4 Things to Consider When Buying a Condominium
By Scott Morris
It’s often said that there are three things that matter when it comes to real estate: location, location, location. While it is important to consider the community when shopping for a condominium, there are a number of other important considerations you should weigh when deciding which condo is the right purchase for you.
Condos are a great option for many home buyers. They can offer many amenities, lower maintenance, and are a more affordable way to enter the housing market to start building wealth that can fuel a future move. Shopping for a condo requires an additional layer of due diligence. Here are 4 things to keep in mind that will help you navigate the condo-buying experience with confidence.
Is There a Homeowners Association?
One of the most important questions to consider when purchasing a condo is whether or not there is a homeowners association. A homeowners association (HOA) is an organization that creates and enforces rules for the residents of a particular community, subdivision, or condominium, and most modern condos will be subject to an HOA’s oversight.
Confirming if your condo has an HOA is only one piece of the puzzle, though. You will also need to inquire about the following items to ensure you’ve done your proper due diligence before purchasing the property:
Is there an HOA application required before you can move in? If you plan to finance your purchase through a mortgage, the HOA application process can cause delays in closing.
How much are the monthly or annual HOA membership dues, and what do they cover? Excessive HOA fees can make or break a budget, but they will commonly cover many amenities like basic cable, pool access, and a community gym.
Assess the CC&Rs
The specific rules of the HOA are outlined in the Declaration of Covenants, Conditions, and Restrictions (CC&Rs). This is a very important document to review prior to purchasing a property in an HOA community as it effectively tells you what you can and can’t do with your condo. The purpose is to protect the property values in the community, but there is a reason why many people complain about their HOA. You may be restricted when it comes to everyday activities and items like:
Painting or adding embellishments to the exterior of your property
Holiday decorations
Noise level and number of home occupants
Maintenance standards
Parking rules
Restrictions around what items can be stored on your terrace or balcony
Whatever the case may be, knowing the HOA’s rules beforehand can save you a lot of frustration down the line.
Is the HOA Financially Sound?
HOAs have two primary accounts: the operating fund and the reserve fund. The operating fund is used for keeping up with day-to-day expenses and maintenance. The reserve fund is essentially a savings account for costly emergency repairs and future upgrades and improvements. For example, if a building suddenly needs to repair a roof or anticipates needing to do so in the future, does the HOA have adequate reserves to fund this expense?
What happens when the HOAs reserve funds are insufficient to meet an expense? The HOA may be forced to do one or some combination of the following, which ultimately become the financial responsibility of the owners:
increase HOA dues
collect a Special Assessment
seek external financing
What should prospective condominium purchasers do? As part of your due diligence, ask to review the HOAs latest reserve study. A reserve study evaluates the condition of major assets and amenities, estimates when they will need to be repaired or replaced, and how much that will cost. With this information you can review the HOAs reserve account to determine if they are adequately prepared to meet these future expenses. While there is not a set formula for an adequately funded reserve account conventional best practices recommend 10% of the HOAs annual operating budget.
Talk to Your Lender
If you plan on obtaining a mortgage to purchase a condominium, it is important to speak with your lender to understand their criteria for loans secured by condominiums. Lending requirements will vary from lender to lender and be driven by occupancy status (primary residence, second home or investment property) and loan-to-value among other things. Lenders may require completion of an HOA Certification Form to gather important information such as: pending litigation, percentage of owner-occupied versus non owner-occupied units, percentage of units owned by a single entity, etc. Additionally, lenders may request HOA budgets, financials, HOA board meeting minutes, and evidence of adequate insurance. All of these can combine to determine the interest rate a lender will offer or whether they will make a loan at all.
Are You Ready to Buy a Condo?
If the tips above sound overwhelming, don’t worry! You’re not alone. At SRM Real Estate Group, we provide expert guidance to our clients as they navigate the home-buying process. We can walk you through each step to ensure you feel confident and comfortable in your decision to buy a condo.
We also provide in-house mortgage financing so you can find exactly what you need all under one roof! To learn more about how we can help, reach out to us at 818-262-3695 or connect@srmrealestategroup.com or you can schedule a no-obligation introductory call online. We can’t wait to connect with you!
About Scott
After his son’s Type 1 diabetes diagnosis, Scott’s life took on a new meaning. He created a purpose-driven business model to put people before profits. With each successful closing, he donates a portion of his earnings to his client’s preferred charity and to the Juvenile Diabetes Research Foundation. Scott’s passion and innovative approach to real estate is found in the promise he makes to every client: when you partner with the SRM team, you’ll save money, time, and together we’ll change lives.
Scott Morris is the Founder and CEO of SRM Real Estate Group, a Los Angeles real estate and mortgage company that does things differently. To learn more about Scott, connect with him on LinkedIn. You can also watch his latest webinar to find out how to be the smartest seller on your block.