7 questions to ask before signing contract

Friday, April 06, 2007

By Robert J. Bruss
Inman News

Spring is the busiest season for condominium sales. There are many reasons for buying a condo instead of a house. They make great affordable first homes. They also make great "last homes" if you are downsizing from a large family house to a smaller residence.

Although condos are no longer the "ugly ducklings" of housing since they now often appreciate in market value about the same as comparable single-family detached houses, there are special questions condo buyers should ask to avoid buying a "bad condo." Buying a condo can be more complicated than buying a house.

CONDO ADVANTAGES. The many reasons for buying a condo instead of a house include (1) usually less expensive than buying a similarly sized single-family house; (2) exterior maintenance is the responsibility of the condo homeowner's association; (3) the security of leaving your condo for an extended period without worry (called "lock and leave"); (4) homeowner tax benefits similar to houses; (5) pride of ownership from being an owner rather than a renter; and (6) potential resale profit as the condo appreciates in market value. However, local supply and demand greatly affects this last potential advantage.

CONDO DISADVANTAGES. Depending on your viewpoint, potential condo disadvantages might include:

1. Being subject to the rules of the condo homeowner's association.
2. Unexpected increases in monthly fees and special assessments for maintenance costs.
3. Policies and rules you don't like -- such as no pets or no rentals.
4. Poor-quality maintenance or management which affect enjoyment and resale values.
5. Poor soundproofing (the number one complaint of condo owners).
6. Lack of freedom to do as you wish, such as have noisy parties.
7. Neighbors you don't like or who don't like you.

ASK KEY QUESTONS TO AVOID BUYING A BAD CONDO. To minimize chances of buying a bad condo, which you will later regret, here are the seven key questions to ask to avoid buying a bad condo:

1. WHAT IS THE FINANCIAL CONDITION OF THE CONDO ASSOCIATION? If you are considering purchase of a brand-new condo, to attract buyers the developer has probably set the monthly condo fees very low. Watch out for inadequate allocations for replacement reserves which are sure to increase in future years as the building ages and needs repairs.

If you are considering buying an older condo, study the replacement reserves. Depending on the building's age and anticipated replacements, such as a new roof every 15 to 20 years, if reserves are inadequate a large special assessment might be levied on each owner when an unexpected cost arises.

For example, I own a condo where each owner incurred a $2,000 special assessment to replace the leaking windows.

There is no minimum replacement reserve guideline, but two standards are (a) at least $2,000 to $3,000 per unit, and/or (b) 25 percent of the annual gross income for the homeowner's association should be in the reserve account.

Smart condo buyers ask if there are any major replacements anticipated in the next 12 months and if there will be a special assessment. Review the board of director's meeting minutes for the last six months to determine what issues are being discussed.

2. HOW DO THE MONTHLY FEES COMPARE WITH COMPARABLE NEARBY CONDO COMPLEXES? The answer is important not only to your wallet, but to the resaleability of the condo. When the condo fees are very high compared to the competition, that holds down the market value of condos in that complex. Be sure to inquire what services are included, such as central heat and air conditioning.

3. IS THE CONDO ASSOCIATION PROFESSIONALLY MANAGED? Unless it is a small condo building of five units or less, professional management is a good sign. The cost usually pays for itself because an experienced condo manager knows where to get repair discounts that often "save" the equivalent of the professional manager's fee.

A related question to ask is how long the professional manager has been managing the complex. The right answer is: the longer, the better. That indicates the condo owners are satisfied.

For example, in the condo complex where I own a unit, the management company has been there over 30 years and the current manager has been with us over 20 years (after his father retired). Needless to say, we are very pleased with the service quality.

4. HOW GOOD IS THE SOUNDPROOFING? Because poor soundproofing is the number one complaint of condo owners (especially for buildings converted from apartments), when you focus on buying a specific unit, it pays to test the soundproofing.

This can easily be done by asking the upstairs, downstairs, and adjacent neighbors to turn on their TVs and stereos to normal levels and see if you can hear them in the unit. Also, check for upstairs noisy floors, especially in wood construction buildings if the upstairs neighbors don't have carpets with heavy padding.

5. WHAT IS THE PERCENTAGE OF RENTERS? Mortgage lenders know the risk of foreclosure default in condo complexes with more than 20 percent to 30 percent renters is very high. Many lenders either refuse to finance units in such complexes, or they charge above-normal interest rates.

The reasons are absentee landlords often have little interest in properly maintaining the condo complex and their renters aren't as considerate as owner-occupants. The result can be declining maintenance quality.

Condo complexes with anti-renter rules are considered very desirable for owner-occupants and often bring premium resale prices.

6. HAS THE CONDO UNIT BEEN PROFESSIONALLY INSPECTED AND DID THE SELLER PROVIDE A DEFECT DISCLOSURE REPORT? Most states now have laws and court decisions requiring condo and house sellers to disclose know defects. Smart buyers carefully study these written disclosure forms before making purchase offers.

In addition, savvy buyers include in their condo purchase offers a contingency approval clause for a professional inspection of the unit after the offer is accepted. The buyer should always accompany the inspector to discuss any undisclosed defects discovered.

7. ASK CURRENT RESIDENTS, "WHAT DO YOU LIKE BEST AND LEAST LIVING HERE?" Or you might prefer to ask, "Would you buy a condo here again?"

Most condo owner-occupants are friendly and willing to share their good and bad experiences. Be sure to talk with several residents just to be sure you aren't talking with a "bad apple," professional complainer. Just to verify your soundproofing test of the unit you are considering for purchase, casually ask, "How is the soundproofing here?"

SUMMARY: Condominium buyers can't ask too many questions because buying a condo is much different than buying a house. By asking the right questions, costly mistakes can be avoided.

More details are in my special report, "The 10 Key Questions Condo Sellers Hope Buyers Don't Ask," is available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 94010, or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com.

Labels: Corona, Foreclosure, Home Prices, Inland Empire, Loan Modification, Moreno Valley, Murrieta, Real Estate, Riverside, Short Sales, Statistics, Temecula