What You Need to Know Before Buying a Condo
|Condominium living has numerous advantages: condominiums require significantly lower investments of time and money when compared to single-family homes. On top of these perks, most condos provide access to communal amenities of a higher quality than you will find in a rented apartment.
The recent news about the catastrophic building failure in South Florida makes it a good time to talk about what you need to do if you’re thinking about buying a condominium. Thankfully, this type of disaster is rare in our country, but stories of poor association management that result in losses for owners abound, so it's important to be fully informed when considering purchasing a condo.
The following factors will impact your condo ownership: the rules and regulations governing owners and residents; effective and prudent management of the association; and how well the building and grounds are kept. All this information is available to a prospective condo purchaser—all you have to do is request and read. Your real estate agent and lawyer will help.
The Information A Condo Seller Will Provide
All sellers of residential real estate must provide information about the condition of the home. Because condo unit owners only own and “control” the interior of a unit (from wall to wall, but not the outside structure), the disclosures will relate to just that space. A condo purchaser will receive a real property disclosure of any material, unfixed defects and, if relevant, lead paint and radon gas disclosure forms. The information in these disclosures must be accurate to the best of the seller’s knowledge, or the seller can be liable to the buyer for damages.
In addition, the seller is required to provide certain documentation and disclosures from the condo association. Once your offer to buy a condo is accepted by the seller, your lawyer will request from the seller’s counsel copies of the association’s bylaws, rules and regulations, budgets for the current and prior year, and minutes from at least one year of board meetings. You will also receive a disclosure required by statute (in Illinois, the statute is [765 ILCS 605/22.1 (6)]) that will detail the level of reserves for capital projects, any lawsuits against the association, and other relevant information.
If you are financing the purchase, your mortgage lender will need to see this information. In response to the South Florida disaster, Fannie Mae has ordered lenders to refuse loans for condo properties with more than five units where the association has significant deferred maintenance or has received a directive from a regulatory authority or inspection agency to make repairs due to unsafe conditions. It is important to ask for it early in the attorney-review process so that you and your lender have enough time to receive, review and digest the information and still meet contractual deadlines. For more details, click here to read the lender letter.
Your Own Research
Before you tie your future to a building, it's important to know its past. The condo association should be the expert to consult, but if they seem uninformed or reticent to share details, we highly recommend snooping. A good starting point is a web search: keep an eye out for any historical data, news articles that mention the building, or reviews from current and former tenants. You could discover that the building played host to historical figures or events that make for excellent bragging rights, but you're equally likely to come across negative reviews about the building or management that show common issues and complaints from residents over the years. Remember, not all information out on the Web is accurate, and some disgruntled residents post things that are untrue or unfairly biased. Still, it’s good to know what’s being said about the building, and you can follow up with the condo association manager about any worrying reports.
Average tenure is also a great way to determine the quality of living that a condo building can provide. If the building has a history of short-term buyers and quick turn-over in their units, that could be a bad sign. If the condo association is tight-lipped on this statistic, research the building history on real estate websites.
It's also important to identify just how long the current building management company has been in place. Management companies are responsible for collecting fees, and for maintaining the building; a long-term and consistent history of company management is often a sign that the building is in good hands. On the other hand, if the management has been passed from company-to-company over the years, it may be a sign that there are underlying issues with the building or the residents.
One attorney we spoke to on the topic (who wished to remain anonymous) advised requesting the condo association's meeting minutes. By most statutes, records of meetings are kept for seven years and the association must make the minutes available to association members within 30 days, and the meeting minutes should be public record and available even to prospective buyers. This varies by state, and some buildings may only provide general minutes or redacted versions to prospective buyers in order to protect tenant privacy. Even if only limited information is available, we highly suggest requesting the minutes before purchasing any condo. Not only will you get a sense of your neighbors and the efficacy of the association and management company, you'll be able to see the type of concerns and complaints the owners have and how they have been addressed.
The Association's Financial Health
As mentioned above, state law requires condo associations to provide financial information to prospective purchasers. When reviewing it, it is helpful to know how the association funds capital improvements to the building and surrounding property.
Larger condo associations mostly manage capital improvements by generating and maintaining capital reserves. Monthly homeowner assessments will include not just funds for the operating budget but also reserve-funding amounts. Kyle Harvey, a realtor with Baird & Warner’s Gold Coast office, advises that buyers expect well-run, larger associations to have at least $1 million in reserves, but cautioned that this number isn't definitive: "if they don’t, find out if they recently had a large capital project and their plan for replenishing the reserves.”
Kyle also shared that smaller associations, often with fewer than 10 owners, do things differently. She said that, in her experience, “some buildings prefer to manage capital projects by special assessment at the time of the project and keep monthly assessments low.” If part of the reason you're attracted to a condo is the low assessment, make sure that you’re prepared for the possibility of less frequent, but much more expensive special assessments. Again, this information should be clear from the association’s disclosure.
It wouldn't be a Chartwell bulletin if we didn't work in our thoughts on insurance! Most, but not all, condo associations take a “walls-in” approach to responsibility for things that go wrong. This means that everything from the drywall in is covered by your homeowner’s policy, while the facilities and utilities outside of the drywall are covered by the association. It's important to get specific when looking into this, because even the smallest gap in coverage can lead to big expenditures down the line.
In the due diligence process, review the bylaws to find out how much insurance coverage is provided by the association and what the unit owners are expected to insure. The bylaws should also detail whether or not a unit owner and their insurer are permitted to recover the costs for repairs made when damage is caused by water, fire, or smoke from another unit (also called subrogation). Your Chartwellian will share our insights and advise you on appropriate coverage for your unit as well.
Once you know the association's coverages and exposures, compare them to historical and regional risks. For example, if you're looking at a building in a region with high humidity, make sure there is sufficient coverage for mold and other problems caused by heavy moisture. As extreme weather events become more frequent, it's also prudent to look into how the building weathered the last major event. If news stories aren't available online, try to find current owners and tenants to ask them about their experiences.
The availability and quality of your homeowners insurance policy is also a factor to consider. If you're currently insured with an AM Best rated (A- or higher), insurance company, you'll expect your insurer to stay the same. Unfortunately, not all companies are willing to insure every condo, even when combined with other lines of coverage. If admitted companies refuse to insure your unit, you might have to turn to a non-admitted carrier or pay a much higher premium. If this happens to you, it's possible that the building has an unappealing risk profile, which is a warning sign for prospective buyers.
The Owner/Tenant Balance
After the market crash in 2008, many condo buildings changed their rules to allow owners to rent out their units rather than sell at a significant loss. Some of these buildings also allow Airbnb rentals, though most require a lease term of at least 6 months. These rules may affect the association’s risk profile for many lenders, who view renters and Airbnb guests as having less incentive to maintain the space and amenities of a building. These lenders will not lend under the same terms as they would for a building with fewer renters, if they lend at all. Ask your agent to find out the minimum length of rental contracts, the percentage of units currently rented, whether there is a cap on the number of units that can be rented, and if Airbnb or other home-sharing rentals are permitted.
If you're interested in potentially renting your unit in the future or buying a condo as an investor, make sure that your unit is eligible for rentals with both the association, and with your insurance. Many buildings require an owner wait 2 years before renting out the unit, and others will also limit the number of lease terms permitted. Renting also results in higher risk, so make sure to express your interest in landlording to your Chartwellian so we can make sure that any quotes we offer will reflect that potential.
Condos make great homes and investments, as long as you know what you are buying! If you have any questions about insuring your unit or want to go into more detail about the ups and downs of condo ownership, feel free to email your Chartwellian, or call us any time at 312.645.1200.
We are very grateful to Kyle Harvey, Chicago realtor and lawyer for her insight and contribution to this article. For more information on Kyle's practice and contact information, please visit kyleharveyrealestate.com.