“Even during the deep recession of the mid-1970s and the downturn in the early 2000s, builders put up significantly more homes per U.S. household than they are constructing now, in the ninth year of an economic expansion”
Wall Street Journal
TOP STORY: A Primer on Condominiums
A roof over your head. That pretty much concludes any discussion of similarities between buying and owning a condominium versus a single family house. The legal structure, rights of ownership, utility, availability, responsibilities of ownership, and even the smart way to purchase one is quite different from the other. So, in this issue, we present your condominium primer.
Let’s start with a not-so-simple definition: A condominium is usually defined as “a multiple-unit dwelling in which there is separate and distinct ownership of individual units and joint ownership of common areas.” Some definitions also add that there is almost always a homeowners’ association (HOA) to manage the overall property. A single family home is generally described as a structure maintained and used as a single dwelling unit. However, each definition gets blurred by exceptions.
There are condo developments with individual freestanding units and townhomes and twin homes that are legally single family homes but which share a common wall. Neighborhoods of single-family homes often have HOAs. It is more precise if legalistic to define a condo as a project where a master deed covers the entire property including buildings and land, while a unit deed conveys the interior of a single unit and a proportional share of the property covered in the master deed. The ownership of a single family home involves a single “fee simple” deed—one that covers the whole kit and caboodle.
According to CoreLogic, condo sales represent about 11% of the overall home sales market or roughly 620,000 units per year.
Like a Little City
Because of the shared ownership of a condo development and the resulting need for cooperation among those living there, condos require their own form of government. This is provided by the HOA, a board or committee made up of unit owners. In a small development all owners may sit on the board, in large developments there are usually representatives elected or appointed to it. The HOA is legally responsible for managing the condo development and has been granted the power to do so. It enforces (and can amend) the development’s bylaws which, along with specific HOA actions, determine whether and to whom owners can rent out units, the extent of improvements they can make to them, and regulations that make community living possible, such as rules for using common areas or whether pets are permitted.
The HOA can hire professional management for the development, sets an annual budget, determines the need for repairs and improvements, and probably most important, levies fees on unit owners. Those fees pay for taxes, the operation of the facilities and building a reserve fund for the inevitable major repairs and improvements.
The Bankers’ View
The form of ownership means lenders approach financing a condominium differently than they do in originating a mortgage for a single family house. Not only does the “bank” have to be concerned that the borrower will repay the mortgage and maintain the property, it has to worry that the HOA will keep the entire development in fiscal and physical repair.
Another wrinkle that concerns banks when it comes to condo financing is so called senior liens. When a condo owner fails to pay condo fees HOA’s can, like a tradesperson who hasn’t been paid for his work, place a lien against an individual unit. Many states have granted senior status to these condo liens which allows them (or the liens) to supercede all other liens including the first mortgage.
Because lending concerns extend beyond the creditworthiness of the borrower, financing a condo has always been a little trickier than a single-family home. Fannie Mae, Freddie Mac (GSEs), the FHA and the VA will only purchase or guarantee loans in condo projects that meet certain standards. In the case of the GSEs that means they are “warrantable” units. In the case of FHA and VA the projects must appear on an approved list.
Falling in love with a “non-warrantable” unit or one ineligible for FHA financing doesn’t preclude its purchase. Loan officers usually have a lot of alternatives for lending on these units, although the rates may be a little higher.
Streamlined Approval Process for Condo Projects
In recent months there have been efforts to standardize and streamline the approval process for condo projects. At the end of June, 2018, Freddie Mac announced that consumers who buy a condo, or refinance an existing condo mortgage, may now be eligible for its automated appraisal waiver.
Originally launched in 2017 for single family home loans it purchases, Freddie Mac’s automated collateral evaluation (ACE) appraisal waiver gives eligible borrowers of mortgages secured by condos the opportunity to realize savings in cases where it’s determined a traditional appraisal isn’t needed. In some instances, borrowers could save approximately $500 on appraisal fees, and potentially close 7-10 days faster.
“We continue to see the share of condo loans we purchase increase, especially among first-time homebuyers,” said David Lowman, executive vice president of Freddie Mac’s Single-Family business. “ACE for condos will help increase the efficiency of the mortgage origination process, offer greater certainty and help save our clients, and their customers, time and money.”
BEFORE MOVING FORWARD
Before you decide whether a condo, co-op or duplex is the best option for you, consider these basic questions:
- How important is privacy?
- Is owning your own property a priority?
- Do you need professional maintenance help?
- Do you have less-than-perfect credit which could adversely affect an easy approval process?
- Would you like the option of being able to rent, sublet, or sell the unit to whomever you choose?
Research all your options to gain a better idea about which type of housing solution is best for you.
Educate yourself as much as possible while seeking the advice of a professional real estate agent who can help you.
With knowledge, patience and determination, you’re bound to find the right home. – Mortgagematch.com
Condos’ Pricey New Status
Condos have always been disproportionately located in urban and inner suburban areas. This makes sense, because land there is at a premium and building “up”, rather than “out” may be the only option. While many projects have been built specifically as condominiums, millions of units were formerly apartments that were “condominimized,” sometimes after significant renovation and sometimes by merely rewriting ownership documents. Tbe-eWer rondos were-ef- ten seen as an answer for first-time buyers while more expensive new construction became a place for empty nesters to downsize. These generalities have shifted, along with recent changes in the condo market.
Another Level of Due Diligence
While any homebuyer needs to do an adequate amount of due diligence both before and after making an offer on a home, there are several additional steps that are crucial when buying a condo. As with a single-family home purchase, you should make sure the property is one for which you can qualify for financing, verify the taxes, and gain as much assurance as possible that an appraisal will validate the price you are paying. After the offer is made you will, of course, have the house inspected for structural integrity, pests, and if the age warrants, for lead paint.
There are a lot more questions to ask when buying a condo. Some should be asked up-front as the answers could be deal-killers. On a financial level these could include whether the project is warrantable and/or on FHA or VA approved lists, and how much the condo fee is (and does it work within your debt-to-income ratio) and if there are any special assessments pending for improvements or repairs.
CONDO BUYING VS. RENTING EQUITY AND TAX ADVANTAGES
If you’re deciding between renting a property and purchasing a condo, note that ownership presents two financial advantages over renting: the opportunity to build equity and the ability to take advantage of tax deductions for mortgage interest and property taxes. If your monthly mortgage payment would be about the same as rent, it may be financially advantageous to buy instead of rent. —Jean Folger, Investopedia
And More to Consider
Other things that might be important—and would not be an issue with a single family home—is whether parking is included, if additional spaces are available to buy or rent, and what accommodations there are for guest parking. Are pets permitted? Is there storage space available? Are there any restrictions on renting out the property or having non-related occupants or boarders?
Any offer should carry the same mortgage and inspection contingencies that would accompany one on a single family home, but there should also be a contingency allowing for an acceptable review of condominium legal documents, budget, reserves, and HOA committee minutes. Many HOAs and/ or management companies will not provide these materials until an offer has been accepted or sometimes not at all unless the seller requests them; another good reason for a contingency.
Reviewing the Nitty- Gritty
Your attorney and/or an accountant should review the documents which, according to many authorities should include—at a minimum—the following:
The condo budget for the current year
The budget will indicate whether sufficient amounts are being spent on maintenance and if unit owners are paying their monthly fees. It is virtually impossible to get a mortgage in a building where unit owner delinquencies are running over 15%. Also a HOA running short on cash may discontinue maintenance or services and possibly even hit owners with special assessments to take up the slack.
Make sure they appear adequate for the age of the building; the older the building the more likely there will be a need for special assessments. As a rule of thumb, many lenders require that 10% of unit fees be set aside as a reserve.
A master insurance policy
The policy a unit owner purchases covers only the interior of the unit. The HOA should be carrying an adequate master hazard and liability policy on the building itself and any amenities.
The percentage of renters in the building
Even if the project meets lender requirements for owner occupancy, a lot of rental units does not bode well for resale or appreciation.
Your attorney should also review the condo documents and by-laws and the minutes of HOA meetings for the previous year or two. The latter is important because the minutes will contain reports of any discussions about refinancing, major repairs or important changes to by-laws (banning pets for example) that would not be apparent in the budget or other documents.
EXISTING HOME SALES
Sales of single family houses went down 0.6% in May of 2018 to 4.81 million, following a 3% slump in April while sales of condos rose 1.6% to 0.620 million after being flat in the previous month. The median house price increased to $264,800 from $257,900 in April and the months’ worth of supply edged up to 4.1. In addition, the number of houses available in the market increased to 1.850 million. Year-on-year, existing home sales rose 5.6%.
Existing Home Sales in the United States averaged 3933.26 Thousand from 1968 until 2018, reaching an all time high of 7250 Thousand in September of 2005 and a record low of 1370 Thousand in March of 1970. —Tradingeconomics.com
Don’t be Intimidated
This isn’t as daunting as it seems, it is routine practice for real estate attorneys, and lenders and real estate agents are familiar with ways to assist. The most important thing is that buyers are aware of the steps involved in a solid performance of due diligence. It is much wiser to look before you leap. We invite you to call, anytime, if you have questions or interest in Laguna Beach Real Estate.