There are multiple reasons not to buy a condo because, although they can be the perfect solution for those who wish to enjoy a particular type of lifestyle, that doesn’t mean that condominiums do not have their downsides. I recently wrote an article about the positive side of living in a condo so, in the interest of fairness and balance, I’m going to explore the negative side of condo living.
10 Reasons Why Condos Are A Bad Idea
In many areas of life, what’s positive for one person can be negative for another, and condos are no different. Buying a condo is very different from buying a house, and there are significant differences in the kind of lifestyle that can be enjoyed in each. While a condo might be someone’s idea of a dream home, condos can also be a bad idea because:
You Have To Play By Other Peoples Rules
And there might be a lot of them.
A condo development is managed by a Home Owners Association, which, in turn, is governed by a set of rules called the covenants, conditions, and restrictions, or CC&R’s.
These can vary a great deal from building to building, and there is no way of telling how restrictive, or otherwise, the CC&R’s might be by looking at the condo itself. There are plenty of luxury condos which are fairly relaxed while many, more affordable buildings may have so many rules about every little thing, they put a dictator to shame. CC&R’s can cover anything from whether people can smoke in outside common areas or their units, to whether or not you can have a pet.
If you don’t like rules, condos are a terrible idea.
A Significant Degree Of Control Over Your Home, Is Out Of Your Hands
When you buy a condo, you purchase the space between the outer walls floors and ceilings and an interest in the HOA. None of the common areas, land or gardens, or external structure actually belong to you; they belong to the HOA.
As a result, you are unlikely to be able to make any decision which will affect the HOA owned elements of the property. This might mean you can’t paint your front door a particular color; you can’t have a planter on your balcony or window-sill or any number of other strange and quirky restrictions which HOAs put in place.
One Florida HOA gained a certain degree of infamy after declaring that storm shutters could not be in place over windows and doors for any more than 24 hours after the end of a storm. Members of the board are said to have walked the property 25 hours after a hurricane, made a note of those properties which still had their shutters in place, and imposed daily fines. Never mind the fact that many people had taken the official advice to evacuate before the storm.
True or not, this story illustrates the way in which control over your use and enjoyment of your home will be, to a certain degree, in the hands of others when you buy a condo.
You Have To Pay Monthly HomeOwner Association, Condo Fees
There is no getting away from it, condos + condo fees.
Residents pay their condo fees to ensure the care and maintenance of common areas.
On one hand, this is a fair and sensible system. For example, shared hallways are the responsibility of the Homeowners Association. This prevents one resident from “doing their bit” to keep the common area up to standard while other residents do nothing.
Also, this can minimize minor neighbor disputes, such as falling out over what color to paint the hallway walls.
When it works, it works well, but there are several drawbacks to the HOA, condo fees system. Members of the HOA board are not necessarily experienced or qualified to plan an ongoing maintenance schedule, budget, capital improvements program, emergency response plan, etc. This can lead to all kinds of intentional or unintentional financial mismanagement such as:
- Unqualified contractors being hired to do repair or maintenance work because they are a friend or family member of an HOA board member. Consequently, your fees go to line the pocket of an HOA board members brother while you see nothing in return.
- Contractors hired without due diligence being carried out as to their skills, qualifications, honesty, reliability, and value for money. This, in turn, can lead to:
- The company that gives the cheapest quote doing the repairs and maintenance in your building, despite the fact their work is at best sub-standard, and at worse dangerous.
- Contractors that charge excessive amounts for simple, inexpensive work.
- On-call or retainer payments being made to underutilized companies.
- A failure to set aside a minimal percentage of the monthly funds for capital projects such as a routinely needed roof replacement. At a minimum, an HOA should be charging a condo owner enough to allow 10% of the fee to be set aside. This should be placed in a reserve fund which will then naturally build over the years so that large expenditures are covered as they arise. Without a healthy reserve fund, you will encounter the next point.
- HOAs without an adequate reserve fund can find themselves in the position where a significant repair or renovation is required, but the funds to cover the work are not available. In this case, the HOA will levy what is known as a special assessment. A special assessment requires all condo owners to pay a one-off lump sum in a specific short-term period, in order to cover the costs. This can sometimes be a few hundred dollars each, but I have seen special assessments that required owners to find $25,000 in the next six weeks or they would be considered delinquent in their HOA contributions. In extreme cases, this can lead to the HOA having the power to force the sale of your home.
So you see, HOA fees are a necessary evil, and it is actually vital to ensure the costs are high enough to ensure you can avoid special assessments and not to minimize them to reduce your monthly outgoings.
Homeowner Fees Are Factored Into Your Mortgage Application
Unfair as it sounds, when you are making an application for a mortgage, your condo fees will be factored into your monthly outgoings, subsequently affecting the amount the lender is willing to offer you.
So, for example, if you were to pay a single family home, you would have to pay utility bills, but although you would be advised to take these into account when you are planning, these amounts are not part of the loan calculation process.
On the other hand.
When you buy a condo, your monthly condo fee will be taken into account, even if it includes everything from common area management to internet and utilities.
Fees Can Skyrocket Suddenly
If you are considering a purchase in an established condo development the historical records can tell you a lot about what might be happening in the near future.
If the monthly fees have remained the same for several years, they may be due to see an increase. This is especially true if the reserve funds are low. So check the CC&R’s for any restrictions on a fee increase amount or percentage. If nothing is written into the rules, you could see your fees triple, or worse, overnight and there will be nothing you can do about it.
Some Condo Owners Leach Off Of Others
There are plenty of condos in which, if a resident is a second late with their HOA fees the board will pounce, demand payment, and do everything in their power to extract the money including putting a lien on the property or taking the resident to court.
This is not always a good thing. Anyone might find themselves in a temporarily tight financial situation, and a little flexibility and human kindness are essential.
Some condo owners regularly fail to pay their fees and get away with it because there is nobody on the board or any rules in the CC&R’s with any authority or will to force them to pay. In these cases, you can find yourself in a building where some owners meet their responsibilities and pay their fees on time, while others never bother.
Not only does this mean less money in the day to day management and reserve funds, but it also results in the decent owners having higher fees levied upon them in order to take up the slack.
Some Condo Developments Are Ruled By Tyrants
Every condominium project begins with the developer officially being in control but once a certain percentage of units have been sold, the development company hands over the reigns to the condos Home Owners Association.
The HOA is responsible for the repair and maintenance of common areas, keeping the condos Covenants, Conditions & Restrictions up to date, as well as administering them. The HOA must also hold an annual general meeting, have regularly scheduled meetings for the membership, make all documents available for all residents and unit owners, and establish and implement both short-term and long-term budgets and plans.
Depending on the particular HOA, either all owners and residents or just the condo owners can run for a position on the board of an HOA. Board members control the day to day management of the condominium.
As a result, you may find yourself buying into a condo which has an established, hard-line HOA whose board members rule with a rod of iron. This can have a significant impact on your lifestyle and enjoyment of your condo, so never rush into buying a condo. Before you commit to buy, review the CC&R’s and the minutes of the last few meetings. It should be evident fairly quickly whether or not you have a dictator or a band of bullies at the helm.
On the other hand…
Other Condos Developments Are Ruled Too Loosely
Perhaps you want to live in a building that is pet free, or child-free, or does not allow short-term rental. If these, or any other rules are essential to your choice of condo, then it is equally important to review the CC&R’s and meeting minutes.
Just as you can find yourself in a building that is run by tyrants, you can just as easily move into a development whose HOA is so flexible and accommodating that they may as well not exist. In this case, it can be just as big a nightmare as living in a mini autocracy.
Do yourself a huge favor. Unless you are laid back to the point of being horizontal, don’t move into a condo with a super relaxed HOA.
It Can Be Difficult To Secure An FHA Loan For A Condo
If you’re in a position to buy your condo with cash, or you have a large enough deposit not to rely on an FHA loan, then you don’t need to worry about this point.
However, you may be one of the many people who now live in a property market where a traditional single-family home is, financially, way out of reach. You may also be in the common position of trying to save for the 20% deposit needed to secure a mortgage but find that your income and ability to save is far outpaced by rising sale prices and the subsequent rise in the required deposit.
For those, and many other people, an FHA mortgage is the only way they could ever afford to buy their own home, and as such the Federal Housing Administration enable thousands of people every year, achieve their dream of homeownership.
Still, it is not all good news.
The FHA has additional rules for mortgages on condos.
Mortgages will only be extended on condos that are within FHA approved developments. To gain status as an FHA approved the development, a project must have:
- All building on the property “substantially complete.” This means that all of the units must be finished, as well as all of the communal areas. Exceptions will be made for minor project elements which are incomplete, such as some landscaping of the ground, or the installation of scheduled art pieces, etc. So, if you are looking at a “Show home” condo for a property that has yet to be built, you are out of luck.
- 50% or more of the properties in the development must already be occupied.
- 49% or less of the building’s units owned by investors or rented out by the owner.
- No more than 50% of the project used as commercial space
- A “reasonable location” – within an acceptable distance from a well-traveled road, an active railway, a military base, or an airport. In the meantime, the development must not be too close to a landfill, on unstable ground or otherwise constructed in a less than optimal location.
To ensure the financial integrity of condo development, the FHA will also review a condo’s HOA financial records to ensure that:
- No more than 15% of residents are in 90 days, or more, arrears in their HOA dues.
- At least 10% of the HOA projected income goes towards the reserve fund.
- The HOA has at least two years worth of reserve funds to cover capital repairs and replacements.
Finally, the HOAs covenants and bylaws will be reviewed to ensure there are no restrictions on renting out units or a lenders right to foreclose on a unit.,
To find an FHA approved development you have to either visit the HUD website search page or ask your real estate agent to ensure any condo they show you would be FHA eligible.
Your Neighbors Are In The Next Room
When you choose to live in a condo, you also chose to live in close proximity to your neighbors. Not only might they be next door to you on both sides but they may also be above and below you.
If your condo is well built, with careful thought given to the ways in which sounds and smells carry you might be ok. If not you are, at least occasionally, likely to:
- Unwillingly bear witness to a raging argument next door
- Enjoy your neighbor’s love of AC/DC songs performed by a sizeable Bavarian accordion band. (Yes, this is a thing. Look it up on YouTube or ask the neighbor I had in my first home.)
- Learn the exact time, every weekday, when the kids upstairs push themselves back from the table, dragging the chair legs across the floor, before thundering to the door so as not to be late for school.
- Be enticed or repulsed by the fragrance or the gourmet downstairs’ culinary experiments. This can either lead to you being put off your food by gross smells or having a direct line installed, exclusively for Skip The Dishes because everything downstairs smells so darn good.
The pros of condo living are offset by the cons, and there is no clear-cut answer to the question “Are condos a bad idea?”
However, while some people are drawn to the upsides, there are plenty of reasons why condos are a terrible idea.
If the freedom of expression, autonomy, and a life that is free from neighborly TMI, then condo living is not the lifestyle you are looking for.
About The Author
Geoff Southworth is the creator of RealEstateInfoGuide.com, the site that helps new homeowners, investors, and homeowners-to-be successfully navigate the complex world of property ownership. Geoff is a real estate investor of 8 years has had experience as a manager of a debt-free, private real estate equity fund, as well as a Registered Nurse in Emergency Trauma and Cardiac Cath Lab Care. As a result, he has developed a unique “people first, business second” approach to real estate.
This article has been reviewed by our editorial board and has been approved for publication in accordance with our editorial policy.