Buying a condominium unit can be more involved than buying a single family home. This is because you have to worry about both the unit itself and the condominium project as a whole.

10 Questions You Must Ask Before Purchasing A Condominium Unit

To borrow from a famous phrase, not all condominiums are created equally. Some condominiums are very well run; some are quite poorly run and underfunded. Buyers interested in purchasing a condominium unit must do their homework:  not only about the condition of the individual unit they are interested in purchasing, but on the financial health and governance of the condominium as a whole. Remember, you are buying into the entire project as much as you are the unit, and your decision will impact your daily living and your ability to re-sell.

Here are the 10 questions buyers should ask when deciding to purchase a condominium unit:

1. What is the monthly condominium fee and what does it pay for? The monthly condominium fee can range quite dramatically from condominium to condominium. The fee is a by-product of the number of units, the annual expenses to maintain the common area, whether the condo is professionally managed or self-managed, the age and condition of the project, and other variables such as litigation. For budgeting and financing you need to know the monthly fee and exactly what you are getting for it.
2. What are the condominium rules & regulations? Condominium rules can prohibit pets, your ability to rent out the unit, and perform renovations. Make sure you carefully review the rules and regulations before buying.  Needless to say, the buyer’s attorney should review and approval all condominium documents, including the master deed, declaration of trust/by-laws, covenants, unit deed and floor plans to ensure compliance with state condominium laws as well as Fannie Mae and FHA guidelines, as necessary.
3. How much money is in the capital reserve account and how much is funded annually? The capital reserve fund is like an insurance policy for the inevitable capital repairs every building requires. As a general rule, the fund should contain at least 10% of the annual revenue budget, and in the case of older projects, even more. If the capital reserve account is poorly funded, there is a higher risk of a special assessment.  Get a copy of the last 2 years budget, the current reserve account funding level and any capital reserve study.
4. Are there any contemplated or pending special assessments? Special assessments are one time fees for capital improvements payable by every unit owner. Some special assessments can run in the thousands, others like the Boston Harbor Towers $75 Million renovation project, in the millions. You need to be aware if you are buying a special assessment along with your unit.  It’s a good idea to ask for the last 2 years of condominium meeting minutes to check what’s been going on with the condomininium.
5. Is there a professional management company or is the association self-managed? Usually, a professional management company, while an added cost, can add great value to a condominium with well run governance and management of common areas. But for smaller condominiums, self-management works just fine.
6. Is the condominium involved in any pending legal actions? Legal disputes between owners, with developers or with the association can signal trouble and a poorly run organization. Legal action equals attorneys’ fees which are payable out of the condominium budget and could result in a special assessment.  In some states, you can run a search of the condominium association in the court database to check if they’ve been involved in recent lawsuits.
7. How many units are owner occupied? A large percentage of renters can create unwanted noise and neighbor issues. It can also raise re-sale and financing  issues with the new Fannie Mae and FHA condominium regulations which limit owner-occupancy rates. If your buyer is using conventional financing, check if it is a Fannie Mae approved condo. If FHA financing, check if it’s an FHA approved condo. (Thanks mortgage specialist Lou Corcoran for the links)
8. What is the condominium fee delinquency rate? Again, a signal of financial trouble, and Fannie Mae and FHA want to see the rate at 15% or less.
9. Do unit owners have exclusive easements or right to use certain common areas such as porches, decks, storage spaces and parking spaces? Condominiums differ as to how they structure the “ownership” of certain amenities such as roof decks, porches, storage spaces and parking spaces. Sometimes, they are truly “deeded” with the unit, so the unit owner has sole responsibility for maintenance and repairs. Sometimes, they are common areas in which the unit owner has the exclusive right to use, but the maintenance and repair is left with the association.  Review the Master Deed and Unit Deed on this one.
10. What Does The Master Insurance Policy Cover? The condominium should have up to $1M or more in coverage under their master condominium policy. For buyer’s own protection, they should always buy an individual HO-6 policy covering the interior and contents of the unit, because the master policy and condo by-laws may not cover all damage to their personal possessions and interior damage in case of a roof leak, water pipe burst or other problem arising from a common area element. Ask for a copy of the master insurance policy and don’t forget to check the fine print of the by-laws. Sometimes, there’s language that would hurt a unit owner in case of a common area casualty. Condominiums over 20 units should also have fidelity insurance to protect against embezzlement.

I posted this list on the Realtor ActiveRain website and it was the featured post, generating a slew of great comments from real estate brokers around the country.

Of course, a good real estate attorney will help buyers and their realtors with this “due diligence.” As part of our standard condominium representation, we will review the following condominium documents and issues:

• Master Deed and amendments
• Declaration of Trust/By-Laws, Rules & Regulations
• HOA Covenants/Restrictions
• Unit Deed and Floor Plans
• Condominium Budget and Capital Reserve Fund
• Fannie Mae/FHA Compliance Provisions
• Condominium Annual and Special Meeting Minutes
• Pending or Contemplated Special Assessments or Litigation

We will also build in provisions into your purchase and sale agreement to protect you in case there are unanticipated or undisclosed issues with the condominium which affect your willingness to move forward with the transaction. Happy condo hunting!

Rona Fischman, a buyer’s agent and co-author of Boston.com’s Real Estate Now Blog asked me to answer a couple of questions regarding condominiums on her Boston.com blog which I’ve reprinted here:

Is an individual unit owner liable if someone gets hurt in the condominium’s common areas?

The answer is most likely not. This is good lead in to the concept of “common areas.” When someone buys a condominium unit, they also obtain an undivided share of the condominium’s common areas and facilities. Common areas typically include obvious things such as building entrances and exits, lobbies, interior stairways, pools and workout rooms. They also include not so obvious areas such as the space between adjoining units, telecommunication wires, and the roof. As outlined in the “master deed,” each unit owner “owns” an undivided share (expressed as a percentage) of all the common areas. But the condominium association has responsibility over managing and maintaining the common areas. Recognizing that unit owners have very little control over common areas, the Massachusetts Condominium Act provides that only the condominium association can be sued for claims related to common areas. The condominium association should have a master liability insurance policy in place in case anyone gets injured on common area property. If however, the claim is so substantial that all common funds, property and insurance proceeds have been exhausted to pay the claim, individual unit owners could be held liable for the balance due, if any, but only up to their respective percentage interest in the condominium. Now, if your unit has a private deck or porch (which is not a common area) with a faulty railing, you could be held responsible if someone fell. For all these reasons, unit owners should absolutely obtain an “HO-6″ policy for their own liability and an umbrella policy on top of that.

I own a condominium unit and rent it out to students. Am I responsible for my tenant’s noise and disturbance problems?

The answer is yes. While a precise response would depend on the provisions of the condominium’s bylaws, typically, a unit owner is responsible for the actions of tenants. Most often, a condominium’s bylaws and house rules are binding on unit owners, resident family members and tenants. If a tenant violates a house rule — by making excessive noise — the unit owner is responsible for all consequences. The condominium association can require the unit owner to evict the tenant; if the unit owner fails or refuses, the condominium association may be able to take separate legal action against the owner and levy stiff fines. If the bylaws provide, the unit owner may be responsible for reimbursing the condo for legal fees and other expenses incurred in connection with his tenant’s eviction. Disgruntled unit owners can also pursue “nuisance” claims against unit owners who rent to noisy tenants. This is a tricky issue with an absentee unit owner who cannot verify the nature of the complaints. Surely, however, renting to noisy tenants will earn you no favors with your fellow unit owners.

Condominium Living 101

My advice to folks considering purchasing a condominium is to recognize that you are buying into a rather unique form of ownership and community. You will be giving up certain rights taken for granted in single family dwelling life — the right to absolute silence, privacy, and control over all aspects of the property — in exchange for perhaps more amenities, convenience, less maintenance, and better location and price. In some cases, you will also be entering into the uniquely democratic (or in some condos, totalitarian) form of governance, rife with politics, fighting and name-calling–think that Seinfeld episode down at the Del Boca Vista Condos. But seriously, the majority of condominiums are well run. But before you buy, it’s imperative that you and your real estate attorney thoroughly review the condominium documents and budget to ensure you’re not buying into a Seinfeld-esque nightmare.

Recent Fannie Mae (FNMA) condominium lending regulations are beginning to live up to the hype as having an onerous impact on condominium sales and project development. The changes, made in January 2009, were part of an effort by mortgage giants Fannie Mae and Freddie Mac to limit risky lending in a segment of the housing market particularly hard hit by foreclosures in recent years.

Here is a brief overview of the Fannie Mae condo guideline changes:

• For new construction and newly converted condominium developments, 70% of the units must be pre-sold (closed or under contract). This guideline is being increased from 51%.  This is the real Catch-22.  Fannie Mae won’t approve condominium mortgages unless 70% of the units are sold, but a developer cannot sell 70% of the units without buyers being able to obtain conventional Fannie Mae compliant mortgages. Buyers who run into problems here are being forced to get loans from small local banks who hold their own mortgages and are not bound by the FNMA guidelines.
• No more than 15% of condominium units within a single project can be more than 30 days delinquent on condo fees. This is an existing guideline that is now being applied to new condominium projects. The requirement was also changed from being 15% of the total fee payments to 15% of total units.
• Fidelity insurance will be required for condominiums with 20 or more units, ensuring that homeowner association funds are protected. Presently, this requirement applies to new projects and is now being extended to include established condominiums.
• Borrowers must now obtain an HO-6 condominium unit owners insurance policy unless the condominium master policy provides interior unit coverage; coverage may not be less than 20% of the assessed value. A condominium owners policy, known as an HO-6 policy, typically covers personal property, personal liability, and the physical unit from the studs and in. Many policies also include special assessment coverage or the option to include a special assessment coverage rider. Click here for a more extensive post on HO-6 policies.
• No more than 10% of a project can be owned by a single entity. Apparently, this was to keep the so-called “vulture buyers” from taking over project.
• No more than 20% of a project can consist of non-residential space. The new guidelines therefore severely impact most mixed commercial-residential use projects, a highly popular development scheme.
• The condominium/homeowners association must have at least 10% of its budgeted income designated in a capital reserve fund for replacement reserves and adequate funds budgeted for the insurance deductible. Many older condominium associations keep woefully inadequate reserves and operating budgets, so they are non-compliant.
• No pending litigation involving the structural soundness, safety or habitability of the condominium project. Fannie Mae underwriters will reject financing if the condominium association is involved in litigation over the construction of the project. I’ve written about this more extensively here. Borrowers may ask for a waiver if they can establish adequate insurance coverage for the litigation or otherwise little or no risk of loss to the association.
• Fannie Mae and Freddie Mac have also boosted fees on mortgages for condominium units. Buyers without a minimum 25% down payment have to pay closing-cost fees equal to 0.75% of their loan, regardless of their credit score, under new rules that took effect in April. Fannie Mae has said it will drop that fee in August for cooperative apartments and detached condos.

According to a Fannie Mae, the guidelines can be modified for condominium projects on a case-by-case basis.  Therefore, these guidelines may not apply to all condo projects.

Click here for the guidelines.

What’s the impact of the changes?

Certainly, the revised guidelines are negatively affecting condominium buyers’ ability to obtain conventional loans for either a new or established condominium if the project does not conform. Most notably, the changes are dramatically affecting new developments, especially in hard hit areas such as Florida and California.

Fannie Mae has already approved a number of projects. Click here for the full list of FNMA approved projects.

Through discussions with some fellow Massachusetts real estate professionals, the impact here in the Bay State is not as bad as some of the harder hit states, but it’s proving to be a major thorn in many transactions. Real estate attorneys on both sides of the table are working hard to get existing condominium developments in compliance with the new regulations.

Rep. Barney Frank (D-Mass.), who ironically spent the last year lambasting Fannie Mae for its questionable lending practices, is now calling for Fannie Mae to relax these guidelines. We’ll see what happens in D.C., and keep you posted on any changes coming down the pipeline.

Update:  Since I posted this article, I’ve been retained several times to issue attorney opinion letters certifying to a lender that a particular condominium project is in compliance with the new FNMA regulations. If you are in need of such an opinion letter, please contact Richard Vetstein at rvetstein@vetsteinlawgroup.com.