What to Know About Buying a Condo

Condominiums can provide a stable, amenity-induced living experience at an affordable cost. For a number of people and families, buying a condo can be a better option than a traditional home. However, it’s important to understand what you’re getting into before you take the plunge. Condos have a lot of differences compared to the single-family dwellings common in the U.S.

A financial advisor can help you create a financial plan for your home buying needs and goals.

What Is a Condo?

Condos are individually sold units within a communal living complex. They often look just like apartment buildings. Unlike apartments, however, you own your private condo unit. Unit owners or the condominium association collectively own common areas like tennis courts, lounges or pools, depending on the property’s legal structure.

Condos tend to be especially popular in spots with high property values, like big cities or popular vacation destinations. Condos can be a great option for potential homeowners who can’t quite afford a house, but want to own some real estate. They also offer conveniences that might be difficult to afford individually, like the maintenance of a pool.

Purchasing a condo is like joining a business arrangement with all the other people who own condos in the building. Because of this, condos have their own homeowners associations (HOA), and each complex will have their own rules and restrictions. It’s important to be aware of those rules and restrictions before you buy a condo, so you can determine if they’re something you can live with.

What to Know About Buying a Condo

In addition to a condo’s rules, it also helps to be aware of the condo association’s budget. That way you know what kind of money you’ll need to contribute, as well as where the money is going.

Look at the budget to make sure that they’re putting enough money towards thing like building repairs. Also take note of any outstanding debt owed to the association and if there are owners who aren’t paying their dues. If an association refuses to share their budget with you, consider that a major red flag.

The association will also have a reserve fund to cover expenses that crop up, like major repairs. Without the right funds in place, associations can charge owners “special assessments” to cover costs. The older the property and the lower its cash reserves the higher the chances you’ll face these types of charges. When looking at a condo complex, you may want to ask about upcoming projects and how they plan to fund them.

Condo insurance differs from homeowner’s insurance, too. The condo association will have a master insurance policy in place, but these will differ from building to building. You or your home inspector should review the policy thoroughly. That way you know exactly what you’ll be responsible for. You wouldn’t want to end up with repair costs that the association insurance won’t cover.

Steps to Buying a Condo

Pros and Cons of Buying a Condo

Pros:

• Amenities
• Less individual upkeep
• Close neighbors

There’s definitely an appeal to buying a condo that comes with amenities like a swimming pool or tennis courts. You won’t have to manage the upkeep of those amenities yourself, nor care for the lawn or garden. Condos also come with a great built-in opportunity for a resident’s social life. Neighbors are closer, and with access to the same building features, you can easily make friends.

Condos may appreciate at a slower rate than single-family homes, although appreciation varies by location, market conditions and property characteristics. Whether this is a plus or minus for you will depend on your usage of the condo. But this does mean that condos could be more affordable than other dwellings in the same area. Owning a condo also means that you can take advantage of homeowner’s tax deductions on your mortgage (if you have one) when you itemize deductions and meet the applicable IRS requirements. However, you will also have to pay property taxes on your condo unit.

Cons:

• Association fees
• Slower appreciation
• Association rules

As with any living situation does, condos also have their drawbacks. For one, if you’re not a more social person, you may not like having to share communal spaces or even walls with your neighbors. The fees that come with owning a condo may put a damper on things, as well. If an association doesn’t have enough reserve funds, you and other residents could get stuck with a big bill to cover repairs.

You’ll want to make sure the association has their business in order, and that their rules align with your expectations of a living space. Many complexes can have rules like quiet hours after 10 p.m. or no pets. Condo associations can have all sorts of nitpicky rules; it’s up to you whether the choice makes sense for your lifestyle.

The purchase price is only one part of the cost of buying a condo. You’ll also need to account for your down payment, mortgage closing costs, property taxes, insurance and recurring association fees. Some buildings charge additional fees for parking, storage or amenities.

Example

For example, consider a $350,000 condo purchased with a 20% down payment and a 30-year fixed-rate mortgage at an assumed 6.5% interest rate. The estimated costs would be:

In this example, the mortgage payment is approximately $1,770 per month, but the additional ownership expenses bring the estimated monthly cost to $2,595. That’s about $825 more than the mortgage payment alone. The calculation excludes closing costs, utilities, maintenance inside the unit and any special assessments. Actual mortgage rates, taxes, insurance premiums and association fees will vary.

The amount you’ll need at closing also depends on your financing. A down payment below 20% may be possible, but it can increase your monthly costs through mortgage insurance or other loan-related charges.

Before making an offer, ask whether association fees have increased recently and whether any special assessments are planned. A condo with a lower purchase price may not be the more affordable option if its recurring expenses are substantially higher.

Condo Property Tax Considerations

Property taxes for condos work similarly to those for single-family homes. Local taxing authorities assess property values under applicable state and local rules, and those assessments are used to calculate property tax bills. However, condo ownership has a unique structure.

While you own the interior of your unit, you share ownership of common areas and the land with other residents. The taxable value of a condominium unit generally reflects the owner’s interest in the property, including associated rights to common areas. In some jurisdictions, separately owned common property may receive its own assessment. The treatment depends on local property tax laws and how ownership is structured.

The Dangers of Double Taxation

Condo buyers should check the property tax treatment for common areas. In most condominium arrangements, the value of shared property appears as part of the individual unit assessments rather than taxed again as a separate property. However, separately titled association-owned property may be assessed under different rules.

A separate assessment does not automatically mean double taxation. If you’re concerned that common property has been assessed twice, review the local assessment records and ask the assessor’s office how the values were determined. Depending on local law, owners or associations may have options to challenge an incorrect assessment.

Bottom Line

Careful research into the ins and outs of condo life can help you make a more confident decision about buying a condo. It helps to ask condo associations and even condo residents about the property you’re looking at. Better to find out about issues before you’ve bought the condo and moved in. You want to make sure that you’re buying the right type of property for you. Condos aren’t better or worse than other housing types. But you’ll have to determine if the style – and specific property – is right for you.

Tips for Buying a Condo

• Get a trusted financial professional on your side. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you want to move fast, get lender preapproval. This means gathering up all your financial documents (tax returns, W-2s, pay stubs, bank statements, etc.) and contacting your lender of choice.
• Before checking out a condo in person, verify that the association fees are within your budget. Some properties charge much more for common fees than others; it’s not standard across condominium developments. Many real estate listing sites will have a section marked “HOA” with the monthly charge.
• Get familiar with condo agreements/declarations. These documents outline how the condominium operates and how it’s governed. You can see if any of the rules or guidelines won’t work for you before committing to a place.

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