Tuesday, September 23, 2008

Key questions to ask before buying a condo

For many aspiring homeowners, buying a condominium can be an affordable way to move from renting to owning a home that doesn't have a lot of the added costs involved in maintaining a house on a piece of property.

Condos also may come with added perks many first-time buyers might not be able to afford in their starter home, such as a swimming pool or hot tub, or resort-like amenities such as tennis courts and security guards.

But the condo life also requires owners to give up some of the freedom they would enjoy if they owned their own detached home, all while being exposed to onerous maintenance fees on top of their mortgage payments.

And too often, experts say, condo buyers don't stop to consider exactly what they're getting into.

"The biggest single mistake that people tend to make is to think that buying a condo is just a less expensive way of buying a house and not really understanding that it's shared ownership, which is a lot different," says Robert Irwin, author of Tips and Traps When Buying a Condo, Co-op or Townhouse.

"They aren't going to be able to do a lot of the things they can freely do when they own their single-family detached house," Mr. Irwin says. Still, there are steps buyers considering a condo purchase can take to ensure they know what to expect before taking the plunge.

The first thing to do is try to find out how much you will have to pay in maintenance costs, or monthly homeowners association fees. You also want to know if there are any big special assessments on the horizon.

Special assessments are fees that condo associations sometimes decide to charge owners in order to pay for an unexpected cost, such as an emergency repair, litigation or even to help cover a shortfall in monthly dues.

Assuming that the maintenance is reasonable and there aren't any special assessments on the radar, you can delve deeper. You may be happy with a building's looks, the size of the unit and location. But a condo is real estate, just like a detached home. And just like a detached home, the value of a condo will rise or fall largely based on how comparable units sell.

Buildings with high proportions of unsold, empty units can send the wrong signal to buyers and can hurt comparable resale prices.

Also, a condo complex that has too many investor-owned units being rented rather than occupied by owners can make it tougher to obtain financing, experts say. "The first thing I want to know is what the occupancy rate is," says Ken Roth, author of Everything You Need to Know Before Buying a Co-op, Condo or Townhouse.

In a market with declining sales and home prices, condo owners who bought during the peak or speculators who bought with the intention of unloading their properties quickly could be in financial trouble, particularly if they took on risky adjustable-rate mortgages, Mr. Roth says.

Buyers looking to snap up a unit in such a complex might find it difficult to get a mortgage because banks typically won't finance or will charge a premium to finance a unit in a building where 40 per cent or more of the units are rentals, he explains.

Mr. Irwin says the threshold is even narrower, as low as 20 per cent. Therefore, condo buyers should find out what the occupancy rate of the building is and what percentage of its units are being rented out by their owners. Ask the homeowners' association, or in the case of a new building, the developer.

Experts advise buyers to examine the financial statements of a developer and to ask to have some guarantee that any money you put in toward a unit in a building under construction be kept in escrow. (Usually paid to a Law Firm in Trust)

One gimmick to watch out for is when developers advertise a building as 80 or 90 per cent sold.
That sounds good, but sometimes what developers are really saying is they've sold most of the units they've put on the market, rather than most of the units in the building.

The next key step when considering a condo purchase is to go over the building's condo rules, conditions and restrictions documents, which are typically handed over to buyers when the contract is signed.

The documents are crucial because they spell out the rules on everything from how parking spaces are assigned to what types of restrictions owners must heed for remodelling and decor.
Too often, buyers don't look through these documents thoroughly and end up in a bind after it's too late.

That's what happened to Tara Washlack and her husband, first-time home buyers who purchased a condo in Los Angeles in July, 2007. The couple skimmed through the condo documents and later ran into trouble when they wanted to install a satellite-TV dish. The condo rules, however, prohibited the installation of such hardware on the building, says Ms. Washlack, a pharmaceutical researcher.

The condo rules also did not allow the Washlacks to run a TV cable through a different location in their unit because it would have been necessary to drill a hole in the exterior of the building. They also couldn't add an overhead light in their living room because they'd have to run cables through the building's roof, Ms. Washlack says.

Then, they discovered they couldn't install a canopy on their balcony. "That's one of the things that was disclosed to us, but again, it was overlooked since we had thousands and thousands and thousands of pages [to read]," says Ms. Washlack, 29, referring to the condo documents. "I think for the average homeowner it's kind of an overload."

One other big reason to plow through the documents closely is to find out what the condo association's financial picture looks like and whether it is involved in litigation.

Although the homeowners' association will typically have some insurance coverage for litigation, it may not completely shield owners from liability, Mr. Irwin warns.

"If you get into a situation and you find where there's a whole bunch of lawsuits going on — regardless of how well you like the physical layout and the building itself," he says, "it may be the sort of thing you might want to pass on." AP Alex Veiga

David Pylyp As with many Etobicoke Condos some issues here apply to all condos. The Author mixes his examination of new and resale condos (used). As an investor or a purchaser you would not know what the mix of tenancy is, until the final closing takes place. I am not currently aware HOW a lending institution could monitor who occupies a unit to establish what percentage may apply as investor vs owner occupant population. Negative Pledge clauses from CMHC based on past loss ratio's for buildings or communities.

One untouched point was that buyers need to educate themselves on the square foot values of the existing condominiums they are purchasing. Too often I have seen buyers pass on a condo with (what they perceive to be) high maintenance fees to save a few dollars only to realise later that maintenance fees are proportionate to size and amenities. My point simply is that they BALKED at fees of $ 650 per month to find themselves paying (saving at) $ 490. Yes they saved but the units were 1600 sq ft vs 880 sq ft. Which was cheaper?

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