Condominiums require homework before purchase

Investigation of governing documents, legal standing protects buyer from costly complications.

For those who are tired of renting and don't want all the work, expenses and problems that comes with owning a house, a condominium is often the choice.

As with other types of homes, getting a mortgage for a condo has its own quirks. In some cases, so does living in one.

Some people like condo living "because they do not have to physically perform any exterior maintenance, such as landscaping, painting, snow removal, lawn mowing, testing the pool, and so on.

It is very similar to living in an apartment," said Burt Jamison, the manager of Consolidated Mortgage, in Stevensville, Md., which specializes in condo loans.

There are also the advantages of ownership, such as the tax deductibility of mortgage interest, accumulation of equity and property appreciation.

While owners are generally not responsible for anything that happens to the common areas or property outside the unit's walls, they do pay to have that work done. That is one of the first factors that make condominium living different: monthly dues to a homeowners association.

Those fees are used for general upkeep and operating expenses. Think of the association as a micro-city council. Neighbors will be on it and will vote to determine what those dues or fees will be, plus any special assessment that might be needed for a big project, such as putting a new roof on an aging unit.

Unlike mortgage interest, Jamison said, HOA dues are not generally tax deductible. Those dues are one more monthly expense, and one that the lender must consider, along with car payments and other expenses, in deciding whether or not to approve a home buyer for a mortgage. After all, the actual cost of living in a condo is the monthly mortgage payment plus the association fee.

Since the association is responsible for the property and everything on it, it is also responsible for insuring it. Condo owners generally do not need individual homeowner's insurance. The HOA maintains what is known as a master policy that covers all units against covered perils, the cost of which is included in the monthly fee.

However, that policy does not normally cover anything inside of those units.

"We recommend that unit owners have an insurance policy that covers the contents of their units, which usually covers fire, theft and liability," Jamison said.

It is similar to the sort of policy you would have if you were renting.

Since HOAs can, in effect, order property owners to pay special assessments, Jamison warns buyers to know what to expect.

"It is my opinion that potential unit owners should be made aware of future planned improvements or assessments coming up within the condo association prior to buying. Ask the HOA to put it in writing," he said.

"There is a Condo Certification Form that any prospective buyer can obtain from the HOA."

Some states require the seller to give the buyer the form. Either way, the buyer has the right to request it. If the homeowners association doesn't want to release it, a buyer should seriously consider not buying a home within the association.

"A Condo Certification Form generally will disclose the total number of units, the monthly fee, number of units delinquent on fees, number of owner and non-owner occupied units, any pending litigation, etc."

Litigation is extremely important. If people sue the association, they are actually suing everyone who lives in it. If there are legal fees or a judgment against the association, each property owner will have to pay a share of it, even the plaintiffs, if they are among the owners.

"Lenders will often turn down a loan if there is pending litigation," Jamison said.

A major lawsuit can affect the value of the property, can lead to problems for all the homeowners and their mortgage companies.

Jamison recommends that potential buyers "ask to see the (homeowners association's) master policy, and the association's budget, along with the size of its reserve fund."

Buyers should know how they are being spent now and in the past, what the plans are for the future, and just how much money the HOA controls.

They should also examine the governing documents. This can include when trash cans may be on the curb, how many cars may be parked and where; what decorations are acceptable outside a home, and so forth.

"I strongly recommend having an attorney review the HOA paperwork, and the contract, before it is signed, of course," Jamison said.

For many people, a condominium is a good fit, so as long as they take a close look at the property they are getting into and its circumstances.