Buying A Condominium – What You Need to Know

My thoughts about what to consider when buying a condominium were published in this week’s San Francisco Chronicle. Below I have included the text of the article followed by a few bonus tips. Thanks for reading!

Condominiums can be a great option in our competitive market, as they tend to be less expensive than single family homes with less upkeep. The tradeoff is that you are living near your neighbors which can bring issues. You need to find out whether the community is a good fit, which requires investigation.

Once you find a unit that fits your criteria, have your agent order the disclosure package. Reading through the Covenants, Conditions, and Restrictions (CC&Rs) document will inform you of rules governing the community such as restrictions on renting your unit, and the building’s pet policy.

The disclosures should also come with Homeowners Association meeting minutes. These meetings discuss issues in the building and give clues about how the building is managed. You can take your due diligence a step further by putting together a list of questions and calling the president of the HOA or community manager to learn more.

Here are my condo buyer tips that weren’t included in the original article

  • Owner Occupancy Ratio Percentage – This is the number of owners living in their unit divided by the total number of units. This number is important for two reasons: A building with lots of tenants will be more transitory. Owners typically are more invested in the upkeep of the building and ensuring the HOA is run well. It’s rare to have a tenant willing to serve the HOA.

    The lender looks at this ratio as part of the guidelines for your loan. Financing can be difficult and more costly if a building’s owner occupancy ratio is less than 50%.
  • HOA Solvency – Homeowners Associations in California are required to maintain reserve accounts. The HOA will typically commission a reserve study to forecast future repairs and earmark a portion of the HOA dues to fund the account. The benefit is that you have a forced savings plan for future repairs on your home. The drawback is that if the HOA does not accurately forecast future repairs, they may assess a special assessment where owners will pay out of pocket for expensive repairs. The disclosure statements should include a budget for the HOA. Review this document to make sure the building is prepared for future repairs.

    If you’re not a numbers person, consultants can help you sort through the HOA financials.
  • Pending Litigation – It’s not uncommon for an HOA to be involved in pending litigation. Pending litigation can mean contractor defects when the building was constructed or slip and fall lawsuits where someone is suing the HOA for an injury that occurred on the property.

    If the HOA is currently involved in pending litigation, this can be an issue for the lender who is providing your financing. Make sure to consult with your lender because every situation is different and you may be able to still obtain a mortgage with certain types of litigation.