Everything You Need to Know About Buying a Condo Roger Odoardi Fact or fiction – it is possible to become a homeowner without buying a home. Fact! Just as it would when purchasing a home, buying a condo allows you to become a homeowner and start building equity in a property of your own. Recently, condos have become an increasingly popular alternative to using a first time home buyer’s loan to purchase a single-family home. Wondering if buying a condo could be right for you? In this comprehensive guide, we’re covering everything you need to know about buying a condo and sharing tips on what to look out for throughout this unique process. What is a Condo? Short for “condominium,” a condo is an individually owned unit among a community of other units. Condos can be designed with attached or detached units and come in different architectural styles ranging from a high-rise apartment building to a traditional ranch-style or multi-story house. Owning a condo is essentially a hybrid between owning an apartment and owning a home. Individuals and families that own condos within the same community share common areas such as parking garages, pools, elevators and hallways. The major distinction that separates a condominium community from an apartment complex is that the individual units in a condominium building can be sold. Condos vs. Single-Family Homes & Townhouses Before diving into the buying process, it is vital to understand the differences between a condo, a single-family home and a townhouse. What Is a Single-Family Home? A single-family home is an independent, free-standing residential building that sits on its own land. As the owner of a single-family home, you are the sole owner of both the building and the land that it’s built on, while as the owner of a condo you own only the unit that you live in. What Is a Townhouse? Otherwise known as a traditional row house, a townhouse can be defined as a form of terraced housing in which each house contains multiple floors and shares a wall with a neighbor on one or both sides. Whereas a condo owner usually only owns the interior of their unit, a townhouse owner will additionally own portions of the exterior such as the driveway and surrounding lawn. As for architecture, townhouses are always designed in rows. All About Condo Communities Condominium Associations When you purchase a condo, it typically will mean that you are now part of a condo association. These associations are established with the goal of maintaining a certain standard of upkeep in a neighborhood. Members of this association are elected by you and your fellow condo owners. Their role is to set new policies and ensure that all members are adhering to rules and regulations. If you care strongly about community, you should know that a healthy condo association strongly correlates to a positive condominium living experience! Homeowners Association The Homeowners Association (HOA) is an organization that establishes and enforces rules for their community in an effort to preserve the property. If a condo owner wishes to change the exterior appearance of their home, they must first ask the HOA for permission. To maintain appearance, it is likely that the HOA would reject a request such as asking to paint the outside of your home a color that does not match the theme of the neighborhood. The main difference between a HOA and a condominium association is the extent of ownership. Homeowners individually own their units in a condo, but it is the HOA that owns the common areas. Therefore, condo fees are used to maintain the property, whereas HOA fees support maintaining the common areas and amenities. Next, we will break down these fees in further detail. HOA Fees HOA fees are required for condo owners and can vary based on the amenities offered such as pools, fitness centers and tennis courts. It is important to mention that even if you do not use these offered features, they will still be included in your monthly fee. If this is the case for you, a condo without any added amenities may better suit you. On the other hand, some buyers may need a condo that offers services such as landscaping and snow removal. These offerings will all be included in the HOA fees. Condo Fees Condo fees are charged to help fund the cost of property upkeep and the building’s security system. These fees also cover exterior maintenance of the complex, including grounds maintenance, insurance, water and sewer, trash pick-up and snow removal. Similar to HOA fees (but not the same!), some associations will also charge fees for the use of other amenities such as pools, tennis courts or fitness centers. Note that condo fees are generally higher than HOA fees. Condo fees are typically based off the number of units in the condo complex, however they can vary if the complex has a professional management company or is preparing for any major repairs. Questions to Ask & Things to Consider When Buying A Condo Ensure that you are making the right decision for you and your cohabitants by asking the following questions: Is there a condo association? What are its rules? As a condo owner you are subject to certain rules and expectations put in place by the condo association. In general, these rules are related to whether or not members are allowed to make improvements such as adding shrubbery, planting a garden or putting up a fence. In some cases, condo associations will implement policies that pertain to having pets, including rules that relate to the size of the pet. We suggest that you research the current makeup of a prospective condo association, as well as look into the existing rules and regulations. You realtor will be able to provide you with further detail here as well. What are the condo fees? Condo fees are required for all condo owners. A common mistake that first time buyers make is forgetting to budget condo fees into their monthly expenses.The condo association’s board of directors will meet annually to estimate the total expenses for the condo and create a budget for monthly payments to be split equally among condo owners. Be sure to inquire about what these fees are on average when considering purchasing a condominium. Who oversees the property? It is important to know who is responsible for overseeing the property that surrounds your condo complex. Most condo associations hire a property management service to take care of landscaping, exterior maintenance and upkeep. Remember that the cost of working with a professional property management company will likely be included in the monthly condo fee. How much money is in the condo association fund? In terms of financing, this is the most crucial question you can ask. The amount of money that is in the condo association’s reserve fund dictates whether or not they have the money to complete major repairs such as roof replacements. This balance will provide predictive insight into the financial health of your potential condo association. It is also important to mention that if the condo fees seem very cheap, there is a high probability that the association’s funds are lacking or there is a lack of management for these funds. Further, a diminished fund can indicate that your prospective fellow condo owners have failed to meet their obligation to pay their condo fees. An issue may arise if a condo association can’t cover a major expense and the burden is placed onto the individual condo owners. Is there a rental policy? It may be that your first condominium home will not be your forever home. If you decide to move but still want to maintain your investment, be sure to inquire whether there is a policy against renting your unit out.On the other hand, perhaps you don’t want to live in a condo complex with a high number of renters. – while not always the case, some renters will care less about the physical property because they don’t feel pride of ownership. Pros & Cons of Buying A Condo The Pros There are numerous advantages to buying a condo, including: Location, location, location: Condos tend to be clustered closer to urban centers, so you can enjoy the advantages of an in-town apartment but keep the benefits of being a homeowner. Amenities: Condos can provide a family access to amenities that they are less likely to afford for a home using a first time home buyer’s loan. Many condo associations offer access to pools, gyms, sports facilities, clubhouses and more. Maintenance: Condo associations handle nearly all of the costs and scheduling for the day-to-day maintenance on the property. Condo owners can forgo the costs of upkeep on a home such as paying for mowers, snow blowers and exterior cleaning. This gives you more time to focus on the interior of your new home! Pricing: The average condo price is much lower the average home price, yet still appreciates as reliably as a home. Families that are just starting out can reap the benefits of ownership with lower monthly payments on their first time home buyer’s loans. Moreover, monthly payments on condo owners’ first time home loans are often cheaper than renting a comparable property, as mortgage payments remain steady while rents continually rise. Safety: Condo associations typically have an additional locked entrance, or sometimes even a gate or doorman. An additional level of safety also comes with living in closer proximity to others within the condo community. Stability: Since the economic downturn, the FHA and others have placed measures to ensure more stability and reliability in the condo market. A good starting point: A condo is the ideal intermediate purchase between renting and buying a home. A family that is just starting out can begin to build equity while maintaining less of a financial burden than renting an apartment of a similar size. The Cons The condominium lifestyle isn’t for everyone – and as with every investment, there are notable downsides. Less autonomy: The rules and regulations that are placed by the condo association or HOA may limit what you can do both inside and outside of your home, such as having a large German Shepard, storing certain types of furniture on your patio or planting an herb garden. Breaking these rules can potentially result in fines. Lack of privacy: With shared walls and common areas, condos generally have less privacy than a house. If your neighboring units are being used as short-term rentals, you also may never have a steady neighbor. Monthly fees: Although they are likely to remain lower than the cost of owning a single-family home, HOA and condo fees will still increase your monthly costs in a condo. Additionally, condo association fees tend to increase over time. Parking: Many condominiums do not have assigned parking spots, leading to an added inconvenience if you have to find parking that is far in proximity to your unit. Lack of storage: Storage is limited in most condo buildings. Indoor storage is typically limited to a small closet or two and in some cases, outside storage spaces fail to exist. Financing Options for Condos There are a wide array of products and programs that can be utilized to finance your condo purchase. Some of the national loan options for condo buyers include: FHA Loan: A type of low down payment government loan insured by the Federal Housing Administration, a program office of the U.S. Department of Housing and Urban Development. VA Loan: A loan provided by a private lender and guaranteed by the U.S. Department of Veterans’ Affairs in order to make homeownership more affordable for veterans. USDA Loan: A type of government loan insured by the U.S. Department of Agriculture’s Rural Housing Program that enables low- and moderate-income households to purchase property in eligible rural areas. Conventional Loan: The most common type of loan for condo purchase, conventional mortgages are private-sector loans that follow the guidelines set by Fannie Mae and Freddie Mac. Borrowers can choose between 15-year, 20-year and 30-year mortgages. Not every condo will qualify for a loan. Not only are lenders considering your personal financial health, but they are also considering the financial health and stability of both the condominium complex as a whole and its association. Other considerable factors include building occupancy and what proportion of owners have been delinquent in their payments. Condo Buying Rules & Regulations per State Whether you are looking for a condo in the New England region – New Hampshire, Massachusetts, Maine or Connecticut – or you are looking in a warmer climate – such as Florida or North Carolina – you will find that the rules and regulations are relatively similar. Condominium laws, otherwise known as horizontal property acts, are enacted in every state. Under these laws, any condo unit owner holds a simple title to the unit, as well as a specified share of the property’s common elements. Common elements refer to items such as lobbies, hallways, elevators, the roof and can even include recreational facilities such as pools or tennis courts. Some states have their own condominium acts that detail general provisions, mortgage details and other important legal information. In sum, the rules and regulations will ultimately vary depending on the condo association. Each association will have their own individualized fees and property rules. The elected board members will create a “declaration” to be used as a legally binding contract between the condo association and each unit owner. This declaration is organized under the specific state’s condominium act. Mortgage Rates: Condo vs. Single-Family Home If you are weighing your options between buying a condo and buying a single-family home, you should consider what your mortgage rate will be. Condo values are based on the entire property as a whole, whereas the value of a single-family home is solely based on the estate it inhabits. Mortgage approval will not only be based on your creditworthiness – it will include factors such as the condition of the amenities, the HOA’s financial health or even the percentage of space that is designed for nonresidential purposes. According to Nerdwallet, the most recent mortgage rates for single-family homes are shown in the table below. Product Interest rate APR 30-year fixed-rate 2.825% 2.881% 20-year fixed-rate 2.626% 2.707% 15-year fixed-rate 2.104%. 2.205% 10-year fixed-rate 2.034% 2.126% 7/1 ARM 2.509% 3.064% 5/1 ARM 2.427% 3.154% 3/1 ARM 2.917% 3.555% 30-year fixed-rate FHA 2.501% 3.178% 30-year fixed-rate VA 2.522% 2.709% So, what are the average mortgage rates for condos? Because of the many uncontrollable variables that could impact the value of a condo’s property, the average mortgage rate for a condominium is tends to be a bit higher than that of a single-family home. The rate you receive will come down to how the lender prices the risk of your particular community living structure. Note that the lender will also determine if the HOA has any pending litigation against it that could impact the future value of the property, thus adding risk. Ready to Get Started? We know that buying a condo is a major financial investment, which is why it is essential to take the time to do your research and ask questions. Our experienced team has the expertise to find the programs that best fit your needs and will secure the best terms possible. Most importantly, we will be by your side throughout every step of the buying journey. To speak with one of our mortgage specialists, contact us today. The Blue Water team can guide you through the condo buying process in any of our licensed states: New Hampshire, Maine, Massachusetts, Connecticut, Florida and North Carolina. Roger Odoardi Roger is an owner and licensed Loan Officer at the Blue Water Mortgage office in Hampton, NH. Roger graduated from the University of New Hampshire Whittemore School of Business and has been in the mortgage industry for over 20 years. Roger has originated over 2500 residential loans and is licensed in New Hampshire, Massachusetts, Maine, Connecticut and Florida.