A young couple making their first housing purchase closed on a two-bedroom condominium. Before moving in, they had a conversation with the property manager in which they happened to mention their dog.
“Dogs aren’t allowed here,” the property manager said.
The couple was stunned. Their real estate agent had told them they could keep their beloved pet.
Not so. The agent was wrong. The building’s governing documents prohibit dogs. No exceptions would be made.
For a brief time the couple considered re-selling the unit but could not take the financial loss. They reluctantly found the dog a new home.
As a hybrid between an apartment and a single-family home, condominiums provide ideal residences for hundreds of thousands of people. But there are nuances to buying and living in a condo that single-family homeowners will never encounter. As the dog owners found out, if you don’t shop carefully, the results can be painful.
We asked several professionals who specialize in community living how to buy a condo. Following are some of their tips:
– Get documented. According to the Illinois Condominium Property Act, the buyer of a condominium is entitled to ask for a substantial amount of information, including a copy of the association’s declaration, by-laws, rules and regulations, and statements of financial condition, liens, lawsuits, status of the reserve account (funds kept in reserve and generally used for large expenditures) and capital expenditures planned for next two years.
The trick here is getting this information at the appropriate time while making your buying decision. The condo act also gives associations 30 days to deliver this information. Smart sellers will assemble it before putting their units on the market but some won’t bother until they have a contract.
“What you can do is make a purchase offer conditional upon the seller obtaining this information and the buyer accepting this information,” says attorney Mark Roth of Pretzel & Stouffer in Chicago.
At the very least, get your hands on the governing documents, says Frank Maguire of Baird & Warner Real Estate, City North. These have the greatest impact on your day-to-day existence.
“I’ve sold condos where the sellers have a pet but the next owner can’t have one,” he says. “Their pet was grandfathered when the rules changed. I’ve also been given old copies of declarations and bylaws. Make sure you get a current copy.”
Another biggie to check on is whether you can rent your unit to someone else. Don’t assume you can, even if yours was a rental when you bought it.
“Sometimes it goes according to percentage,” says Maguire. “The association says we’ll let 10 percent of the owners rent out their units. If they’re up to 10 percent, you can’t rent out yours.”
– Look for a tough, not lenient, set of rules and enforcement policies. It’s the way to maintain property values, says Carole O’Neill of The Prudential Preferred Properties in Arlington Heights .
The bigger the complex, the tighter the rules have to be, she adds. “You can’t have leniency when you have several hundred people living in complexes.”
– Learn some history of the building. You want to get a feeling for the association’s priorities and what improvements you might be responsible for in the future. Maguire advises:
Find out who the developer was and who the management company is. Ask your real estate agent about their reputations. When you look at condo conversions, ask what capital improvements have been made. If you’ll be sharing a doorway, try to meet the neighbors.
“Sometimes the management company is equally important or more important if the building has been established for some time,” Maguire says. “Sometimes buildings didn’t have the best developer but may have an excellent manager and be in good financial shape and be well-maintained.”
– It’s not a fire sale if several units are for sale in one building. This is especially true in the spring and summer, says Maguire. “In the city, there is a specific condo market, the first-time buyers, which is tied to the May 1 and Oct. 1 leases.”
Savvy sellers know this and attempt to market to those whose leases are about to expire. If you’re buying, it’s a good time to look.
– Find out how many of the occupants are owners. Conventional wisdom says that owners are better caretakers than renters. For that reason, most money lenders want that number to be 70 percent or higher, says Ken Perlmutter, president of Perl Mortgage in Chicago. A few, however, will make loans if the percentage is 60 percent or lower.
“Some lenders will do what they call a limited review,” he says. “If you put down 25 percent, they won’t ask how many owners live in the building. They’re protected by the equity so they don’t ask as many questions.”
In that same vein, ask if any one entity owns more than 10 percent of the units. That gives one owner a lot of clout. Lenders don’t like to see that, either, but won’t ask if you make a big down payment, says Perlmutter.
– Don’t jump at the condominium with the lowest monthly assessment. First find out what the amount covers and do some apples-to-apples comparison shopping. In some buildings the assessment covers heat and water. In cooperatives, your share of the property tax is included in the monthly assessment.
If a portion of your assessment goes to utilities, be sure to let your lender know. You may qualify for a higher mortgage, says Perlmutter.
Typically, lenders don’t want you to spend more than 33 percent of your pre-tax income on housing. That includes your principal, interest, taxes, insurance and assessments. They also don’t want you to spend more than 38 percent of your pre-tax income on total debt, which includes housing plus such obligations as car payments, credit cards and student loans.
“If you have an assessment of $300 a month and $100 goes for gas, some lenders look at that as a compensating factor,” says Perlmutter. “They’ll take out some of that $100 and your (debt-to-income) ratios are a little lower.”
– Ask about special assessments for next year, not this one. If a special assessment has been levied before you close, you can negotiate with the seller to pay it. What you want to know is if there are rumblings about extra payments down the road when you’re footing the bill.
“Newer buildings are pretty well funded,” says O’Neill. “It’s the ones that are 15, 20 and 30 years old you have to look out for.”
– Ask what past special assessments have been used for. Condominium associations are run by boards of managers who have varying business philosophies. Some want to buy the best of everything while others are satisfied with middle-of-the-road quality. Some feel queasy if they don’t have gobs of rainy-day money in the bank and will levy special assessments to stockpile more. Knowing how previous special assessments were spent will give you clues.
“Most people are comfortable with higher assessments with no special assessments,” says Maguire. “Others don’t want the high assessment. They want to pay as you go (for large capital improvements).”
– Consult with an attorney. Roth prefers to be brought into the deal before buyers tender their offers. “Then we can put in the necessary contingency clauses from the beginning,” he says. “We want to give you an `out’ in case you really don’t want to buy.”
If you didn’t do all of the above, which most people don’t, make your offer contingent upon an attorney’s approval. And give him or her ample time in which to give it, advises Roth.
– Inspect the laundry rooms. Usually you’ll hear people advise noting how well the grounds and hallways are maintained but O’Neill tells buyers to go a step further. She figures that if someone took time to scour the nooks and crannies of the laundry room, the rest of the building will check out OK.
“It’s like the front door of a house,” she says with a chuckle. “I always tell sellers to clean the front door because that’s where buyers are standing and waiting and looking around. In a condominium, I want to know what the laundry room looks like.”
