10 Questions You Should Ask Before Purchasing A Condominium
Buying a condominium unit can be more involved than buying a single family home.
This is because you have to be concerned about both the unit itself as well as the condominium complex as a whole.
Not all condominiums are created equally. Some condominiums are very well managed and some are poorly managed and underfunded. If you are interested in purchasing a condominium unit, you must do your homework, not only about the condition of the individual unit you are interested in purchasing, but on the financial health and governance of the condominium as a whole.
Remember, you are buying into the entire project as much as you are the specific unit, and your decision will impact your daily living and your ability to re-sell the property in the future.
Here are the 10 questions you should ask when deciding to purchase a condominium unit:
1. What is the monthly condominium fee and what does it pay for?
The monthly condominium fee can range quite dramatically from condominium to condominium. The fee is a by-product of the number of units, the annual expenses to maintain the common area, whether the condo is professionally managed or self-managed, the age and condition of the project, and other variables such as litigation. For budgeting and financing you need to know the monthly fee and exactly what you are getting for it.
2. What are the condominium rules & regulations?
Condominium rules can prohibit pets, your ability to rent out the unit, and perform renovations.
Make sure you carefully review the rules and regulations before buying.
You should review all condominium documents, including the by-laws, covenants, rules and regulations and financials.
3. How much money is in the capital reserve account and how much is funded annually?
The capital reserve fund is like an insurance policy for the inevitable capital repairs every building requires. As a general rule, the fund should contain at least 10% of the annual revenue budget, and in the case of older projects, even more. If the capital reserve account is poorly funded, there is a higher risk of a special assessment. Try to get a copy of the last 2 years budget, the current reserve account funding level and any capital reserve study.
4. Are there any contemplated or pending special assessments?
Special assessments are one time fees for capital improvements payable by every unit owner. Some special assessments can be a couple hundred dollars while others can run in the thousands.. You need to be aware if you are buying a special assessment along with your unit. It’s a good idea to ask for the last 2 years of condominium meeting minutes to check what’s been going on with the condominium.
5. Is there a professional management company or is the association self-managed?
A professional management company, while an added cost, can add great value to a condominium with well run governance and management of common areas.
6. Is the condominium involved in any pending legal actions?
Legal disputes between owners, with developers or with the association can signal trouble and a poorly run organization. Legal action equals attorneys’ fees which are payable out of the condominium budget and could result in a special assessment.
7. How many units are owner occupied?
A large percentage of renters can create unwanted noise and neighbor issues. It can also raise re-sale and financing issues with the new Fannie Mae and FHA condominium regulations which limit owner-occupancy rates. If you are using conventional financing, check if it is a Fannie Mae approved condo.
If FHA financing, check if it’s an FHA approved condo.
8. What is the condominium fee delinquency rate?
Again, a signal of financial trouble, and Fannie Mae and FHA currently require that the rate be at 15% or less.
9. Do unit owners have exclusive easements or right to use certain common areas such as porches, decks, storage spaces and parking spaces?
Condominiums differ as to how they structure the “ownership” of certain amenities such as roof decks, porches, storage spaces and parking spaces. Sometimes, they are truly “deeded” with the unit, so the unit owner has sole responsibility for maintenance and repairs. Sometimes, they are common areas in which the unit owner has the exclusive right to use, but the maintenance and repair is left with the association.
10. What Does The Master Insurance Policy Cover?
The condominium should have up to $1M or more in coverage under their master condominium policy. For your own protection, you should always buy an individual policy covering the interior and contents of the unit, because the master policy and condo by-laws may not cover all damage to their personal possessions and interior damage in case of a roof leak, water pipe burst or other problem arising from a common area element.
Ask for a copy of the master insurance policy and don’t forget to check the fine print of the by-laws.
Sometimes, there’s language that would hurt a unit owner in case of a common area casualty.