Article Courtesy of Forbes Advisor
By Natalie Campisi
Published May 16, 2021
Whether you’re looking for a low-maintenance home, a downtown
pad or a vacation getaway, condominiums, or condos, offer many attractive
features. They’re typically a more budget-friendly way to access homeownership,
especially if you’re in a high-priced city.
Condos can also be fairly sound long-term investments for people who want a
holiday escape for a week or two and then rent it out the rest of the year.
In recent years, condos have gained popularity, likely due to the shortage of
affordable housing supply and the feverish demand for real estate. In March,
existing condo and co-op sales shot up by 29.1% from the same time last year,
according to the National Association of Realtors (NAR). There were 710,000
condo sales this past March compared to 550,000 the year before.
Condo owners saw their property jump in value this year as price appreciation
neared 10% nationwide, which trailed behind the 17.2% year-over-year price gains
for single-family homes that same period. But, the median sales price for a
condo—$289,000—was still below the $329,100 price tag on a single-family home,
which reached historical highs in March.
What Is a Condo?
Condos are like apartments in that separate units are housed in a single
building. The difference between a condo and an apartment is that condos can be
owned by different people versus apartment buildings where one owner or company
rents out the units. Condo owners will share expenses like maintenance of the
entire property and insurance but will pay their individual mortgages and
insurance for the inside dwelling.
Although condos are considered real estate, there are some distinct differences
between buying a condo and buying a house. Some of the advantages of owning a
condo are that there’s less maintenance and the price tag can sometimes be
cheaper than a house.
However, condo owners typically don’t have the private outdoor space and ability
to add on an extra room or build a pool that people with detached houses can do.
The other drawback is that condo owners typically have to be part of a
homeowners association (HOA), which comes with a list of rules and sometimes
hefty fees.
Pros and Cons of Buying a Condo
Here are some advantages and disadvantages of buying a condo rather than a
single-family home.
Pros of Buying a Condo
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Condos are usually cheaper
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Condos require less maintenance
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More options in terms of location and budget
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You might have access to more amenities (tennis courts,
pools, gyms, etc.)
Cons of Buying a Condo
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Less private outdoor space
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Can’t add rooms that would take on more outdoor space or
change the outside dwelling
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Might have to join an HOA
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The HOA might have restrictions on what you can put
outside on a yard or balcony if you have one
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Share walls with neighbors
Getting a Condo Mortgage
There are many similarities between getting a mortgage for a single-family house
and a condo, but there are some differences, too.
Using Traditional Mortgage Options to Buy a Condo
Homebuyers can use most mortgage types to buy a condo, including conventional
30-year fixed-rate mortgages and Federal Housing Administration (FHA) home
loans. The process is similar in that the lender will check your finances,
including things like your credit score, debt, cash reserves and income history.
However, some restrictions might apply to condos that don’t qualify as
single-family homes. For example, to get an FHA loan the condo must be on the
U.S Department of Housing and Urban Development’s (HUD) list of approved condo
properties.
Home loans that allow condo purchases include:
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Federal Housing Authority (FHA) loan
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Veterans Administration (VA) loan
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U.S. Department of Agriculture (USDA) loan
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Conventional loan
Mortgage rates might also be higher with a condo than a single-family home
because they’re generally considered riskier investments. There are also times
when a home looks like a single-family unit or townhouse but is deemed a condo
to lenders. You can usually check in the details of the home sale listing, where
it will show whether there is a HOA fee, or ask your realtor.
Lenders Will Verify That the Condo Association Is Financially Fit
Lenders will also check the financial health of the condo association as well.
Because the mortgage is tied to a larger development, there are factors beyond
the control of the borrower that can damage the value of the condo, such as high
rates of mortgage delinquency across the property overall or poor management.
All of these things (and more) can give lenders insight into the stability and
long-term viability of the property. If the condo project, as a whole, falls
below the lender’s standards or risk tolerance, they might not approve the
mortgage.
Condo Owners Must Abide by All HOA Rules
Since condo owners are part of a larger development, there are covenants,
conditions and restrictions (CC&Rs) that outline the rights and requirements of
the condo owners.
Generally, CC&Rs include rules around how the property is used, how disputes are
handled (and any associated legal fees), maintenance requirements, rule
enforcement and lender rights.
It’s a good idea to read through the CC&R carefully before you buy. Some experts
recommend having an attorney review the CC&R. There are also homeowners
association rules that you will likely have to follow. These can be even more
restrictive than the CC&Rs, so it’s a good idea to familiarize yourself with
these rules before you buy.
For example, there might be a restriction on a grill or even plant that you put
outside in your yard or balcony. There could also be heavy parking restrictions
outside of a garage or for visitors.
You Might Be Prohibited From Renting Out Your Unit
If you’re thinking about buying a condo as a way to generate income, be sure to
check your condo association rules first. Some condo associations don’t allow
owners to rent out their places or for a certain number of years initially.
Furthermore, if renting is okay, some associations might have requirements
around how long the lease must be. Some also might permit short-term rentals
while others will only allow long-term rentals.
Another thing to check is whether there’s a set number or percentage of condos
in the overall property that can be rented out at any given time. If there is
and you plan on renting, find out if the property has reached or even neared its
rental capacity.
Pet Lovers Beware: Some Condos Have Pet Restrictions
If you have pets, be sure to find out what the condo association’s rules are
around having animals. Some associations will limit the number of pets and even
the type of pet you have.
Keep in mind, state laws may also govern what associations are allowed to do.
For example, in California, there’s a law (Civil Code 4715) that allows condo
owners to have at least one pet, in effect restraining the association’s
authority in this matter.
Bottom Line
If you’re considering a condo life, ask yourself what your goals are and what
they might be in the future. If you want to live in the condo full time, make
sure the building lifestyle is in line with your preferences. Some condos might
put an emphasis on social gatherings while others prioritize privacy and
maintaining a quiet, peaceful atmosphere.
Likewise, if you plan on renting out the condo for part of the year, find out
what the HOA rules say about rentals. Some HOAs are lax about renters where
others have very strict guidelines.
Be sure to talk to people who lived in the condo community for several years.
Longtime residents will be able to give you insight into daily life that you
won’t get from a 30-minute tour.
Find out about the people that live below, above and next door to you. Living in
proximity to your neighbors can be a great thing or a terrible thing, depending
on the people. So the more you know about the living situation before you sign a
contract, the better informed you will be about whether or not this is the right
place for you. |