What to know/do before buying condo ?

Question

Hello BP!!!

What do you guys think about buying condo for rental ?( in Dallas )  and What to consider before buying one ?

Does HOA usually cover everything including insurance ? I would love to hear your advices and opinions .

Thank you so much!!!

Paul B. · Answer

Usually the HOA will take care of the roof and foundation, which is often the most expensive part of the property. Many don't like condos because of the HOA fees, but those fees are covering some major CapEx, if the HOA is well-managed. That can be a big if.

Dan Barli · Answer

@Hao Dinh generally the HOA fees increase every year or every 2 years. In theory, the HOA is supposed to take care of external condo issues, such as the roof, etc. I have had some clients in positions where the HOA did not do what they were supposed to do.

Ben Stevenson · Answer

Look for an owner-occupied percentage rule in your HOA. You may have to get on a list to be able to rent out your unit.Also... ensure the reserve is healthy if the building is old.

Ben Stevenson · Answer

A good real estate attorney could help you with that.

You will likely receive the building's status certificate (I believe it's mandatory here, in Ontario, Canada). You can pick through it yourself but there's generally a lot of lawyer-speak in it.

A building we were looking at was brand new so we didn't think there was any sense of looking at the reserve... however, our lawyer dug up a pending slip and fall lawsuit as well as a 30% increase in maintenance fees the month we were going to close on the condo, then another 10% in the new year. All found in the status certificate.

Hao Dinh · Answer

thank you so much guys .

Ronald Rohde · Answer

Are you purchasing in an LLC? Be sure to have a good tenant lease agreement, personal guaranty if necessary (students, etc.)

John Mocker · Answer

Hao,

Insurance for a Condo is made up of two parts.  The Association insures the bulk of the Building.  The bylaws have a description of the Unit you are purchasing and shows where their ownership ends and where yours begins.  For some condos you may need to insure from the Studs in while others it is from the surface of the walls/floors.  You then need to purchase a policy to insure the parts you own.  It is normally done on a condo unit owner policy (type of homeowners policy) or a dwelling fire policy (used for rented units).

Some of the coverage you should discuss with your agent are:

1.  Improvements & Betterments (also called Additions & Alterations).  Covers the parts of the building that you own (sheet rock, cabinets, sinks, toilets, etc.)

2. Contents:  If you have any non-permanently attached belongings (ie. furniture, appliances, etc.)

3.  Loss of Rents:  coverage for your lost rental income if the unit is damaged by covered loss.

4. Loss Assessment:  Covers an assessment from the association for a loss that was caused by a peril (ie. fire, theft, etc.) that is covered on your policy.  Amount of coverage you need depends on number of factors such as # of units, etc.

5. Liability:  My recommendation is to buy the max limit that your policy allows and supplement it with an Umbrella policy

6. Medical Payments:  coverage is used to pay medical bills when someone is injured on the property but your liability is not certain.  Used to make small claims go away without litigation

One Non Insurance item you should check into is how well the Association has been putting away money for repairs and renovations.  If they have been collecting and banking money toward the repairs that will eventually have to be done (roof, siding/painting, etc.) you are less likely to see a big assessment when the work has to be done.

Andrew Postell · Answer

@Hao Dinh the rate will be about 1/2 a point higher than a standard Fannie/Freddie rate.  So if you are purchasing this as an investment property, and your Fannie/Freddie rate is 5.875% then the non-warrantable rate will be 6.375%.  Thanks!

Hao Dinh · Answer

@Dan Barli Thank you for the HOA tip Dan. I totally forgot about HOA can increase overtime . Is that something you can ask the HOA about the risk of HOA increase? Please excuse another silly question i have, If something happen to your condos ( roofs, foundation etc. ) is that something HOA will take care of ?

@Ben Stevenson Thank you Ben! Do you know if there are anyway to tell if the reserve is healthy ? should i look for condo that have higher HOA fee instead ?

@Andrew Postell Thank you Andrew! I will keep that in mind. If you dont mind im asking what is the average rate now to lend with non-warrantable condos ? or how much higher ? Thanks

Andrew Postell · Answer

@Hao Dinh you should really ask if the condominium is "warrantable" or not.  Sure, other things are important too but knowing if the condo complex is warrantable is important because that will affect your lending sources. Now, if you are flipping, it won't affect your lending sources...but it ABSOLUTELY will affect your buyer's lending sources.  Being Warrantable means it can be lent on with a Fannie/Freddie loan (FHA is a totally different discussion).  There are other loan types that will lend to non-warrantable condos but the rate is higher.  And the down payment is higher.  So whether it's you (for cash flow) or others (to make sure you have as many buyers as possible) make sure to ask if it is warrantable.  Good luck!

What to know/do before buying condo ?

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