By: Meghan Monson, Manager of Homeownership and Counseling Programs
Condominium ownership – for some a steppingstone in the path to their forever home, for others, a desirable option for urban living. However it is viewed, condominium ownership is vastly different from owning a single-family home, and unless you grew up living in a condo, it’s unlikely you know the full extent of the differences that may impact your homeownership experience. To help avoid surprises and to ensure a productive role as a member of a condo association, it’s a good idea to learn as much about condos in general and the specific property being considered, before committing to purchasing it.
Special Considerations
The process of purchasing a condominium varies from other property types, and usually if the buyer is working with an experienced and knowledgeable real estate agent and real estate attorney, the buyer does not have to become an expert on the process. Nonetheless, the buyer should be aware of the main differences that will impact their process when looking to buy a condo.
For example, in the Offer to Purchase Real Estate, there is a special contingency designed for use with condos. This contingency, when included in the Offer, allows the buyer to terminate the transaction and have their deposit returned if they find any item within the condominium documents (ie. Bylaws, Rules and Regulations, Annual Budget, Meeting Minutes, etc.) that is disagreeable to them. The classic example of the value of this contingency is if the buyer has a pet and the condo association does not allow pets. Another common example of potential conflicts is represented in those situations where a buyer is a smoker but the condo association does not allow smoking. The buyer may not find out about the association’s anti-pet or anti-smoking policies until after their Offer is accepted, so the contingency, called the “Condominium Documents Addendum,” would allow them the opportunity to thoroughly review the documents and if needed to cancel the transaction and have their deposit returned. This way they could continue looking for another condo that will accommodate their needs.
The Purchasing Process
It is important to remember that when you buy a condo, not only are you buying your next home, but you are also buying into a condo association and all the legal requirements associated with the condominium structure. For that reason, your lender will have a few extra requirements for you to satisfy to make sure that the collateral your mortgage provider will be securing retains its value. This plays out, sometimes dramatically, when your mortgage application is going through the underwriting process and the underwriter at the bank is reviewing the condominium documents with a fine-tooth comb. Not only does your mortgage product have its own condo standards, but your lender may add additional requirements to the conventional requirements in what is often called an “overlay.” As a rule, the larger your downpayment is, the less your lender will focus on finding a problem with the condo association during the underwriting process. This is because your larger initial investment means the loan to value ratio is smaller, making your lender’s chances of getting back their mortgage greater if they have to foreclose on your unit. The lender will then be less concerned about the financial strength of a condo association. However, even a larger down payment cannot always mitigate the risk of a poorly run condo association.
Lenders usually want to see a certain amount of owner-occupancy present within the condo association. For example, it could be difficult to find a lender that would give you a loan to buy a condo in an association where only two out of forty-eight units are owner-occupied. That’s because the less owner-occupancy, the less of a vested interest condo owners have in ensuring the common area conditions are acceptable. Condo owners who do not live at the property will be less aware of common area problems so conditions could deteriorate and create a requirement for larger capital investments. These larger capital investments may require special assessments and put a strain on the health of the condo associations. Lenders would worry that their mortgage investment would be put into jeopardy so would ask for additional downpayment to reduce their risk. When it comes to analyzing the potential for financing troubles or a lack thereof when evaluating the condo association, lenders always focus on their own potential risk. Most of the time, the lender’s interest and the buyer’s interest line up to help provide a buyer some assurance that their transaction is a prudent investment, but it is important for a buyer to evaluate the potential risk independently too.
Condo Associations
If you have been successful obtaining financing for your condo and you have closed on the loan – congratulations! Now your job is to be a productive member of the condo association and participate in activities that will help protect your investment and ensure a quality living environment. This starts with being aware of what’s in your condo documents. These documents will provide you with a point of reference regarding all the rules you have to abide by, as well as the process for electing new board members, in case you want to try to change any of those rules. The documents will also lay out processes for handling issues and grievances, in case you do run into any troubles because of your own action or a neighbor’s. Because a condo association is run like a business, a condo association needs regular input, decorum, oversight, and accountability so that it operates in the manner it was intended to when it was created.
Living in a condo can be an enjoyable experience with less responsibility for the homeowner when compared to other property types. As is true in the greater Boston area, condos are more plentiful and are often more affordable than single-families or multi-families. The nature of condo ownership, however, requires more due diligence on the buyer’s part to make sure that the investment is sound. Of course, it is imperative that you get a home inspection before buying a condo, but equally as important to surround yourself with experienced real estate professionals that can help you interpret and understand the condominium documents and what it means for you as a potential association member. Ideally, this will ensure that any condo association you consider joining will be one worth investing in.