Wednesday, November 12, 2014

10 Important things to consider before you purchase a condominium. (Part 2, 6-10)

Across the United States, the emerging trend is people who choose to live in urban centers for the lifestyle it offers; arts and culture, shorter commute times, access to public transportation, and plenty of choices for restaurants, cafes, and shopping. This “Smaller square footage but bigger life,” movement also leads these new urbanites – spanning from Millenials all the way to retired seniors – to look to condominiums as a home base. Condos are far less expensive than trying to find single-family houses in densely populated cities and the utilities are often lower. They require little or no maintenance, so owners can spend their weekends with their friends and hobbies instead of mowing the lawn and tackling long honey-do lists. Condos also commonly offer built-in amenities like parking, swimming pools, work out rooms, and recreation.

1. A solid plan.
Whether an investor or homeowner, everyone wants to make the most possible money on their real estate investments. But too often, people purchase condos without a solid plan. That plan should include a comprehensive budget that includes expenses like property taxes, special assessments, condo dues, and all mortgage and utility costs. To be conservative, estimate your costs to be 15% higher than they are now and if you’re renting it out, factor in possibly vacancies and even evictions.

The most important part of your plan should be an exit strategy. Do you plan to sell and move “up” to a house in a couple years? Keep it forever and rent it out when you move? Or stay there for the long term? Condos are often much harder to sell than single family houses for reasons we document here, so you may be “stuck” in the property for much longer than you think. Since the value of condos can be so volatile and dependent on so many factors outside your control, don’t bank on having significant appreciation. As an investor, it’s recommended you focus on an income approach instead of capital appreciation, meaning you should make sure it cash flows on a monthly basis instead of waiting around for it to rise in value.

2. Special assessments.
If you own a condo, “Assessment,” is a bad word because it means there are big improvements needed but not enough cash to pay for them. Special assessments collect reserves for future capital improvements like new roofs, windows, paving parking lots, or HVAC replacement. Each owner is required to pay his or her pro rata share of these expenses. Obviously, these assessments can up to tens of thousands of dollars or much more, so request the condo’s budget before you buy and research what improvements are coming – and anticipate an assessment at some point.

3. The condo association.
As a good rule of thumb, you aren’t just buying the condo but the condo association as well, and your experience as an owner will only be as good or bad as they allow. That’s because almost every single decisions is dictated by the association’s bylaws. A good association can protect your values and make sure everything runs smoothly. But an association that is inefficient, absent, negligent, or just plain abrasive can spin the condo community into chaos. Scrutinize their bylaws before you buy, as they may have restrictions on renting the condo you need to know about. It’s also a good idea you meet the association staff before hand to feel them out, as well as request their budget to show you they have enough reserves and how much debt they are carrying and the percentage of owners who are not paying their dues. Also, knock on a few doors and talk to people who already live there and see what they think of the association’s body of work.

4. Condo fees.
While single-family homes may cost more, don’t forget that condos have significant monthly association fees. These fees are collected by the association to cover the cost of services, like trash hauling, exterior painting, and landscaping, etc. Condo fees also cover the property’s master insurance policy, maintaining swimming pools and fitness rooms, condo staff, and professional services like lawyers and accountants when needed. These fees could range from a hundred dollars all the way to a thousand dollars for luxury condos in big cities, but even the average two hundred dollar bill should be anticipated and factored into the owner’s expenses. 

5. Improvements.
When you own a single family home, you are free to improve the property and make as many upgrades as you wish. Weekend projects like tiling floors, adding new light fixtures, and even landscaping add up to better values over time. But with a condominium, there is very little you can do – or are allowed to do – to improve your property. Other than just painting your interior walls, every alteration or improvement usually needs to be ok’d by the condo board, who has no interest in approving big projects that will change the floor plan or make other units look obsolete. If the condo board does approve a remodel, owners often make the mistake of over improving their property, rendering it far different than other units. But when it comes to sell, potential condo buyers are looking for conformity, not to purchase the outlier, so it’s often harder to unload instead of going for a higher price.

If you'd like to read #1-5, click here, and email us for real estate help any time!

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