Personal Finance

What to Know Before Buying an Apartment

If you’ve never bought a condo (often simply called a condo), you might be surprised at all the different things to consider. Buying an apartment is not the same as buying a house. You may have adjacent walls with neighbors, as well as other physical elements that differ from detached homes.

Also, the entire process you need to go through to make a decision and get a mortgage can be very different.

key takeaways

  • Before buying a condo, it’s important to understand the difference between living in a condo and a single-family home, and determine if the condo lifestyle is right for you.
  • Apartments are generally less expensive than single-family homes and have lower maintenance requirements, making them a great option for homebuyers on a budget or those looking to downsize.
  • Loans for condos can be more difficult to obtain because some lenders have strict requirements on owner occupancy and loan-to-value ratios.
  • Apartment owners must comply with the complex’s Covenants, Conditions and Restrictions (CC&R) or risk being fined, forced to comply or prosecuted.
  • Apartment owners pay a monthly fee to cover ongoing maintenance and repairs to common areas within the complex, such as the grounds, pool, lobbies, elevators, and recreation rooms.

Who should own an apartment?

The first thing you need to ask yourself is, “Are you an apartment type?” What exactly does that mean? As a city dweller, a. Many apartments are located in urban environments. Apartments have sprung up downtown, and some have even built amenities within the development, including grocery stores, bank branches and other businesses. With this convenience comes more noise and congestion.

If you’re considering buying a potential condo in a location, check the area at different times of the day and night to see how loud or bright it is. If noise or light is an issue for you, this may not be the right choice.

One thing that comes with condo ownership is the Homeowners Association (HOA). It sets out a Covenant, Conditions and Restrictions (CC&R) statement outlining the things you must comply with as an apartment owner in order to live there. If you find yourself unable to comply with CC&R, apartment living may not be for you. Non-compliance can mean you could be fined, forced to comply or even prosecuted.

Apartments may be a suitable option for certain types of people, such as first-time buyers who can’t afford a more expensive single-family home. Apartments also have the advantage of low maintenance costs. This could be an attractive feature for seniors who are looking for less home for physical management. Apartments are also an attractive option for those who want to live in the center of a big city.

Introduction to buying an apartment

loan problem

Buying an apartment can be harder than buying a house. Lenders are very careful when making loans for such homes. They usually require a certain percentage of the unit to be occupied, or what they call “owner occupancy”.

Another limit could be how many condos an investor is allowed to own. Typically, lenders do not want one person to own more than 10% of a building’s units.Many times, lenders also set regulations regarding building occupancy. Some lenders require at least 90% of units to be sold before any financing is provided.

Lenders may also have stricter loan-to-value (LTV) ratios and restrictions on people buying condos. The LTV ratio is the value of the apartment to the amount owed to it. For example, if you put down 20% on your home, your LTV will be 80%.

Federal Housing Administration (FHA)-backed apartment mortgages do exist for up to 30 years; they are called Section 234(c) loans.While the borrower’s terms are similar to those of a home loan, there are many restrictions on condos; at the outset, the building must have more than four units.

other fee

There may be other costs involved in owning an apartment. Even if the HOA provides coverage, you may need to carry additional homeowners insurance. Read all documents carefully to ensure that the insurance provided by the HOA does not transfer risk to you in order to maintain a lower premium.

Also, please note that you will be required to pay monthly for the apartment. All owners in an apartment complex pay a fee to cover ongoing maintenance and repairs to common areas within the building. Expenses typically cover maintenance of areas such as the lobby, elevators, swimming pool, recreation room, parking lot, and grounds within the complex. Some funds may be reserved to pay for major repairs, such as replacing roof or exterior paint. Apartment fees vary widely depending on the size of the complex and the amenities offered.

Avoid questionable apartments

One of the most important things you can do to protect yourself when buying an apartment is to research HOAs and attend HOA conferences. You may also want to talk to your neighbors to see if they are happy with how the apartment is being managed. Check the Bylaws to determine what the HOA covers. You can also request minutes of recent board and member meetings and find out how much HOA dues have increased over the past few years.

Another area to study is the board’s litigation history, including taxation and other general issues. If you buy, you may find that there are pending lawsuits that you may not want to be involved in. Some condo associations have been forced into bankruptcy for failing to pay their HOA dues. Lenders may also stop financing the units if they default on dues, which could impact resale value.

Review financial records of arrears and reserves. A good association should have at least 25% of its total revenue for emergency and repairs. If they run out of money, you may be hit with an appraisal. Also, be sure to check the most recent property tax assessment. If your condo is selling for a low price but has a high tax assessment, you may have to pay a higher tax bill than you expected. Make sure the tax is consistent with the true value of the property.

bottom line

In tough times, condos can be a good investment for the right buyer in the right location, although they can be more difficult to buy and sell than a detached home. Be sure to do your due diligence and review HOA, CC&R, and any tax and insurance conditions before buying a condo.

Also, be sure to find a real estate agent and loan officer with extensive experience selling condos, as the issues of this type of purchase are not as simple as those of a traditional single-family home.

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