By Deborah Goonan, Independent American Communities
Thinking of buying a condo? Before you make a financial commitment, here are three important considerations.
1. Think about how you plan to use the condo.
People buy condos for different reasons, with vastly different expectations. Which category best describes your reasons for considering a condo purchase?
Buying a condo as a place to live.
A first-time home buyer or single adult might purchase a condo because its sale price is more affordable than sale prices of single family detached homes. A retired couple might downsize from a large family home, pay cash for a small condo, and invest the remainder of sale proceeds in their retirement fund. Many are drawn in by claims of carefree, low maintenance lifestlyes, and recreational amenities such as a community pool, fitness center, or sports facilities.
Buying a condo as an investment.
Many people buy a condo as an investment, with no intention of living in the community. Some buyers intend to lease their unit to a long-term tenant, providing a steady flow of passive income as part of their investment portfolio, or perhaps to provide income in retirement.
Other buyers prefer to make money by offering their unit for rent on a short-term basis, such as vacations, weekend getaways, or as lodging for travelers attending special events in their city or town. (Think Airbnb, HomeAway, VRBO, etc.) Not only does a series of short-term rentals tend to bring in more income for the owner, but it also ensures that the owner can occasionally use the property for his or her own vacation.
2. What are your expectations, and are they realistic?
Condo owners who live in the community often claim that, in addition to an affordable price point, the condo lifestyle promises less maintenance than a detached single family home.
The idea that an owner can redecorate their home’s interior can be very appealing for tenants making the leap to homeownership.
Owner-occupants also tend to expect that most of their condo neighbors will live in the community, too. They envision that their condo fees will remain relatively affordable, with minimal annual increases. They expect to become familiar with their neighbors, and desire a reasonable level of peace, quiet, and consideration from their neighbors.
However, the realities of condo ownership often do not meet expectations.
Some condo associations do not keep up with maintenance and repairs. Those that do a better job of keeping the common areas functional and attractive tend to increase assessments substantially as the community matures. Unexpected special assessments are common, because the majority of condo associations do not save enough money in reserves to cover major expenses such as replacing a roof, an elevator, or the heating and air conditioning system.
In addition, condo owners need to obtain permission for most interior improvements of their units, and some of their requests are likely to be denied. For example, the condo association may not allow an owner to take out carpet and put in hardwood floors, due to expected increases in noise complaints from downstairs neighbors. Walls cannot be removed to create open floor plans if they serve as structural supports for the building, or if they contain electrical, plumbing, or heating supply lines to neighboring units.
Also, over the course of several years, condo units in many communities tend to resell to investors rather than owner-occupants. To understand why that might be a problem, keep reading.
Investor owners expect a reliable positive cash flow from rental income. They often expect to hold onto their condo units for several years, selling at the most opportune time to gain a good return on their investment.
Investors usually expect condo management to keep the amenities and common areas looking trendy and attractive, to remain competitive with apartment communities and local hotels. After holding onto a condo unit for several years, some investors are willing to spend extra money to update and upgrade the community, so they can justify charging higher rent.
Because investor-owners tend to have different expectations than owner-occupants, conflict is common.
For example, owner-occupants tend to feel uncomfortable living among a high percentage of tenants. Not only is it difficult to make long-term connections to neighbors, but also, their home tends to feel more like a rental apartment, the very type of housing arrangement they were hoping to escape by owning a home of their own.
An even bigger source of conflict is the increasing popularity of Airbnb and other short-term rental or “home-sharing” arrangements. Owner-occupants often complain that vacationers or tourists that come and go on a weekly or nightly basis are noisy and inconsiderate of condo owners, cause crowding at the pool, or create long waiting times for exercise equipment. If parking space is limited, this is another major source of frustration for owner-occupants.
The board of the condo association may agree with owner-occupants, leading them to organize a campaign to restrict rights to rent units on either a long-term or short-term basis or both. If successful in enacting restrictions, the condo can turn into a bad investment over night.
For example, Rancho Santa Fe Association, a California coastal, resort community, threatens to restrict property rights of investor-owners to protect the property rights of owner-occupants.
RSF Association considers prohibiting vacation rentals
The Rancho Santa Fe Association is joining homeowners associations and cities across the state in considering prohibiting vacation rentals in residential neighborhoods. At its Nov. 2 meeting, the board approved posting the proposed new rental regulations for a 30-day public comment period. The board will then consider adopting the rules at its Dec. 7 meeting.
RSF Association Manager Bob Hall said the rule seeks to address “transient types” of rental uses, growing in popularity for travelers as well as homeowners looking to make extra money.
“Homeowners are realizing that it can be much more profitable to rent their home for thousands of dollars a night using a site like Airbnb or HomeAway versus a regular rental arrangement,” Hall said.
It’s important for condo investors to understand that HOAs (including condo associations) have greater legal rights to limit vacation rentals than municipalities.
If you buy into the wrong condo association, even in a resort location, you may find out that you cannot make a good return on your investment after all.
3. The balance of power in a condo association can change, sometimes suddenly.
Of course, it makes sense for any condo buyer to perform due diligence. Verify the owner occupancy to renter ratio prior to making a purchase. You should inquire with the condo board or manager, but double check County Assessor records to get a good sense of who currently owns most of the condo units.
In addition to the governing documents, ask to see at least three years of annual budgets, recent audit and reserve reports (including the management summary), and minutes of board and annual meetings for the past year or so. All of these documents can help to provide clues as to the financial stability of the association, the possibility of upcoming special assessments, and any ongoing discussion of pending changes to rental restrictions.
However, be aware that condo leadership, management, and preferences of owners holding the majority of voting interests can change unexpectedly. So a condo association that seems to be aligned with your ownership goals and expectations may be directly opposed to your interests within a few months or a few years of your purchase.
Think about it: are you prepared for this possibility?
For example, as reported by ABC 15, one Phoenix condo owner purchased her condo and made substantial interior improvements, with the intent of living in the unit and increasing its value. But only eight months later, an investor has purchased an 80% controlling interest in the condo corporation, forcing minority owners to sell and move out. And, in this case, the investor group chose an appraiser to justify a low-ball offer to the condo owner. If forced to accept this offer, the condo owner will lose tens of thousands of dollars that she invested in her unit less than a year ago.
Condo owner questions appraisal after law allows home to be taken (AZ)
Courtney Holmes, Joe Ducey
6:17 PM, Nov 7, 2017
6:36 AM, Nov 8, 2017
We’ve been following the stories of Phoenix condo owners who are the latest to fall victim to a bizarre state law.
In June, Courtney Hoogervorst and her neighbors in Solstice Arcadia Condominiums, near 54th Street and Thomas Road, were informed that their complex was being taken over by a local investor, Travis Karl, using the condominium termination statute. It says if 80 percent of the units agree, a condominium association can dissolve and force the remaining owners to sell at fair market value.
She bought the unit for $93,000 in September 2016, and says she spent more than $15,000 in upgrades. Hoogervorst says she was offered $95,000 despite the appraiser nor the investor never setting foot in her unit. She believes that number is low. So does Valley realtor Dean Ouellette, who says the area went up in value from the time she bought her place until the appraisal.
“Forget the upgrades. She didn’t even get the six percent appreciation that the area had, so she got it coming and going,” he says.
In conclusion, the condo buyer needs to understand that ownership does not guarantee individual property rights. On the contrary, property rights in condo and homeowners’ associations are intentionally limited by restrictive covenants. And the owner’s ability to uphold those rights may ultimately be determined by circumstances beyond the individual’s control. It all boils down to who holds majority of voting interests in the condo association.