Hot topics include soundproofing, monthly fees, rentals
By Robert J. Bruss | May 18, 2006
Finally, we get to the all-important 10 key questions smart condo buyers should ask (but condo sellers hope their buyers don't ask):
1 ? WHAT IS THE FINANCIAL CONDITION OF THE HOMEOWNER'S ASSOCIATION (HOA)? If you are a buyer seriously considering purchasing a specific condo unit, it's time to ask for and read copies of the latest HOA financial reports, minutes of the HOA meetings for the last six months, and a copy of the CC&Rs, by-laws and rules.
Don't hesitate to ask lots of questions about this information, such as, "Are any monthly association fee increases planned or under discussion? "How many special assessments were levied against the condo owners in the last five years?" "Are any owners delinquent in their monthly fee payments?" and "Is the HOA involved in any lawsuits?"
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When you receive the latest HOA financial statement, be sure to look especially close at the replacement reserves? There is no minimum reserve guideline, but two standards are (a) at least $2,000 to $3,000 per unit, and/or (b) 25 percent of the HOA annual gross revenue should be the balance of the replacement reserve account. Ask if there are any major replacements anticipated for the next 12 months, such as a new roof or other major repairs.
2 ? WHAT IS THE PERCENTAGE OF RENTERS IN THE COMPLEX? If there is more than 20 percent renters, that is a very bad sign and it's best not to buy there. The key reason is when the percentage rises higher, mortgage lenders either refuse to make new loans there, thus hurting resales and market-value appreciation, or they will charge borrowers higher-than-normal interest rates.
Equally important, if you are buying for owner-occupancy, you don't want to be surrounded by renters who often don't have the same pride of ownership that owner-occupants usually do. If you learn the condo complex has less than 10 percent renters, that's a very good sign. Be sure to ask about HOA rental restrictions and inquire if renters are discouraged.
Of course, in resort areas the condo might have been designed for rentals when the owners are not "in residence," rather than primarily for owner-occupancy, especially if a management company handles a "rental pool." But don't overlook this very important topic of condo rentals.
3 ? IS THE CONDO COMPLEX PROFESSIONALLY MANAGED? If not, why not? All but the very smallest condo buildings need outside professional management. Hiring an independent professional condominium management company usually pays for itself.
EXAMPLE: The condo management company which for over 25 years has managed the 63-unit condo complex where I own my second home often saves us "big money" by handling the 1,001 management details such as obtaining annual bids for lawn care, elevator maintenance, and pest control. A few years ago, they saved us more than their annual fee by obtaining new carpeting far below our budget cost. Just last month, the professional manager alerted the HOA board of directors that our elderly resident caretaker had recently made some potentially costly and dangerous mistakes. Although the caretaker is extremely well liked, the HOA board voted to terminate his employment before a costly accident occurs. Without that outside management advice, our HOA board might not have known about the caretaker's forgetfulness, which was becoming a serious problem.
Because the condo management company always sends its representative to our monthly HOA director's meetings, he acts like an expert consultant since he also manages other similar nearby condo complexes. Our professional condo manager also prepares the annual budget, including planned capital improvements. As a result of the manager knowing where to find reliable suppliers, bids often come in below estimated costs. Also, he handles personnel matters, such as making sure the new caretaker is qualified, experienced, and trustworthy.
4 ? HOW DO THE MONTHLY FEES COMPARE WITH SIMILAR NEARBY CONDO COMPLEXES AND WHAT SERVICES ARE INCLUDED? Before making a purchase offer, be sure to compare the current monthly condo fees and get a written list of included services. To illustrate, some condo complexes include central heat and/or air conditioning whereas others don't because each unit has their own heat and air conditioning.
Be sure to inquire if any increase in the monthly assessment fee is planned, or if any special assessment for a major expenditure is expected. At the condo complex where I own my unit, the HOA board voted several years ago to annually increase our monthly fees by 5 percent to pay for rising expenses and increased replacement reserves. A few years ago, we had a $2,000 per unit special assessment to replace the old leaky windows. After all the complaints about that special assessment, the HOA board decided it would be better in the future to gradually increase the monthly fees to avoid special assessments (except for a serious unexpected emergency, of course).
5 ? HAS YOUR CONDO SELLER PREPARED A DEFECT DISCLOSURE REPORT? Depending on state law where the condo is located, the condo seller may be required to prepare a state-mandated defect disclosure form. Even in states without such a disclosure statute, smart condo sellers and their listing realty agents voluntarily prepare a disclosure report. The result is to prevent surprises and avoid after-sale lawsuits for non-disclosed defects of which the seller is aware.
6 ? HAS THE CONDO UNIT BEEN PROFESSIONALLY INSPECTED? Whether you are buying a new or resale condo, it pays to include a contingency clause in your purchase offer for a professional inspection. If the condo seller already had a recent professional inspection report from a reputable inspector, you might consider accepting it to save the inspection fee of about $350.
I recommend hiring a member of the American Society of Home Inspectors (ASHI) because of their tough membership and experience requirements. Local ASHI members can be located at www.ashi.com or 1-800-743-2744. Be sure to accompany your professional inspector to discuss any defects discovered which were not previously disclosed to you.
Most sellers of resale condos won't object to a buyer's contingency clause in the purchase contract for a professional inspection. However, some builders of new condos will resent a buyer hiring their own inspector. They usually say, "This complex was fully inspected and approved by the city building inspector who provided our permit of occupancy." While helpful, government inspections carry no liability for defective or incomplete inspections.
7 ? HOW GOOD IS THE SOUNDPROOFING? As explained earlier, poor soundproofing is the number one complaint of condominium owners. Before making a purchase offer, smart buyers ask their prospective neighbors to turn on their TV or stereo at normal levels to check for sound penetration. When possible, to minimize sound transmission between condo units buy an "end unit" (with a neighbor on only one side) and a first floor or top floor unit. If you are buying a condo with an upstairs condo, be sure to ask the upstairs neighbor to walk on the floors to see if there is sound transmission; wood floors can be especially noisy.
8 ? HAS THE SELLER COMPLIED WITH APPLICABLE STATUTES? In addition to the residential transfer disclosure statements which many states now require, the federal government requires every house and condo buyer be given a written lead-based paint disclosure for residences built before 1978, plus a federal booklet about lead-based paint dangers. Buyers then have 10 days to have the property professionally inspected for lead-based paint, if they wish, at the buyer's expense. But home sellers are not required to remove lead-based paint.
There may be additional local or state disclosures required, such as for energy efficiency, building-code compliance, radon, and well-water quality. The listing realty agent should know which disclosures are required locally.
9 ? ARE THERE ANY SPECIAL CONTRACTS OR LONG-TERM LEASES AFFECTING THE CONDO COMPLEX? Before making a condo purchase offer, be sure to ask if there are any special contracts or long-term leases made with the developer. Especially in Florida, some condo developers retained title or control of the recreation complex and/or parking area, signing long-term unfavorable leases with the condo homeowner association. Some sweetheart contracts even require the HOA to hire the developer as the professional property manager.
If the condo complex is brand new, be sure to inquire how many units have been sold and how many, if any, are still owned by the developer. If the developer holds title to many units, or plans to keep title to a significant number of units, this is not a good sign because he/she then can control decisions made by the HOA. Fortunately, most condo mortgage lenders require at least 50 percent to 75 percent of the new units be sold before they will fund mortgages on the condos sold to individual buyers.
10 ? ARE THERE ANY NEGATIVE INFLUENCES TO CONSIDER? Condo buyers, especially those who are not familiar with the location, should ask about and observe any negative influences. Examples include a poor floor plan, inferior construction quality and workmanship, inadequate parking (the best condo complexes have two assigned indoor or covered parking spaces per unit, plus adequate visitor parking), density and landscaping (many condo units are beautiful inside but are jammed so close together there is little open space), public school quality (even if you don't have school age children, school quality affects potential market value appreciation), property taxes (often reassessed shortly after purchase), recreational and meeting facilities (if you want a pool, tennis, golf, physical fitness center, etc., the condo price will usually reflect these amenities), and outside influences such as a nearby noisy freeway, airport flight patterns (especially early mornings and nights), smelly sewer works or factories, nearby noisy railroad, adjacent high voltage power lines, noisy street traffic, poor location, lack of public transportation and/or nearby shopping, high crime rate, moisture and mold in the building, formaldehyde, and other adverse influences.
GET ALL SELLER PROMISES AND REPRESENTATIONS IN WRITING. As with any real estate transaction, get all seller or sales agent promises and representations in writing. To illustrate, if the developer's sales agent promises the adjoining open space will remain that way, or it will be professionally landscaped, get that representation in writing as part of the sales contract, signed by the developer. Or, if the seller promises a decorating or upgrade credit, get that in writing too.
Before the buyer takes title, the buyer is king! After the buyer takes title, the buyer loses leverage control over the seller.
SUMMARY: Purchasing a condominium is more complicated than buying a single-family detached house. Greater buyer "due diligence" is required before purchase to avoid buying a "bad condo."
Be sure to ask lots of questions, especially the 10 key questions, but bear in mind that no condominium (or house) is perfect. A good book to read for further information is "Make Money with Condominium and Townhouses" by Gary W. Eldred (John Wiley and Sons, New York), 2003, $19.95, 283 pages, available in stock or by special order at local bookstores, public libraries, and www.amazon.com.