First-time Buyers – What do I need to know about condos?

This is the second in a series of posts for first-time home buyers. Since I’m not sure how many there will be, I’m not putting a number on the series at the start. Obviously these posts might also be valuable to someone who is not a first-time buyer.

Answer - One could think of a condo as a half-way house between an apartment and a free-standing home. At least you actually own something with a condo and will be building equity; but, what that “something” is that you own can vary and what you need to understand may be different from condo complex to condo complex.

Condos come in a few different flavors. There are high-rise condos that may actually look like big office towers, but with balconies.  There are attached units that may have single story or multi-story layouts (sometimes called townhouses); and there are detached condos which have no shared walls with other units. Then there are lots of variations of those themes.

All of these condo types have this in common – there is a condominium association which owns the physical structures involved and other shared property called common areas. Common areas might include a pool and pool house, a park or playground, the roads in the complex, detached carports or garages, sidewalks and even the balconies or patios associated with the units. The definition of what those shared or common areas are and who is responsible for maintaining them will be found in the Condo Association Master Deed and By-laws.

When you buy into a condo complex you are required as a covenant of the deed to your unit to become a member of the Condo Association. You will be required to stay a member in good standing the entire time that you own the unit. That means that you’ll be required to pay the condo association fees, usually a monthly amount. Those fees are used by the association to pay for the maintenance of the common areas, including things like new roofs, road repairs, exterior painting and insurance (Property, Casualty and Liability) coverage on the common elements.

So what do you own and what are you responsible for? Think of your unit as an empty box. Everything inside the box, including the last coat of paint on the walls is normally yours and your responsibility. Some things that you can see from inside the box, like exterior doors and windows are actually the responsibility of the condo association. Even the deck or patio out back that is attached to you unit really belongs to them. Check your by-laws for what you can and cannot do out there on those decks or patios.

Inside, anything that you want to do is fair game, so long as it does not adversely impact the structure. You

can finish the basement, if it was not finished. You can replace he kitchen cabinets and counter tops. You can probably switch the natural fireplace to a gas log, but going the other way might involve reworking the flue and chimney system and that is association property, so that would be off limits. You can paint the interior rooms any color that you would like, but the outside color, including the stain on the deck, is the responsibility of the association and you should not touch them. You cannot plant flowers around your deck or patio, but the association may have rules allowing you to place potted plants on the deck or patio – check with the association management.

As for insurance, it is critical that you have your insurance agent read through the association’s Master Deed and By-Laws , so that he/she can determine what type of coverage you need. Here’s a good read on the topic of condo insurance from BankRate.ocm. You should not assume that you only need to insure your personal belonging, as you might have done in an apartment. There are also often clauses in the By-Laws about liability that you may have to the association, should some act of negligence on your part cause damage to units other than yours or to common areas. Make sure that your insurance agent understands everything that is in those documents and recommends a policy for you that has you covered.

Condo owners sometimes get surprised by special assessments that are levied by the association and become your obligation to pay. Usually these are for things that the association did not properly budget for in the first place and did not have enough in their capital reserve fund to pay for. The big cost items are things like road repair or replacement, roof replacement, major window and entry door replacement projects and exterior painting. It is important when considering a condo purchase that you ask to see documentation (usually an annual or quarterly report) on the capital reserves of the association. It may feel great initially that they have a really low monthly association fee, until one of those big projects comes up and you get hit with a special assessment. Assessments like that are normally spread out over time; however, you may be required to pay off any remaining balance when you try to sell the unit.

You also need to understand that your use of the common areas and behavior while doing so are subject to association rules. You can’t just throw a pool party for 10-15 friends around the pool. There are rules and regulations about all of that. There are even rules about how many cars you and your visitors can have in the complex and where they can be parked. Welcome to the annoying world of adult rules!

I've already stated that you need to have your insurance agent review the Master Deed and By-Laws, but it should be clear to you by now that you need to review them well before you get to that stage. In fact, you need to review them before you make an offer or within some short grace period after an offer is accepted to determine whether they are something that you can live with or not. It’s also a good idea to try to talk to someone who lives there to get their take on how it is to live within the rules of the complex. Once you are in place you should also go to the association meetings, so that you know what issues the association is dealing with that might impact you. If you are concerned about the association’s budgeting for contingencies or upcoming maintenance issues, that is the place to raise that concern.

An ideal condo situation for many is the detached condo, which is a condo unit that has no common walls with neighbors (and thus less concern about noisy neighbors) – it literally is a stand-alone unit. Detached condos are fairly rare, at least in this area in Michigan. All of the stuff that was mentioned above still applies and even though it looks like you have your own little house, the association is still in charge of everything outside and you still can’t plant your own garden or flowers.

For some getting an end unit in a row of condos is the best thing. You only have neighbors on one side and you usually end up with some extra windows on that “open” side. In high-rise condos there is some premium associated by many with the ground floor (a lower jump if you have to escape that way) and a great premium with the top floors (great views), especially if there are penthouse layouts available.

Site condos -

A variation on the condo theme is the site condo, which is a Michigan invention that became popular in the mid 1980’s. Basically developers found in the mid-80’s that they could get through the Michigan’s approval process for condo developments in less than half the time and at less cost than going through a complete subdivision platting process. They decided that they could build homes that were a step beyond detached condos, but which would still fall under the State’s development rules for condos.

The idea of a site condo is that the owners own and are responsible for the little piece of land upon which their home sits and for the house itself (inside and out); but that the plot and house exist within a condo complex which also owns some common areas and requires that the homeowner be a member. Importantly,

the “common areas” include the roads within the complex, plus any other areas like playgrounds or parks spaces or even the entrance to the complex (you've all seen the little entrance islands with the sub name on them – the association owns that, too). So, collectively, the owners are responsible for all of those things and for insuring those areas.

For the most part a site condo development is so much like a typical plated subdivision that one can’t tell the difference; until it’s time to repair or replace the roads. In plated subs the roads are the responsibility of the local governmental body – the Township, Village or City. In a site condo complex, it’s the homeowners who are on the hook. That is one big reason to make sure that you check to see if the HOA is collecting and saving money for road repairs in your site-condo sub.

The other things that can be dramatically different are the rules that you may have to live under in a site condo sub. Some site condo HOA’s have very strict rules about what you can and cannot do to your property, especially on the outside. Some go so far as to have committees that must approve any exterior changes r additions and even what colors you can use on the exterior. If you can live with the restrictions that are impose by the site–condo HOA, then don’t buy there in the first place.

Mortgages for condos have their own set of rules and can be much more complex than mortgages on standalone houses (here’s an article from the Washington Post which explains that); plus, many of the on-line mortgage companies may not understand the Michigan concept of the site condo. Here’s a good read on the hoops that you might have to jump through to get a condo mortgage. Here’s an article about the FHA rules for a condo loan. 

Finally, if you intend or want to use your VA benefits to get the mortgage for your new home, be aware that not all condos or site condos are VA approved. Gaining VA approval for a development is something that the builder must do during the built phase, there is no process for getting an approval after the project is completed. It’s not a hard process nor very onerous for the builders; but, it’s an extra paperwork step that many failed to take when they are building and now it’s too late. Without that VA approval you cannot get a VA mortgage for that condo or site condo. Click here to go to a Web site that you can use to check to see if a development that was built under the condo rules is VA approved or not.

hope that this dissertation helps you better understand condos and site condos (if you are in Michigan) as you start your hunt for a new home. Good luck.