What to Know Before Buying a Condo | Extra Mile

“My wife and I have no kids. We travel, we both work, and we have no interest in landscaping. We like the safety of a secured parking area and we don’t need the square footage. It’s like living in a hotel,” explains Matt Parker about owning his condo on the outskirts of Seattle. Given the recent rise in condo sales, it would seem that this lifestyle appeals to both single-family home owners and first-time buyers—and maybe even you.

If you’re interested in buying a condo, do your homework to help ensure that the condo buying process goes smoothly and that you find a place that truly fits your lifestyle.

Buying Your Condo

Home Owners’ Association (HOA) Fees

Think of a condominium as a large pie. You contribute to the entire pie, even though you only own one slice. If the building’s roof needs replacing, for example, you and the other owners are responsible for it. Matters such as this are often overseen by a Home Owners’ Association (HOA), toward which you’ll likely pay regular fees to cover the maintenance and repairs of the communal areas, as well as the landscaping.

Although condos are typically less expensive to purchase than single-family homes, keep HOA fees in mind when budgeting and applying for financing.

Parker, who is a real estate broker with Keller Williams Puget Sound and the author of Real Estate Smart, says that based on anecdotal evidence, HOA fees for many condos seem to be increasing at a higher rate than in the past. In many cases, it’s to catch up with repairs that weren’t done during the Great Recession.

Parker personally pays $325 a month on a 567-square-foot condo, “and [dues have] been going up three to ten percent each year.” From what he’s seen in his role as a broker, the amenities haven’t changed. “You’re paying for ‘Super Size’ but getting a regular meal.”

Finding a Mortgage Lender

Once you determine what you can afford to pay each month, fees included, it’s time to look for a mortgage lender. Be aware that most lenders follow Fannie Mae and Freddy Mac, the federal housing finance agencies. They have rules about lending before a certain percentage of units are owned, says Patrick Lavell, vice president of mortgage lending for Guaranteed Rate.

Since 2009, the Federal Housing Authority will only insure loans on condos if at least 50 percent of the units in that building are owner-occupied, and in new developments, if at least 30 percent of the units are already sold.

It’s important to evaluate the building’s fiscal soundness. Although your lender will undertake their own investigation of the HOA’s management company, you should do your due diligence too:

  • Make sure the HOA is doing a good job at actively maintaining all structures. Tour the halls, the common areas, fitness facility, roof garden. Rely on your gut. If everything is clean and in order, it’s a good sign that the association is collecting the appropriate amount of dues and looking after the building, Parker says. If it looks like it’s been weeks and weeks since the grounds have been mowed, “it’s probably not an isolated condition.”
  • Check on the building’s reserve amount—money they’ve stashed away for emergencies. The HOA should have had a reserve study done by an auditing firm, which maps out the future of the building. It will let you know whether the building is underfunded, which in turn will give you a sense as to whether dues may need to be raised, and by how much.

Insuring Your Condo

Just as with any home, it’s wise to insure your space. You will need to purchase condo insurance for your own unit, but the building will have a policy in place to cover the shared spaces.

The building’s policy is called a master policy and it defines what’s covered by the entire community as funded through HOA dues. Typically, it covers the exterior of the structure along with communal amenities, such as a pool or garage.

Ask the HOA board for a copy of its “declaration,” which defines what the HOA insures and what the unit owners insure. Aim to purchase insurance for those things that the master policy does not cover.

Types of Master Policies

There are four master policy types that offer varying levels of coverage.

  • For a “bare walls in” policy, you, as the unit owner, are responsible for “the touchable wall and anything attached to it, the floor and ceiling—the interior shell of the structure,” says insurance broker Cindy St. George, with the independent Christopher Williams Agency in Pittsford, N.Y. “The rest is the responsibility of the HOA.”
  • For a “wall studs in” policy, you are responsible for the back of the wall, where it meets the studs, and inward. The HOA is then responsible for the outside shell. Think of a box within a box,” St. George explains.
  • For an “original specification” policy, features such as countertops, faucets and flooring would be covered by the HOA master policy unless you’ve made any additions or alterations, such as a new quartz countertop.
  • For an “all in” policy, the condo association is responsible for covering the interior features, but you’re still responsible for insuring your personal property, as well as purchasing insurance to cover your liability—should an accident occur on your property—and living expenses—should you be forced to move elsewhere temporarily while your home in under repair. St. George explains this type of policy: “If I turned your apartment upside down, you insure whatever falls out.” She suggests purchasing replacement costs coverage for all your belongings.

Additional Insurance Concerns

In addition to determining what type of policy is in place at the building you’re interested in, you should also find out how much the master policy’s deductible is. Due to increases in insurance costs, buildings are purchasing larger deductibles—in some cases, $50,000. And depending on the HOA bylaws, if a covered loss were to occur, either all of the owners would pay toward the deductible, or only the owners of affected units would pay toward the deductible.

Here’s an example of what that could mean: The Westledge Condo Complex consists of 20 buildings with 10 units in each building—for a total of 200 units. A terrible hurricane rolls through the condo complex, blowing off the roofs of two buildings. If the $50,000 deductible was assessed over the 200 units, each unit would be responsible for $250. If the deductible was assessed over the 20 units that were affected only, each unit would be responsible for $2,500.

Or, perhaps instead of a hurricane, there was a fire that affected one unit only. That owner of that unit might be responsible for the entire $50,000.

Note that Loss Assessment coverage is likely included in your individual policy. This provides coverage when you, as the condo owner, are assessed for a covered loss that the condo association suffers, such as when roofs are blown off or someone falls at the pool and sues. However, the amount of coverage will probably be small (perhaps $1,000), so it’s a good idea to purchase more loss assessment coverage based on the association’s bylaws and deductible.

And, if the building or complex is located in an earthquake-prone area, Earthquake Loss Assessment coverage should be purchased as well, as it is a separate coverage altogether, not included in your basic or additional loss assessment coverage.

As with all insurance needs, it’s important to work with an experienced agent or carrier. “What if I have a $2,000 mountain bike on my deck and the deck falls off and the bike is destroyed? Who covers it?” Parker asks. “Or does it cover my car in the garage or the things in my storage unit if the building falls down?” Those are the kinds of things you need to investigate when selecting an insurer.

Keep Reading: Are You Ready to ‘Rightsize’ Your Home?

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