What I Learned from Buying a Condo

When I became a first-time “homeowner,” I didn’t actually buy a home but a condo. The place was awesome - a loft with exposed brick, hardwood floors, huge windows and just blocks from some of my favorite drinking establishments.

Eventually (when school quality overtook bourbon options), my housing needs changed and I moved to a home in the ‘burbs. Lucky for me, the condo’s value almost doubled in five years. That helped me afford an otherwise unobtainable home in my area.

Like me, many first-time home buyers consider condos as a good first step. But, in my personal and professional experience, there are definitely pros and cons to consider. And, a few you don’t often see discussed.

What Is A Condo, Exactly?

First, some basics. Condos are a type of real estate where you own a unit (starting at the interior walls) and jointly own a broader set of common spaces. To govern the co-owned space, condos appoint a board that runs the building. To fund the costs of running the building, in addition to their mortgage payment, everyone pays a monthly fee called a condo fee.

This website has a good overview of the detailed pros and cons of condo ownership. But there are three important areas that aren’t discussed as much.

1. A Lower Condo Fee Isn’t Always Better

The condo fee is set and collected by the condo board to manage the overall building (often through a third-party management company). As you might guess, I was on the board when I lived in a condo. And, I learned the importance of the condo fee.

That’s because, in addition to the day-to-day costs, the fee contributes to a reserve, i.e., a condo savings account. A ‘reserve study’ commissioned by the board determines how much money needs to be saved each year for the future replacement costs of carpets or elevators, repainting, etc. Our condo fees were high ($700) but that’s what it took to be responsible about saving for the future.

If the reserves are insufficient and a major expense comes up, the condo board has to make a special assessment which is a one-time fee charged to all residents. We never had to make one of these at our building, but I’ve heard horror stories about surprise assessments costing residents thousands of dollars without warning.

A lower fee might sound great, but it could portend assessments and fee increases. This is a bigger problem for new buildings because developers set the initial fee low so people will buy the condo for more money. When the board finally realizes they aren’t saving enough money, they have to crank up the fee.

Before you buy, find out as much as you can about the condo’s finances. A condo that has a low condo fee might seem great but it could mean trouble in the future.

2. You May Not Be Able To Rent Out Your Condo

Buildings need to follow standards to be eligible for traditional mortgages. One of the standards limits how many units can be rental properties. This is because people who live in their own units generally take better care of the property.

This impacted many of the owners in my building because we had reached the maximum. Many of my neighbors who were moving hoped to keep their condo and rent it, but were forced to sell instead. If you plan to keep the condo as an investment, you’ll want to be sure to check what the status is.

As a side note, some buildings don’t follow these standards. While that removes these kinds of limitations, it also means the units can’t be purchased with traditional mortgages. That could limit your options to get a mortgage.

3. Condo Values Are Riskier

Mortgage rates are higher for condos because condos are riskier than normal homes. I was part of the team at Fannie Mae that introduced these price adjustments back in 2009 (and, sadly, had to pay it when I got my own mortgage).

The first additional risk is the potential for bad management. But the bigger risk is that condo prices can drop faster in bad economies. That’s because, if a building has many similar units up for sale at once, everyone’s price gets set by the one person who is desperate and sells at a low price.

If the housing market hits a really rough patch, you may be forced to sell at a loss if you need to move. On the flip side, condos are often in great locations with high demand. In good times, that could mean rapidly increasing values.

Bottom Line

Condos can be a great investment and a perfect way to start your journey into homeownership. I was lucky to live in a well-managed property that went up in value. And, I loved my neighborhood and not having to mow the lawn. If this is something you’re considering, be sure to do your research and be aware of the pros and cons. Email me at jlawless@biltcard.com if you have any other questions about condos!