When it comes to buying real estate, condominiums are interesting alternatives to single-family homes. Whether for first time buyers or seasoned investors, condominiums have some inherent advantages but also pitfalls that can snare the unaware. In fact, they say there are two main reasons people buy condominiums: Because they're cheap, and/or new. While those may be significant factors in many buyers' decision making, there are pros and cons to condo ownership.
Of course, when you purchase a single-family house you get the land underneath, not just the space between the walls, but SFR’s tend to appreciate better and their values stay more stable. They also afford more privacy from neighbors and pride of ownership as you can improve them at will. But condos afford a low-maintenance lifestyle and amenities that are hard to match in a house.
Therefore, if you are considering purchasing a condominium, understanding the unique traits of condos can make all the difference between the dream home and the nightmare purchase.
1. The value paradox.
In many hot real estate markets, condominiums sometimes appreciate precipitously in value, especially when they are brand new. But research shows that condo values also drop much more quickly that single family homes when the market declines and even in normalized markets.
2. Hidden restrictions and ratios.
There are a few key condo ownership statistics to follow before you buy and even during your tenure as owner. Why? Banks and lenders considered condominiums somewhat of a different animal than single-family houses, duplexes, halfplexes, and even townhouses. They understand there is much more risk involved with lending mortgages against condos, so they buffer their risk by looking at a few key factors. If these ratios don’t measure out, then the bank will not issue a mortgage. For instance, most banks have an owner/investor ratio they consider. If too many units in your condo complex are owned by investors and rented out (compared to owner occupied units,) then they see this as a signal of value volatility, therefore might not lend against the property for a new buyer or a refinance. To combat this, condo associations often restrict the number of units that are allowed as rentals, or even dictate a no-rental policy.
The same is true with delinquencies. It’s hard to get a mortgage for a unit in a complex where too high a percentage of owners aren’t paying their association dues. Fannie Mae, Freddie Mac and the Federal Housing Administration, which buy or insure most mortgages, do not approve condos with delinquency rates higher than 15 percent. Complexes with a significant number of foreclosures, short sales, or delinquent property taxes may also raise red flags in the lending process.
These are big problem if potential buyers have difficulty getting loans. Even if the sales price is deemed fair and the condo appraises, the owner oc./rental ratio may negate the deal. And no buyers = no closed sales = a possible severe decline in values.
3. Supply and demand.
The balanced scales of supply and demand can be tipped very quickly (and not in your favor) if a developer comes in and breaks ground on another condo complex in your area. All of a sudden, your complex will be “cold product,” dropping your values. Also, there are far more condos in one concentrated area than single family homes, so there’s little to differentiate you other than lowering your price when it comes time to sell.
4. Location and neighborhood.
Words of wisdom to live by are that “The neighborhood makes the condo and not the other way around.” The most beautiful condo development in a marginal area can mean they are overpriced and still inconvenient, as tenants need to drive far to enjoy their surroundings. Of course, if they are developing restaurants, nice parks, and shopping areas around your condo, it could be a wise time to get in.
5. Developer reputation.
The great thing about condominiums is that you know who the builder is so it’s easy to look at their track record. Do a little research into other condominium projects they’ve developed and how they’ve done and over time, with resale, design, maintenance, and the strength of the ever-important condo association. Are they brand new to the development game or not based in the area? You will also know how much of their sales model is based on hype and promotion versus building quality projects with long-term value and a solid reputation in mind.
Stay tuned for part 2 of this blog next week, when we outline condo associations and fees, special assessments, and other things to consider when buying a condominium.