Thinking about buying a condo? Here’s the first thing any potential buyer should do: check out the HOA–the homeowner’s association. That’s the first thing you should do, but it’s usually far off the radar for buyers, especially first-timers. So, why does it matter?
The Whole Enchilada
In buying a condo, you are buying a share of the whole complex. You are obligating yourself financially to support the whole operation and to obey its rules. It makes sense to know the rules, doesn’t it? Aren’t you concerned about the financial health of the group? The fact is the seller is obligated to give you all the documents relating to the HOA. It’ll be a big packet, and you will get that sinking feeling just looking at it. Fear not. Here’s what to look for.
That’s very important. What exactly are the fees and what do they cover? Typically, fees include exterior maintenance and insurance as well as exterior lighting and groundskeeping. If your condo has lots of beautiful grounds with trickling brooks, is a high rise or if it has a pool and clubhouse or is gate guarded, the HOA is going to be higher. Be sure to find out exactly what the HOA covers, including insurance. Many include earthquake insurance, a comforting thought these days.
Check out the reserve fund, a special amount set aside for major repairs and replacements. Some smaller condos or those in financial distress have nothing. That means if a unit in the complex needs a new roof or it’s time to paint, then a special assessment comes into play, requiring all the homeowners to pay extra. This can run into thousands of dollars. So, it’s important to have good reserves.
Make sure to find out from the HOA board or the property management company if any homeowners are delinquent in their payments and exactly how delinquent and how many such homeowners there are. Remember that the condo complex owners are all in this together. If some are not paying or are in foreclosure, that means the rest of the homeowners have to take up the slack or dig into the reserves. Alternatively, the HOA may be cutting corners–an accident waiting to happen. If more than 5% of the owners are delinquent, think seriously about taking a pass on your purchase.
CC&Rs [Covenants, Codes and Restrictions] are the rules of the condo association. Things like pool hours, color of paint, number of pets and parking rules are covered here. Make sure you are on board with the rules. If you flaunt them, the HOA can legally fine you or restrict you from using a common element, such as the clubhouse or work-out room.
Make sure you check out the whole complex because that’s what you are really buying. The unit you have in mind may be gorgeous, but are they all? It’s kind of like buying the best house on the block, a definite real estate no-no. Just be sure that other units are equally attractive or you may have a great deal of difficulty selling in later years.
Sometimes it’s good to be nosy and this is especially true when you are buying a property. Read the documentation you are given. Talk to the neighbors. How often does the board meet? Quarterly is the best. Read the copies of the meeting minutes and find out what kind of issues the board deals with. Do they seem to be proactive about protecting the complex or do they seem to be just marking time? How is the board perceived by the other condo owners?
The Management Company
Unless the complex is extremely small, less than 10 or so units, it should have a professional management company. If it does not, this is not a good sign. For some reason, the board is obsessively saving money and relying on part-time volunteers. For sure, this will result in deferred maintenance or a gradual decline in the appearance of the property. Not good.
Because some lenders, such as FHA, set limits on the number of rental units in a complex, HOAs have started limiting the right to rent much as mobile home parks have done for years. This may be a big negative for you, so make sure to find out the rule. Decide if you can live with it. Many condo owners go on to own single-family houses while keeping the condo as a rental. It could be you.
Most likely, you’ve checked out the place, the complex, the rules, the board and the financials and found the place is well-run with good financials. You are good to go. Get ready for condo living. It can be really fun.