September 2004
 
 

John M. Lee: Invest Wisely With a Condo

With home prices being so high, many people are purchasing condos as their first home. It was not too long ago when people thought condos did not appreciate and were a poor investment. Also, people tend to think that all that homeowner association fees are a waste of money.

However, with homes starting in the $600,000-plus range, many first time homebuyers are making the decision to start off with a condo.

If you are thinking about buying one, and this applies to low-end starter condos as well as high-end luxury ones, investigate carefully the homeowner association's finances, management and current or potential litigation actions before proceeding.

When you are serious about a condominium, start your investigation by studying the 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 association are expected to abide by. They will contain various items, including 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? Can you install hardwood floors in the unit? Can you install a satellite dish? These are some of the common areas of concern for a typical buyer.

Next, examine the association's financial records. Is the homeowner association (HOA) maintaining financial records? They should have current and past year's budgets, income and expense statements and a current balance sheet showing its financial position. Look to see where the association is spending its money. What is included in the monthly dues? Are there any upcoming special needs which will require a special assessment on the homeowners? How are the reserves? Is there enough to maintain the property and take care of unexpected issues which can come up?

When buying a condo, you also need to decide whether a small or large condo is for you. Larger condos tend to have professional management and more amenities, where the smaller ones usually are self-managed with less features. The trade-off is in higher monthly homeowner association dues. Do you want others to manage the property or are you the type who needs to be involved in all the 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 the common areas are being taken care of. Is the maintenance adequate or will it require a special assessment on the homeowners to bring it up to par?

Is there any current or potential litigation? Some banks do not lend to projects which have litigation, and if enough banks reject the project financing will be hard to come by, which results in a lower valuation of units at the complex. Also, while in litigation, many HOAs tend to raise monthly assessments to offset legal fees.

Examine the insurance coverage for the complex. Do they 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 type of additional insurance do you need? Does the condo association carry earthquake insurance? Do you need it?

Buying a condo is more complicated than purchasing a single-family home because you have to make joint decisions with all of 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 buying real estate is a big decision so 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 the Richmond and Sunset districts. If you have any questions regarding real estate, call him at (415) 447-6231 or e-mail johnlee@isellsf.com.

 

 

 
 
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