6 Insider Pointers For Purchasing A Condo

Condo 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 services 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
problems. Over the years, I've sold many Buckhead condos and have
also served on a condo board, so I've thought of 6 key things to
research:1. How much of the dues are allocated to a capital reserve
account. As a buyer, it's important to know the monthly dues, but the
information is almost worthless without having an understanding of the
capital asset accounts. There are condo boards that take advantage of
these buyers and play a condo dues shell game. Some associations keep
their dues artificially low by not allocating any money for future
capital projects and repairs. They purposely ignore future roof
replacements, paint jobs and parking lot resurfacing. Later, they
assess for all capital expenses. It won't do you any good to have low
monthly dues while always getting hit with unplanned assessments.I
think this is extremely irresponsible and unethical, but many
associations 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 an offer. With the
financials, you'll be able to see if the association has adequately
planned for future projects.2. Is there a rental cap. This can be
important for two seemingly contradictory reasons. You might want to
rent your unit at some point or you want to make sure there won't be a
bunch of renters living in your 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 expect, in this difficult financial climate, that lenders
have become even bigger sticklers for this rule.The real estate
slowdown, and the huge drop in condo values, has caused a lot of
bitterness and rethinking of the rental caps. Owners are put in a
really difficult situation, when they have to leave, but can't sell,
because they owe a lot more than the unit's current market value.
Unless you you have enough money to make up the difference, an owner's
only options are waiting the market out or foreclosure. In order to
"wait the market out," an owner would probably need rental income to
pay the mortgage. Condominium boards are faced with the difficult
choice of deciding if their lifestyle and property values are better
off with increased rentals or a bunch of foreclosures and the
resulting fire sales.3. Is the complex facing any problems. Condo
associations are supposed to keep minutes from their board meetings.
During your due diligence period, request copies of past meeting
minutes. If the association is objectively recording the meetings, the
copies should help you learn about concerns, issues, problems and
litigation.4. How old is the building. Although your own unit may have
been gutted with new paint, floors, cabinets and fixtures; if the
building is 75 years old, then the pipes, electrical and
infrastructure could be in need of a huge upgrade. These are the
big-ticket 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 there is no money in the capital reserve account,
then you'll be responsible for your share through a major assessment.
(see point #1)5. Is there enough parking for residents and guests.
Condominium developers can be notoriously chintsy when it comes to
parking. Research if you'll have assigned parking spaces and whether
there is guest parking. If there are only a few, unassigned spaces,
you'll have parking problems, especially on the weekends. If you don't
like looking for a parking spot at Piedmont Park, try that experience
every day.
How many units are behind on their dues. In a normal market
this is rarely a concern, but in this market, 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 currently playing out all over Atlanta:6. The
owner is behind on her mortgage, so she's probably even further behind
on her condo dues. The association doesn't have many options when it
comes to collecting the dues, their only real weapon is a lien.
Normally, when the unit is sold, all liens are paid at the closing and
the condo board is made whole again. But in this market, the owner
might not be able to sell because she owes more than it's worth, so
the unit eventually goes through foreclosure and the owner is evicted.
During foreclosure all liens are wiped off the books and the
association is out all uncollected dues for that unit. The remaining
owners will be stuck paying for the uncollected accounts receivable.
You can see how this could lead to a snowball effect.