By Deborah Goonan, Independent American Communities Blog
I follow real estate news feeds, in particular those related to homeowners, condo, and cooperative associations. Lately I am seeing several articles written enticing millennials to get into the real estate market by buying their first home. Most of them are pushing condominiums rather than a single family starter home.
This is kind of puzzling, because in some hot housing markets, such as New York, Denver and Miami, developers aren’t building condos at entry-level price points anyway.
Nevertheless, at least one major real estate company is publishing articles and blogs highlighting “reasons to buy a condo.” The reasons cited (I am paraphrasing): Buying is cheaper than renting, condos are less expensive and easier to maintain than single family homes, condos are in the city near nightlife instead of the “boring” suburbs, and after you live in the condo for a few years you can move into a house and rent the condo, turning your home into an investment.
Sounds appealing, right? What could be better?
Well, it’s time to bring the millennial buyer down to earth.
Here are 5 reasons you might want to skip the condo:
Condos come with HOA assessments that can make renting less expensive than owning. Trulia has created an interactive rent or buy report that illustrates this fact. But Trulia has not accounted for one important additional factor. Assessment increases can be unpredictable, and special assessments are quite common. In a 2013 HOA industry survey, 20% of community association managers indicated that their Associations invoiced owners for at least one special assessment in the previous 4-5 years. Another 33% had to raise monthly assessments to cover unexpected cost increases. Add several thousand dollars in unexpected HOA payments over the next couple of years, and condo life can quickly become less affordable than renting.
Condo life retains many of the disadvantages of renting an apartment. You’ll still be sharing walls and will continue to have limited privacy. You might think that a condo building is built to higher quality standards, with additional soundproofing, but that’s usually not the case at entry-level price points. The interior finishes might be more to your liking, but the most important components of a multifamily building are inside the walls and covering the exterior. You may still have to deal with common utilities, heat and air conditioning that you cannot control, hauling your trash to the trash compactor, and competing for the elevator and parking spaces. What happens if you end up living next to the condo owner from hell? Remember, an owner cannot be evicted in the same way an apartment manager can evict a problem tenant. You could be in for an unpleasant battle.
At the same time, you will have added responsibilities of owning a condo. For example, Although you won’t have to do exterior maintenance, you’ll still have to maintain the interior of your unit. If an appliance breaks, if the toilet overflows, and if light fixtures stop working, it will be up to you to arrange and pay for the repairs. And you’ll probably have to live with a lot more rules and restrictions, too. Many condo associations specify what type of window and floor coverings you can install, limit what you can put out on the patio, and even forbid backing into your parking space. And, most importantly, you will need to keep an eye on how the condo association is spending your money, by reading annual reports, periodic newsletters, and attending at least the annual membership meeting to elect the HOA board.
There’s no guarantee you’ll be able to rent your condo in the future, despite the fact that condos are often marketed as good investments that have the possibility of generating rental income. Before you purchase, be sure to check the governing documents for rental restrictions. Some condo associations mandate a 1 or 2 year waiting period before you can lease your unit. Others set a maximum cap on the percentage of units that can be leased at any given time. If that limit is say, 30%, and the condo association already has 30% tenant occupancy, the Condo Association Board will deny your request to lease your unit. And here’s the kicker: even if the rental restrictions are lax or nonexistent at the time of purchase, association documents could be amended to include new rental restrictions in the future. Don’t count on existing owners being grandfathered into the original agreement.
Owner-occupants and absentee landlords often don’t mix. Something else to consider. At any given time, a condo building will contain some owner-occupied units and some tenant-occupied units that are owned by either the developer or absentee landlords. The potential problem with this mix is that condo association members who live on site tend to have different priorities than members who live elsewhere while collecting rent every month. As a true homeowner, you’ll probably expect a higher level of maintenance and services, peace and quiet, and steady but predictable assessment increases. But landlord owners tend to be more concerned with keeping assessments low, and tend to pay less attention to maintenance levels. A landlord might be in a better position to absorb periodic special assessments than most owner-occupants. When it comes to capital improvements, competing interests can result in significant disagreements over how elaborate or frugal to be with the budget. If landlord-owners hold the majority of votes, as an owner-occupant, you will have to go along with majority rule.
It’s important to consider both advantages and disadvantages when choosing your first home purchase, especially if that home is part of a condo or homeowner association.
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