difficulty even breaking even. There is generally much less competition from builders on modestly priced detached homes.
In addition, one reason why condos historically haven’t appreciated as much as single family homes is that there are fewer ways for homeowners to improve their condos. An owner of a detached home can improve their home with a new deck, special landscaping, or even an addition, but those aren’t really options with a condo.
Who Is Responsible for Condo Maintenance?
When you purchase a condominium, you become a member of what is called a condominium association or COA. Every condo or unit owner is a member of this condo association. There are typically monthly dues to help finance the maintenance of the building, surrounding grounds, amenities (like pools, dog parks, etc.), and other repairs that may need to be made.
The association elects a board that is responsible for maintaining the financial and governing health of the condo association. They are the core people responsible for assisting current owners, processing resale documents, welcoming new owners, and managing the overall maintenance that the association is responsible for. They’ll decide which private contractors to hire for snow removal, renovations, pool maintenance, and more.
Condo Association Dues or Fees: What Do Condo Fees Include?
Condominium Association fees, sometimes called Homeowners Association dues, are a standard part of owning a condo within a larger building. They support the maintenance and management of the building and surrounding shared areas.
Most condos will require a monthly fee, although this varies depending on the association’s bylaws. It’s important to consider multiple condo associations when shopping around because some bylaws are fairer than others. Snow removal costs could be significantly higher in one condo association vs. another.
It is common for first time homebuyers to shy away from wanting to pay the association fees after paying apartment rent for years. They feel like they made their landlord a lot of money while they were renting and want to avoid that expense when they buy their first home. However, the better way to look at those association fees is to realize the association is not making any profit on those fees. They pay direct costs of the association. Nobody is getting rich from those fees.
Be cautious when buying a condo because it can be managed by more than one association, depending on the property’s location. It’s not uncommon for a greater association that includes multiple types of properties (condos, single-family homes, townhouses) to charge separate fees apart from the core building association that governs your condo specifically.
The association fees are also added to the monthly mortgage payment for lender qualification, so don’t forget those association fees when you are budgeting and talking to lenders.
Occasionally, you will encounter what is called a special assessment. This additional fee is used to cover the cost of a larger project for the building. For example, an association may vote to add a new amenity or cover the cost of a large maintenance project that goes outside the scope of the reserves held by the association.
They will take the project’s entire cost and then divide it by the number of units using calculations related to square footage, number of bedrooms, etc. It depends on the way that the association chooses to manage this project. If there is already a special assessment planned for a future project, it will be included in the resale documents that you receive. It’s important for the COA to disclose this information.
Examine the Condominium Resale Package/Documents
When purchasing a condominium, you are provided with a condo resale package for review. These documents go by various names, depending on the state where you purchased the condo. Some other common titles for these documents are condominium resale documents, estoppel, estoppel letter, COA resale certificate, a master deed, and all the by-laws.
It is very important to review these documents to ensure the condo association is governed properly, has cash reserves, and has good communication with all the building residents. In Washington D.C., for example, the condo document review period is three business days which means once the resale package has been delivered by the seller to the buyer, the next day is day one. Under the DC CONDOMINIUM ACT, every condo owner has CERTAIN RIGHTS AND RESPONSIBILITIES.
You’ll need to review many details in the COA resale documents, but a few details are most important when deciding if the condo is a good investment for you. Focus on the following three areas when examining the documents during your allotted review period:
1) The Financial Status of the COA
Review the financial status of the condo association, including the operating budget, reserve funds, and any legal actions against the association. The reserves are essentially a large sum of money used in the event of major repairs or unplanned costs. Also, review any special assessments. This could be a costly project to replace elevators or the roof. A special assessment may raise the monthly condo fee or be an additional monthly cost. And finally, the condo association should have a master insurance policy for the building.
2) The Bylaws or COA Rules
Review the bylaws or the rules of the condo association. Pay close attention to the rules since you must abide by them. Some condominium associations do not allow pets. Even if the association allows pets, most will have restrictions on the size and number. If you have a dog or cat, you won’t be able to agree to this rule and should not consider purchasing a condo in the building.
3) Meeting Minutes from COA Meetings
Review the meeting minutes which are taken at monthly condo meetings. The meeting minutes show the topics of concern and the communication between the board members. You’ll want to review these minutes to better understand any current problems or issues with the building and community as a whole.
What to Look For on a Condo Tour
When you are touring a condo building with your Exclusive Buyer’s Agent, pay close attention to the exterior of the buildings. Are the balconies in good condition? Do the roofs look updated? Are the grounds well kept and free from debris?
When you are inside the building, examine the common areas, like the lobby. Is the space clean and updated? Are all the elevators in working order? Are hallways well lit? Are all the machines in working order and updated if there is a common laundry area?
The collapse of the Surfside building in the state of Florida resulted from poor maintenance and management of the condo building itself over time. Its concrete and structure needed repair, and the association did not act quickly enough to correct the damage before its collapse in 2021.
This is just one example of what can go wrong when a COA doesn’t do its part. Make sure you’re reviewing the history of the building and its current condition when touring a condo and reviewing the resale documents.
Plan for the Future
When you own a condo you have a right to vote for members of the board of directors and your vote can impact how your future home is managed. You might even consider being active on the condominium board if you have ideas on improving the management of the association.
Remember, you are making an investment and one day may put your condo on the market for sale. Take time to review the condo documents and inspect the interior and exterior closely so you make an informed decision. How will future buyers view your investment?
Older buildings often have more associated risks, but they can also be located in better areas than newer ones. Work with your Exclusive Buyer’s Agent to review comps in the area and find the best option for your step towards property ownership.