Condos are an affordable real estate option for many, which typically make them a smart investment. Just keep in mind that condos are a unique type of real estate that can present complications for both sellers and buyers.
To help you sell or buy a condo with confidence, we have identified eight potential complications that are unique to condo transactions. Being aware of these issues in advance can help sellers close the deal more quickly and help buyers avoid frustration down the road.
What Sellers Need to Know
1. Issues with the condo association could impact your sale.
Your buyer’s lender will look at the financial condition of your condo association when deciding whether to approve the buyer’s application for a mortgage loan. Any of the following issues could result in a delay or denial of financing:
- Too many delinquencies on association dues
- Lawsuits
- Limited cash reserves
- Too little insurance
- Too many renters
Ask yourself whether any of these issues could impact buyer financing before you put your condo on the market. You may want to work with other owners to improve the condo development’s bottom line before you decide it is time to sell your unit.
2. You are obligated to disclose condo association minutes, the costs of common insurance and utilities as well as issues that could affect your condo’s value or desirability.
Basically, you have to be transparent with the buyer about what they are getting themselves into when they buy your condo. If your hot water heater leaks, you can’t conveniently forget to mention that. If lawsuits against the condo association are underway, you need to disclose their existence.
3. Make sure the sale price will cover your mortgage balance and closing costs.
Although the real estate market has improved, some sellers may not be able to cover their mortgage loan balance if their condo value declined significantly after the unit was purchased. Even if you sell the condo for the amount of your loan balance, you will still need to raise money to cover unpaid property taxes, title insurance, and other closing costs. If it is not realistic to expect to receive a selling price that will pay the mortgage loan balance, you may need to attempt a “short sale” (a sale for less than the loan balance) unless you can wait for condo prices to rise. Since short sales can be tricky, make sure you get advice from your real estate lawyer before you enter into negotiations with your mortgage lender.
What Buyers Need to Know
1. Condos often have other costs and maintenance fees in addition to your mortgage
A lower mortgage payment than a traditional home purchase would require is often the most appealing part of owning a condo, but don’t forget that in order to live in most condo communities you will also have to pay an association fee. This fee usually covers conveniences like lawn care, gate security and other community amenities. The more perks your community offers, the higher the fee is likely to be. Find out before you sign the purchase agreement how much your community’s association fees are so you can budget appropriately and avoid surprises.
2. Condo association bylaws may be too restrictive for some buyers
When you live in a condo, you must abide by the codes and restrictions of the community. These are typically outlined in a document called the CC&Rs or “Covenants, Codes, and Restrictions”. One of the primary goals of the CC&Rs is to ensure that the community maintains its curb appeal. The document outlines how repairs to the exterior of the property will be handled as well as other issues that could impact you as a condo owner. For example, let’s say you always wanted a red door on your condo. The regulations in the CC&Rs could prevent you from having the door of your dreams since it is an exterior improvement that might affect the general appearance of the community. This may not be a deal breaker for you, but something else (like a restriction on pet ownership) could be. Ask to read the CC&Rs before you make an offer to make sure there are no red flags for you.
3. Even though condo owners pay property tax, they do not hold title to the land their condo is built upon.
As a condo owner, you will be responsible for paying property tax. However, that doesn’t mean you will own the land upon which your condo is built. In most cases, the land is owned by the condo association. You may not even own certain elements inside your actual condo. Remember the CC&Rs we mentioned above? They also outline exactly what is part of the unit you own and what is community property. For example, the deck or patio attached to your unit may be community property. Also fixtures like porch and patio lighting may be community property. Make sure you understand exactly what you will own and what you will not before you sign on the dotted line.
4. Parking space ownership: find out whether your parking space(s) is deeded to your unit or if it is controlled by the condo association.
If you own one or more vehicles or plan to acquire one during the time you own your condo, it is important to understand in advance how your condo association handles parking space ownership. In some communities, parking spaces are deeded to each unit. In that case, the condo association would maintain a condominium map that shows which spaces are allocated to each unit. In other communities, the condo association assigns parking spaces to each unit but they are not deeded. In this scenario, the association would have the right to change assignments. If the community you are considering assigns spaces, it is important to read the regulations that govern how and when changes to assigned spaces could occur.
5. Condos have special insurance considerations. Check that your unit and the condominium as a whole are adequately insured.
When you go to buy condo insurance, your insurance company will need to factor in the coverage that your condo association has for the building you live in. That coverage is referred to as the master policy. There are two common types of master policies: “all-in” and “bare walls-in.” The “all-in” master policy (also referred to as the single-unit master policy) covers the fixtures in the condo, such as the appliances, wiring, plumbing, and flooring. The “bare walls-in” master policy does not cover anything inside your condo. In some cases, it does not even cover your unit’s plumbing or electrical systems. Neither policy offers coverage for your personal belongings.
If your condo association opted for a “bare walls-in” master policy, you will need more condo insurance to protect you in the event of a fire or other natural disaster. Talk to your insurance company to determine which type of coverage you will need.
Selling or buying a condo can be a rewarding experience as long as sellers are patient with the process and buyers know exactly what they are getting into. Still, the concerns outlined above are only a few of the issues you need to be thinking about. Whether you’re buying or selling, you should protect investment by consulting with an experienced Illinois real estate attorney before you move forward.
