10 Tips Know Before Buying a Condo

Condos are very different from purchasing a single family home, town home, or apartment building. While most homes will qualify for almost any financing, condos can be much more difficult. Since they are a collected group of owners sharing the same land, walls, & maintenance expenses, rules are necessary to govern the common good of the entire building or buildings. An association of home owners or a private management company will administer the rules, collect monthly payments, pay bills and administer improvements or repairs. In order for a condo building to qualify for financing the association must be active and healthy. Here are 10 tips to make your condo purchase smoother and flush out all the potential challenges before making an offer.

1. Will the building qualify for financing? Since the down turn in real estate, financing options have changed and tightened up considerably. Unless you are purchasing a home with cash, it will need to be financed. Make sure the building can be financed with relative ease. Find out what types of loan can be used, this will affect ease of resale if multiple loan types can be used.

2. What types of loans can be used? Currently the most common financing options for purchasing a condo are:

– FHA (government backed with only 3.5% down payment. Building has to be FHA approved and meet guidelines)
– Conventional (5-20% down payment, higher qualifications & most likely sold on the secondary mortgage market)
– Portfolio Loan (higher down payment, bank will lend its own money & keep the loan usually at a higher interest rate)
– Cash (necessary when a building will not qualify for financing)

The next 6 questions will determine financing options.

3. How many condos are being rented? Owner occupancy will affect financing since conventional & FHA loans allow no more than 50% to be rented. A good association will have rules in place to keep rentals at an acceptable level.

4. What’s the investor concentration? Find out if 1 person or entity owns more than 10% of the building. With smaller buildings 3-10 units if 1 person owns more than 1 condo. This is another financing guideline for FHA & Conventional loans. This standard is in place so if that 1 person or entity defaults, the whole building doesn’t suffer.

5. Are more than 10% of the condos delinquent or behind in assessment payments? This can also be road block to financing because it is usually leads to the entire association not being able to pay its bill or insolvency. Many times it’s also sign that condos owners will default on their loans.

6. How many condos are for sale as foreclosure or short sales? Not only do a high amount of short sales and foreclosures hurt values for all condos in the building but, conventional & FHA guidelines only allow for 25% or less.

7. How much is in reserve funds? Reserve funds are meant to pay for special projects or common repairs such as a roof, decks, exterior walls or other common elements.

8. Are there special assessments? When a condo building doesn’t have enough reserves to cover repairs or updates a special assessment is needed. This comes in the form of additional payments from each condo owner with a 1 time payment or monthly installment payments over a set period of time ie 1-3 years.

9. What’s included in monthly assessments? Find out what your monthly assessments cover heat, electric, cable, internet, parking and common amenities such as a pool or gym.

10. Is parking included? Parking spaces can be included as a common element with each unit, deeded & sold separately, or leased.

Before starting your condo search make sure you get pre-approved for a loan. This will help guide in your condo search by letting you know which financing method you can use and which buildings will qualify for that type of financing. The most disappointing feeling is finding that perfect place and finding out later that it won’t qualify for the type of financing you are using.

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