This is important because it reveals the “momentum” of a condo project. Don’t buy into the explanation of units “under” contract; ask them for the recorded/closed sales! The primary reason you should be concerned about this number is that some lenders cannot finance condos when the owner percentage is below 50%. Your condo is typically more marketable with a higher percentage of closed/recorded homes. Similarly, the risk of downward pressure on pricing is greater when many of the project’s condos remain unsold.
2. Have prices precipitously declined over the past 12 to 18 months in the project?
No one wants to buy a stock on the way down; much less a valuable condominium. Typically, condominium projects with excessive inventory have no choice, but to continually drop prices to attract new buyers. Condo buyers should be wary of such projects. If lower and lower pricing is the only way a condo project can attract new buyers, it is likely the value of your new condo will be eroded by further price decreases. While no one can predict the future, history can provide a valuable forecast. If prices have continually dropped over the past 12-18 months at a project, it is safe to say they will continue to drop over time until you see a leveling off or even a slight increase. A steady average pricing over a 12-month period is typically indicative of stable pricing within a condominium project.
3. Has the condominium received project approval from Fannie Mae and is the entire project approved (i.e., not just certain floors of the condo project)?
In today’s market, Fannie Mae, Freddie Mac and FHA have new stricter rules when it comes to condo financing. At the moment, Fannie Mae, Freddie Mac and FHA account for around 90 percent of all loans being approved. So if you’re looking for a home loan, you’ll need to play by their rules. Buyers may now find themselves trapped in contracts if they are buying in a condominium project that has not been approved or can’t be approved. These days, if financing is not available through Fannie Mae for your condo, the number of lenders available is reduced dramatically, which will significantly affect your ability to resell the condo in the future. Some projects have a partial approval, meaning only certain blocks or floors of condos in a project are approved by Fannie Mae. Buyers should beware of purchasing a condo under such circumstances. While the condominium project may have special financing set up for your purchase of a condo, such special financing options are rarely available once you resell your condo to a third party. Make sure Fannie Mae has approved all condos, not just certain floors of the condominium project.
4. Is the condo project FHA approved and can an FHA loan be closed presently?
With the recent problems suffered by sub-prime mortgage lenders, FHA loans are making a strong comeback as a useful alternative for first-time home buyers and home buyers with less than perfect credit. FHA does not provide or guarantee loans, it insures loans. The insurance either eliminates or minimizes the default risk lenders face when buyers make down payments of less than 20 percent. Prior to assuming this type of risk, the FHA comprehensively reviews a condo project to assess the project’s overall stability and longevity. It is important to know whether any FHA loans have closed in a project as some condo projects will obtain a preliminary approval, but must sell a certain number of units before they are officially permitted to close FHA loans. If the FHA is unwilling to take on the risk of loans closed in a condo project, buyers should likewise be cautious of purchasing in such a condo project.
5. Who is the developer behind the condominium project?
It is to your benefit to be familiar with the face behind the name of any condominium project. The strength of a developer is critical to the success of a condominium project. Since the credit crisis, many developers have walked away from their condominium projects leaving their projects in the hands of their lenders. It is common for these projects to deteriorate as a result of these lenders having little to no experience managing condominium projects. Simply having an HOA manager is not the equivalent of having an experienced developer committed to the success of the condominium project.
6. When is the construction loan due for the condominium project?
This is an important question to ask the sales representative of any new condominium project. Construction loans are taken out by the developer to construct the condominium project and typically are due shortly after construction is completed. If the developer is unable to pay off the construction loan when due, the lender can foreclose on the condo project. This will not affect your individual condo as it is released from the construction loan when you close escrow, but the lender will assume ownership of any unsold condos in the building, often resulting in a “fire sale”of all unsold condos. This can significantly affect the value of your condo.
7. Have Homeowners Association dues commenced?
With newly constructed condominium projects, the developer often sets monthly association dues very low and/or subsidizes the dues in order to attract buyers. If kept artificially low by the developer for too long, you will likely see a dramatic increase (30- 50%) in monthly dues once the assessments actually commence and/or the developer’s role is diminished. Exercise caution when considering purchasing a property with reduced or delayed HOA dues because this really means that the developer hasn’t commenced the actual dues for the project. This is a ticking time bomb which can explode into higher dues or special assessments down the road.
8. Has the project received a Final Certificate of Occupancy?
A Temporary Certificate of Occupancy (TCO) has an expiration date. This means that while the condominium meets the minimum guidelines for occupancy, this is a temporary approval that is subject to expiration. If you purchase a condo that has a TCO, you should consult an attorney and a professional architect or engineer to determine the requirements for obtaining a Final Certificate of Occupancy (CO) before purchasing.
9. Has the Homeowners Association (HOA) been formed and is it homeowner-controlled?
There is a certain time when the HOA is formed and the developer turns over the HOA to the homeowners of a condominium project. Dues are instated and the homeowners are given the authority to manage their own community. Potential buyers have the right to know when the HOA will be formed and how many closings must occur before it is turned over. The success of the condominium community is directly related to the caliber of the association. If the association board of directors is functioning properly and has resident board members to represent the interests of the homeowners, then the entire community will have better chances of functioning correctly in the long term. On the other hand, if the association has not been formed or there are no resident board members, you have no assurance that your interests will be represented and decisions could be made by the developer that affects your condo’s market value.
10. Does the condominium project have a replacement reserve study?
A replacement reserve study is a study made of all the major capital systems in the association. Professional engineers evaluate how much life the systems have left and how much they’re likely to cost when they wear out. From that, the association can calculate how much money it should set aside each year to have enough to replace those items when they do wear out. If your condo project does not have a reserve study, your association may not have enough money to replace critical systems when they wear out, which can result in expensive special assessments to you as a homeowner.
11. How do the monthly dues compare with comparable nearby condominium projects?
The answer is important not only to your wallet, but to your condo’s future market value. When the association dues are very high compared to the competition, this holds down the market value of condos in that community. It is not uncommon for developers to artificially supplement the HOA budget to give the appearance of low HOA dues. It is important for you to see the actual HOA budget so you can assess whether the budget reasonably addresses the needs of the Association. Typically, if a homeowners association is homeowner-controlled you can reasonably assume that the budget is true and accurate and is not being subsidized or artificially inflated by the developer.
12. Does the HOA have functioning chartered committees?
Chartered committees are the internal volunteers who enforce the rules and regulations and other community enhancement programs. Having committees formed with able bodies is a strong indication of a well run association.
13. Are there any liens against the project?
A mechanic’s lien is a mechanism that allows contractors to have a lien against your condo building when they’ve performed construction-type services on the property. It’s a powerful tool because many lenders refuse to lend on projects with liens attached to them. They’ll require the lien be paid before any new loan may close. Thus, a lien can affect your ability to close on your condo or sell it in the future. On new construction, you can even be joined in a lawsuit to foreclose the lien, regardless of whether you personally did anything wrong. Always make sure all liens have been removed from your condo building before buying your condo.
14. Do any investors control large blocks of units?
When sales are slow at a condominium project or developers find themselves in financial trouble, large blocks of condos are sometimes sold to one single investor. Selling condos in bulk brings cash in quickly for developers, but investors interested in bulk purchases insist on steep discounts (30-50%) from the prices buyers of single units would be expected to pay. Further once the investor owns the block of condos, he/she will typically either rent them for the time being or sell them. Either way, an investor bulk purchase of condos can significantly reduce the value of your condo unit, impede financing, or hinder your ability to rent your unit out later.
15. Is there a warranty for my condo and how are warranty requests resolved? Is there an onsite warranty resolve team?
Typically there are a number of different warranties that come with the purchase of your condo unit. State mandated, developer, appliance warranties and others. It is important for you to find out what warranties come with your condo purchase. You will also want to know how the warranty requests are handled specifically within the condo project. Some condo complexes boast a warranty, but do little to expeditiously resolve warranty requests once they actually occur.