John M. Lee: Investigate When Buying a Condo

With home prices being so high, many people are purchasing condominiums as their first home. It was not too long ago when people thought condos did not appreciate and were a poor investment.

Also, people tended to think that all that homeowner association fees were a waste of money. However, with homes starting in the $500,000-plus range, many first time home buyers are deciding to start off with a condo.

If you are thinking about buying a condo, either low-end starter condos or high-end luxury condos, investigate carefully the homeowner association and its finances and management.

When you are serious about a condo project, start your investigation by studying its Covenants, Conditions and Restrictions (CC&R), By-laws and House Rules. These are documents that tell you what you can and cannot do in your condo. These are rules that all occupants of the condo project are expected to abide by. For instance, they will tell you about pet restrictions. Do they allow dogs and cats? If yes, is there a size restriction? Is there a quantity restriction? Can the pets go into the common areas such as the backyard? Other questions include: Can you install hardwood floors to the unit? Can you install DirectTV with a satellite dish? These are some of the common areas of concern for a typical condo buyer.

Next, examine financial records. Is the Homeowner Association (HOA) maintaining financial records? They should have current and past year's budgets and income and expense statements. Also, they should have a current balance sheet showing its financial position.

Look to see where the association is spending its money. What is included in HOA monthly dues? Are there any upcoming special needs which will require a special assessment on the homeowners? How are the financial reserves? Is there enough to maintain the property and to take care of some unexpected issues that might crop up?

When buying a condo, you also need to decide whether a larger or smaller condo project is for you. Larger condos tend to have professional management firms and more amenities, where the smaller ones are usually self-managed. The trade-off many times is higher monthly HOA dues. Do you want others to manage the property or are you the type who needs to be involved in making decisions? Who is in charge of the HOA? Are they qualified and experienced to run it? Remember, you will be entrusting your monthly dues to them.

Walk around the complex and see how well common areas are taken care of. Is the maintenance adequate or will it require a special assessment on the homeowners to bring it up to par?

Are there any current or potential litigation actions pending? Some banks do not lend on projects which are involved in litigation, and if enough banks reject the project, financing will be hard to come by, which limits the number of potential buyers, resulting, inevitably, in a lower valuation of units in the complex. Also, while in litigation, many associations tend to raise the monthly assessments to offset legal and attorney fees.

Examine the insurance coverage for the complex. Does it have enough coverage to rebuild the property if it suffers major damage? What exactly is covered? Condo policies usually cover fire, general liability, board of director insurance and fidelity bonds. What other types of insurance do you need? Does the condo association carry earthquake insurance?

Buying a condo is more complicated than purchasing a single-family home because you have to make joint decisions with all the other owners, and others will dictate to a certain degree what you can and cannot do with your home. Hopefully, this has not scared you into not purchasing a condo. But because purchasing real estate is a big decision, you need to investigate and understand fully how a condo purchase will impact you.

John M. Lee is a top selling broker at Pacific Union specializing in Richmond and Sunset district properties. If you have any questions regarding real estate, call him at (415) 447-6231 or e-mail him at isellsf@aol.com.