6 Things To Research Before You Buy A Condominium

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Condominium ownership is a great choice if you’re not one who likes to spend a lot of time on yard work and home maintenance.  Depending on the amenities available, you can have everything from on-site security and concierge services to a swimming pool and health club.  While there are many great benefits to condos, be careful of the potential pitfalls.  Having sold many Buckhead condos, and served on a condo board myself, I’ve thought of 6 important things to research:

 

  1. Are an appropriate amount of the dues going to a capital reserve account.
    Many buyers are too focused on condo dues without enough due diligence and understanding how the dues are budgeted.  There are condo boards that take advantage of these buyers and play a condo dues shell game.  Some boards keep their dues artificially low by not saving any money for future capital projects and repairs.  They purposely ignore future roof replacements, paint jobs and parking lot resurfacing.  In the future they assess for all capital expenses.  It won’t do you any good to have low monthly dues while constantly getting hit with unplanned assessments.

    I believe this is extremely irresponsible and unethical, but many boards have rationalized this improper behavior into sound financial planning. You should request the current financials during your due diligence period; or before you even make the offer. With the financials, you’ll be able to see if the condo board has adequately planned for future projects.

     

  2. Is there a rental cap.
    This can be important for two seemingly contradictory reasons, due to the fact you might want to rent your own unit or be assured there won’t be too many renters in the complex  Usually the association will have a rental cap; probably somewhere around 10%.  The percentage is primarily to ensure other units don’t have difficulty in obtaining financing.

    If a certain percentage of condos are rentals, new purchasers will be unable to get conforming loans at the complex. Usually, when a borrower is trying to get financing, the condo association has to fill out a form called a “condo questionnaire”. Some of the questions can include, “what percentage of the units are rentals” or “does one owner own more than 10% of the units in the complex.” I’m sure, in the current real estate marketplace, the lenders are even more strict about the cap.

    The real estate slowdown, and the disproportionate drop in condo values, has caused a lot of bitterness and rethinking of the rental caps. For various reasons, a lot of owners have to leave their units, but are unable to sell due to owing much more than the condo is worth. Unless you can write a check to make up the difference, an owner pay mortgage payments, dues and taxes on an empty unit or face foreclosure. In order to “wait the market out,” an owner would probably need rental income to pay the mortgage.  It’s a difficult choice for the condominium boards: increased rentals, which could decrease property values and impair future mortgages, or more foreclosures, which will definitely decrease property values.

     

  3. What’s been happening for the last year.
    Condo associations are supposed to keep minutes from their board meetings. During your due diligence period, you should ask for copies of the last 12 months of minutes. If the association is objectively recording the meetings, the copies should help you smoke-out concerns, issues, problems and litigation.

     

  4. What is the age of the building.
    While your own unit might look “brand spankin” new, in an old building, there is a good chance it’s all superficial, with the pipes, electrical and infrastructure all in need of a huge upgrade.  These are the major costs. For instance, if the plumbing is made out of galvanized steel (a common problem in older buildings), the pipes are probably starting to dissenegrate and they will need to be completely replaced. Ripping the building’s walls out to replace plumbing will be very expensive.  If the association has been irresponsible with its capital reserve account, then you’ll be required to write a large assessment check. (see point #1)

     

  5. Is there enough parking for residents and guests.
    Condominium developers don’t always place a big priority on parking. Find out if there are assigned parking spaces and how much is allocated for guest parking. If there are only a few, unassigned spaces, you’ll have parking problems, especially on the weekends. It can be little like finding a parking spot at Lenox Mall the week before Christmas.

     

  6. What percentage of owners are behind on their dues.
    In a normal market this is rarely a concern, but during this downturn, accounts receivable should be investigated. When you request financial statements (see point #1), you’ll see how much is in accounts receivable. The following scenario is fairly common in Atlanta:

    An owner is way behind on his mortgage, which means he’s probably further behind on his dues, since you’ll pay the before the condo association fees. The association can’t really do much to collect, other than to place a lien on the unit.  When the unit is sold, then the association is paid at closing, but if it’s a foreclosure, which is common in this market, all the liens are wiped clean and the association is left with without payment.  So, the rest of the owners in the complex will have to pay extra for these uncollected, past-due receivables.  You can see how this could have a snowball effect.

I also work with premium Buckhead homes.

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