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Condo bound? Here's how to do it right
Seattle Times staff reporter
Before you purchase your first condominium, let's play a game.
Call it Twenty Condo Questions. (OK; it's actually 18 questions.) It's all the things you, as a potential buyer, should ask in deciding whether condo living is right for you.
Q: What is a condominium?
A: It's a residential development that offers individual ownership of units, along with joint ownership of the land and common areas. In comparison, a Planned Unit Development offers ownership of individual units and the land under them; common areas are owned by the homeowners association. In a co-op, owners buy shares in a corporation, which then leases them their apartment. All three types of ownership are found in the Seattle area, although co-ops are relatively few.
To answer our questions, we turned to several experts (see box below).
Q: How are condos governed?
A: Each has a homeowners association, composed of all the owners, who elect a board of directors. This board has the power to set and enforce rules. Additionally, condos must abide by specific state laws, and all condos have governing documents called CC&Rs, for covenants, conditions and restrictions, that spell out rules, rights and responsibilities. Potential buyers are counseled to carefully read them.
Q: What are the biggest pros of condominium ownership?
A: They're often more affordable than houses. Some offer amenities, like swimming pools, that would be out of buyers' financial reach otherwise. Since owners share financial — but not physical — responsibility for maintenance of common areas, their time isn't spent doing major upkeep. Many buildings provide a sense of security and community.
Q: And the biggest cons?
A: As real-estate attorney Kris Sundberg explains, first-time buyers often think they've bought "an apartment with a tax deduction, and their home is their castle. The reality is you're giving up a substantial amount of the freedom you'd have in a single-family home in exchange for the benefits of an organization that's going to take care of building repairs and maintenance. But you're going to have to conform to rules and regulations that may or may not be of your liking concerning noise, pets, even whether you can put up holiday decorations. You may find yourself in an association that has irresponsible leadership, and there's not a whole lot you can do about it as a single owner."
Q: What type of person does best as a condo owner?
A: A flexible, easygoing one, says condo properties manager Cheryl Dittamore. "You have to adjust to what the majority wants to do. If you want things done exactly a certain way, you're going to be frustrated out of your mind and drive the people around you nuts." Agent Leslie Williams adds that buyers need to realize successful ownership takes work. "People do buy for lifestyle, meaning they don't have to deal with exterior painting or the yard, but condo ownership still requires responsibility." That means attending membership meetings, serving on the condo board or committees, being willing to pay for necessary services. That's how owners protect their investment.
Q: What are a condo owner's financial obligations?
A: Each pays mortgage and property taxes on their individual unit, plus a regular monthly assessment. These monthly dues cover common expenses, such as insurance, management fees, taxes on the common areas and minor maintenance costs. A portion of the dues usually goes into a reserve account — essentially the association's savings to pay for expensive maintenance and repairs. Associations also may levy special one-time assessments to pay for big, unanticipated repairs or to cover shortages in the reserve account.
Q: What do I need to know about reserve accounts?
A: First, whether the condo association maintains one. Attorney Sundberg says Washington law doesn't require them, "however the vast majority of condo documents do require the board to keep adequate reserves." Sundberg says well-run associations arrive at that figure by commissioning a pro, such as an architect or engineer, to do a professional reserve study. Done every few years, the expert examines the property's common components, estimates what work will be needed and how much it will cost. It's then up to the board to ensure that enough is set aside.
"I've seen many boards who think their responsibility is to keep dues down, and that couldn't be further from the truth," says Sundberg. The result can be hundreds of thousands of dollars in deferred maintenance on a 20-year-old building and not enough money to pay for it. "So unfortunately the current group of owners have to bear the burden for all the owners over the past 20 years who should have borne it."
"One of the biggest problems I see in condos that are older are very large special assessments to the tune of $10,000 to $60,000 a unit for unfunded repairs," adds real-estate attorney Jim Strichartz. "That's pretty common."
Q: What information should I get from the seller of a used condo?
A: By law the seller must provide you with a "resale certificate." It includes the condo's CC&Rs, the previous year's financial audit (done by a CPA if the condo has 50 or more units), the current financial statement and minutes from both the annual homeowners' and the board's meetings. They typically are monthly. Some condo pros suggest getting one year's meeting minutes; some suggest three years.
"You want to read them carefully," counsels Strichartz. "Consider the quality of the decision-making process as reflected in the minutes. Does the board and do the owners approach issues in a businesslike fashion, or do they get bogged down? You also need to look at the kinds of problems that are reflected, and if the same complaints are coming up month after month." That signals ineffective leadership, just as indications of low owner turnout at the annual meeting signal an apathetic community.
Another reason to study the minutes is to see if the association is considering an assessment. By law sellers don't have to divulge one until it's formally approved by the board.
Follow that up by asking the seller and the condo manager any questions that seem relevant. How often are professional financial audits done? Are any lawsuits or special assessments being contemplated? What percentage of owners are more than 30 days delinquent with their dues? (Over 5 percent is problematic, Strichartz says.) What's the policy regarding pets, renters, parking? Make sure you see anything that's important to you in writing. And "don't ever believe anyone who tells you dues stay the same," cautions Dittamore.
Q: How can I assess a particular condo development?
A: One way is by working with a real-estate agent who specializes in condos and knows a lot about individual buildings — which run smoothly and which don't; which have a lot of turnover or have suffered expensive structural problems, etc.
On your own, go to a board meeting. Visit the building on a weekend, assessing the people you see and asking them questions. "I'd see if the people there were the kind of people I wanted to live in close proximity to," Dittamore says, adding that the No. 1 problem she sees as a condo manager is "people not liking the people around them." She'd scope out general maintenance — an indication of how well-funded and run the association is — and study other clues. Like what owners keep on their decks. Some buildings have no restrictions so decks become storage for all kinds of things, while others are very strict. There's no right or wrong, Dittamore says. "It's what do you want your neighborhood to look like?" Condo manager Marshall Johnson says rules enforcement helps bring value to a building. "If there are a lot of apparent rules violations, to me that's a tip-off there isn't very good communication" between the board and the owners.
And of course, as with any home purchase, having a competent home inspection is always recommended.
Q: What should I know about management?
A: Many condos opt to pay a professional manager to collect dues, pay bills, handle maintenance, etc. Others decide to save money by managing themselves. Sundberg considers this second approach problematic for two reasons: competence and fairness. "You've got volunteer board members who have limited time and usually no training in running a multimillion-dollar-asset business." And having a handful of volunteers shoulder the work of running the place violates the central condo tenet that members share responsibility equally, he says. "What you're actually doing is giving a discount to all the people who aren't on the board because they're (the board) having to do the work a manager would do." And that, he contends, can make for lax management, mismanagement and burnout.
Q: Are there structural issues I should consider?
A: Absolutely! Virtually all our sources mentioned an epidemic of structural problems facing local condo communities, and not just brand-new ones. The biggest problem is water intrusion, which has occurred in buildings clad with synthetic stucco (commonly called EFIS), vinyl, cement-based siding, even wood. Rainwater gets behind the siding and cannot escape, so the building rots from within. Often there are no external clues this is occurring, and once discovered, repair bills can run into the millions. Sometimes developers or insurance companies have paid, sometimes homeowners have been stuck with the bill. This has meant special assessments as high as $100,000 for individual unit owners. Architect Blaine Weber says he'd "be very, very hesitant to consider a building built with a barrier system, rather than one that allows water to escape."
Q: What should I ask to make sure I don't buy into a structural problem?
A: Ask if the developer, builder and architects have built condos before. Research their reputations. "There are a lot of buildings that are well-designed but not well-constructed, and vice versa," Weber says. Ask if waterproofing consultants were employed during construction; Weber says that helps guard against problems.
See if there are any construction-defect legal claims on the project you're considering (and any others built by the same people) and, if so, what the developer is doing about it. "Is the developer working cooperatively with the homeowners association or is there a lawsuit?" Weber would ask.
If the condo is relatively new, ask if it's had a "building envelope integrity survey," which looks for hidden construction problems. This is crucial, Sundberg says, because there's a four-year statute of limitations (after the first unit is sold) to resolve building-defect issues with the developer.
Q: Is there anything I should consider with a brand-new building?
A: By law you will be given a "public offering statement." It contains information about the developer, including whether there are any pending lawsuits. Besides reading it and sleuthing the building's structural standards, the big thing is when your loan closes. Strichartz explains that Fannie Mae and Freddie Mac, the two major suppliers of mortgage money to lenders, require 60 percent of the units be sold before they'll underwrite mortgages in that building. This typically means the units are sold as presales, and then close at the same time.
Even those buyers who get money elsewhere or who won't have mortgages (typically empty-nesters downsizing from homes) should insist their purchase not close before the rest. Why? Because if sales stall and the developer runs into financial problems, his bank may foreclose. Then typically the bank sells the unsold portion to an investor, who may rent out the unsold units. As a result, "you have a minority of owner-occupants who are never able to control the association," Strichartz says.
Q: What should I look at in assessing whether to buy a particular unit?
A: Pay particular attention to room configuration and storage, Weber says. He's seen bathrooms without medicine cabinets, bedrooms without closets and living rooms so chopped up by doorways, windows, etc., that they're difficult to furnish. He also recommends at least one elevator for every 55 units.
Noson, the noise expert, suggests looking at the building's floor plan and the relation of the unit to such noise producers as elevators, big metal garage doors or a community room. If noise is an issue, the farther away the better. In stacked units, he says floor plans that have bedroom over bedroom are better than ones where you could end up with someone's living room above your bedroom.
Q: Speaking of noise, how big an issue is this and what can be done about it?
A: Noise is at or near the top of the complaint list. Some sound, says Dittamore, is just a given whether it's stacked flats or townhouses. Noson says it's possible to retrofit noisy units with soundproofing, but the cost (to the unit owner) can well run into the thousands. Thus he says it's better to choose a quieter unit to begin with. Here's how:
Select a courtyard or back unit over one facing the street. If facing a busy street, choose a unit far away from a controlled intersection where cars continually stop and start. If possible, "test" a prospective unit by having a friend hold a pretend conversation in the hallway and in an adjacent unit. While he's next door, have him play a radio and flush the toilet. Investigate the floor finishes in the unit above you. Carpet is much quieter than wood or tile.
Noson says a 6-inch concrete floor system is quieter than wood construction. The walls between units ideally will be staggered-stud, double wall-construction with insulation in between. Wall outlets will be staggered, too, so they're not back-to-back sound transmitters between units.
Q: What is meant by common elements?
A: This is one of the least understood areas of condo ownership. Basically a purchaser is buying the unit from the wall paint out — in other words, a box of air. The unit's walls, floors, windows, ceiling and decks are common elements, as are hallways, lobbies, parking and amenities such as a swimming pool. The association has rules about common elements, which are enforced by the board. Example: a homeowner who wants to rip out living room carpeting and install another flooring surface usually must get the board's permission first.
The fact that structural features within individual units are considered common, and thus the maintenance responsibility of all, often confounds new owners, says Johnson, who's used to hearing them question why their dues are buying a neighbor a new deck.
Q: What do I need to know about insurance?
A: Condo associations buy a master policy insuring the whole complex. Homeowners then purchase insurance to cover at least their own belongings. Some buildings make this mandatory. Insurance agent Brent Ward says it's important buyers ask what type of master policy the complex has so they'll know how much coverage they need. Otherwise there could be gaps or expensive duplications.
There are three types of master policies. The first, "bare walls," is the cheapest and only insures the shell of the building, which Ward says accounts for about half the value of a unit. Next is a "single entity" policy. It covers everything originally installed by the builder. If the building is new, this can be good coverage. If the building is old, and many of the interior furnishings and fixtures replaced, it may not be adequate. The third type of coverage is called an "all-in" policy. The most expensive, it insures everything that cannot be put in a moving van.
Q: What about renters?
A: Some associations allow owners to rent their units, some set a limit on rentals, some don't allow them at all. So if this issue is important to you, ask. Numerous renters may mean numerous off-site owners who are less invested in the functioning of the community. In a high-rise, the lower units, because they're less expensive, may have been bought as investments. Thus they may have a markedly higher percentage of rentals than the upper floors — leading to a sense of the building being a hybrid apartment building/condominium.
Strichartz says if more than 30 percent are rentals, buyers can't get private mortgage insurance. That means that anyone who sells their unit can only do so to a buyer who has at least a 20 percent down payment. If more than 40 percent are rentals, Freddie Mac and Fannie Mae won't underwrite a mortgage in that building.
Elizabeth Rhodes: email@example.com.