Your Real Estate Clients Are Buying a Condo? Here’s What You Need to Know
Do you have real estate clients who want to buy a condo? Awesome! A condo can be a great investment, IF the unit is in a healthy complex and there aren’t any looming issues that could cause the property value to take a hit.
Here’s what you’ll want to help your clients find out so they make the best choice:
How many of the units are occupied by owners rather than renters? At least 50% is a decent number to use as a base point, seeing as this is the lower cutoff point for some financing options.
Some buyers prefer to see 70% or higher. The general perception is that owners are more personally invested and likely to take better care of their properties than renters do.
It's all too common for recently built condo complexes to sue the builder or a contractor involved in the construction. In the soggy Pacific Northwest many complexes have at some point been involved in litigation regarding faulty installation of window flashings that allowed water intrusion, or have had to have their EIFS 'stucco' siding replaced.
Tip: If a legal issue seems extremely likely to be resolved in a satisfactory manner soon, this can be a good opportunity for your buyer to get in on a unit that still has an unofficial price discount because of the litigation that has been damaging its market appeal. (Especially true if your client is a cash buyer who doesn't have to worry about a lender nixing the deal due to the lawsuit.)
Just keep in mind that there's always a risk the litigation will remain an albatross around the neck of the complex, and your client needs to be completely aware of that.
Many large condo complexes hire an independent management company to run their affairs, whereas some smaller complexes are self-managed by homeowners. Either option can work well (or not).
Regardless, this is something your clients should be aware of and have a chance to evaluate.
Even when the complex is professionally managed, there is usually an association of homeowners who meet regularly to discuss issues regarding the complex. See if you can help your clients obtain minutes of recent homeowner meetings - these usually give you a window into what's happening in the community, and may give you a heads up about any upcoming special assessments.
As part of the Purchase and Sale Agreement, your buyers may have a chance to review the Resale Certificate for the complex. (In Washington this is a state requirement that buyers don't even have the option to waive.)
The Resale Certificate will show the financial condition of the complex, including the dollar amount of homeowner dues currently in default, and the amount held in Reserves for major expenditures.
For example, if the complex needs to replace the roofs or repave the common asphalt areas, it's good to know whether there's enough money in Reserves to cover it, or if the complex would have to levy a Special Assessment.
When the complex is faced with a large expense that it can't cover with the Reserves, it may levy a Special Assessment against each unit in order to come up with the funds.
Special Assessments are usually based on your unit's percentage of square footage, so larger units will pay more. Sometimes Special Assessments can be paid off over months or years, but occasionally complexes will require them to be paid in one lump sum. The amounts vary from hundreds of dollars to tens of thousands.
(I know, ouch!)
If a Special Assessment has already been levied against the unit, that needs to be disclosed in the listing, and the agent remarks may state up front how the seller will handle it (i.e., "Seller to pay off Special Assessment at closing.")
Three main things to consider are:
1) Is there a Special Assessment in the works that has not yet been assessed?
2) If there's already an assessment, who's going to pay for it - seller or buyer?
3) If there's a current or upcoming Special Assessment, is the cause understandable or is there some other systemic problem with management that is creating financial issues?
This is usually by no means a deal killer, unless of course your buyers are using an FHA loan. The Federal Housing Administration keeps a list of "approved" condo complexes based on the results of Reserve Studies paid for by the complexes.
Here's where you can check to see if a condo complex is approved by the FHA or VA:
Two things to keep in mind:
1) Many healthy condo complexes are not approved by the FHA simply because they've never paid for a Reserve Study or applied for approval. This is especially true of smaller and/or self-managed complexes.
2) Regardless of how healthy the complex is, it's a fact that when your buyers are ready to sell their unit, the target market will be somewhat larger if the complex is FHA-approved.
Think Goldilocks: "Not too high, and not too low" is the goal here. When dues are too low the complex doesn't have enough to keep Reserves healthy, whereas very high dues can turn away buyers and decrease property value.
Whether or not dues are "high" depends in part on what is included. Does the complex have elevators, exercise facilities, a pool, a rooftop deck, a movie room, or conference areas? Do the dues include expenses such as cable, hot water, garbage, or sewer?
A VERY general guideline in the greater Seattle area is for dues to be approximately .1 percent of a unit's market value. For example, if a unit would reasonably sell for around $360,000, it may be reasonable to expect the dues to be somewhere in the $360 per month range. (If you're using this as a data point, just multiply the price of the unit by .001.)
That is an extremely general estimation, and could vary widely depending on what amenities come with the unit. (Dues in other parts of the U.S. may be quite different.)
Some complexes restrict the number of units that can be used as rentals. In the Seattle area a common restriction is for no fewer than 80% of the units to be owner-occupied, although it can vary.
Pros: This prevents a complex from being targeted by investors and turning into what feels like a community of apartment rentals. The general perception is that owners are more likely to take good care of their properties.
Cons: It limits your clients' options. If they end up moving on and would prefer to rent out their unit rather than sell it, they may not be able to. It also means that when they do sell, their target market is somewhat reduced because it will probably not include investors.
Many complexes won't accept dogs over a certain weight, or they may not accept dogs or cats at all. This is something to find out even if your clients don't have pets, because it may affect their resale value down the road.
For many people a condo is their first step out of apartment life into homeownership. If that's the case, your buyers may have a huge secret longing to finally be done with shlepping their laundry around common laundry facilities, and to be able to wash their clothes in the comfort of their own home. (Completely understandable!) 🙂
Every amenity is relative to price, of course, but it's worth noting that the washer/dryer question can really hit an emotional hot button with buyers - and this in turn affects your clients' eventual resale value.
This is typically a Resale Certificate question that can cause financing problems if the answer is "Yes".
I recently read that this condition does not apply to complexes of 5 to 20 units, but I remember I ran into this problem several years ago when I helped a client purchase a condo in a 16-unit complex where one person already owned two units.
Fortunately the lender was able to get around it, and it appears from what I read that since that time the guidelines may have changed, but it's still something to keep an eye out for just in case it could create an issue with financing.
When the condo unit comes with parking, such as a carport or a specific garage space, this is usually assigned to the unit on the Condo Declaration and it's easy to look it up when you get a copy of the Resale Certificate and associated documents.
If that's the case, it's on record that the parking space was assigned to the unit when the complex was first formed.
Occasionally, however, the parking spot is a separate piece of property with its own legal description and Tax ID number. (This often happens if a condo owner bought the parking space from someone else in the complex after they purchased their unit.)
Whatever the reason, in these cases the parking space needs to be treated like a separate piece of property and specifically included in the Purchase and Sale agreement with its legal description or at least the parcel number. (Check with escrow to find out what's necessary.)
If not, you could find out after closing that your client bought the condo unit, but not the parking space they thought went along with it.
Tip: The owner and listing agent may not even be aware of this, so it's important to verify the parking space situation every time you handle a condo purchase.
The Covenants, Codes and Restrictions determine what your clients can and can't do with their unit. They are typically recorded on title and available from the title company, or they may be part of the Resale Certificate packet.
Tip: You'll want to know for sure that the contract allows for a review of the CCRs - never just assume that it's part of the agreement.
Just a few examples of what CCRs may do:
Some complexes limit whether or not owners can install hardwood floors in units that are located above another unit, due to the potential noise. (This is definitely something to check on if your client walks into a unit and says "I can't wait to rip out this carpet and get hardwoods in here!")