• November 06, 2017
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  • In Category : Blog

A condominium allows you to wade into homeownership without adopting the responsibilities of a single-family home.

You pay dues to a condo association, which typically handles exterior building maintenance and landscaping. So, you may find you don’t have to worry about painting your window frames or mowing a lawn. But you also could find trouble if you don’t ask the right questions. Here, BankRate suggests six things you’ll want to know before you buy a condo.

1. How is the condo association run?

Buyers need to think of purchasing a condo as signing a business agreement with all others who own in the project they are buying into. As with any other business venture, learn how the place is managed and inquire about its financial stability.

2. How does the budget look?

You need to ask for a copy of the association’s budget. The association is not likely to give a prospective buyer a copy of the budget, but the seller—as an owner—can request a copy and provide it to the buyer. The most important parts of that budget include the total amount of outstanding debt owed to the association and the percentage of owners who are not paying their dues.

3. What’s the delinquency rate?

Buyers have little chances of obtaining financing in a building with a high percentage of owners who are delinquent on dues. Fannie Mae, Freddie Mac and the Federal Housing Administration, which buy or insure most mortgages, do not approve condos with delinquency rates above 15 percent. In buildings that don’t meet that requirement, it can be extremely challenging to get a mortgage or refinance. For buyers who can pay cash and don’t plan on selling their unit anytime soon, the delinquency rate may not seem like a big deal. But keep in mind that when an association is starved of cash, it has to make cutbacks. Some associations also may charge unit owners special assessment fees to make up for a budget shortfall that results when dues aren’t paid.

4. How are the cash reserves handled?

The lower the cash reserves a condo association has and the older the building, the higher the chances that owners in that building will be hit with a special assessment at some point. Fannie, Freddie and FHA require condominiums to put aside 10 percent of their annual revenue for emergencies and capital expenditures.

5. Are there a lot of absentee owners?

The percentage of investors who own units in a project also could impact a buyer’s ability to get a mortgage or sell the unit soon. The FHA does not approve condo projects in which more than 49 percent of the units are owned by investors. Generally, units in buildings with financing issues lose value because they have to sell mostly for cash, at discounted prices.

6. Is the building insured?

Another important factor that condo buyers often overlook is the community’s insurance coverage. Many condo associations have reduced or dropped the community’s insurance coverage to cut costs, which jeopardizes the investment of all the owners in those projects.