The first consideration when buying a condo or townhome is the type of mortgage financing you are using to purchase. If you are using FHA financing to purchase a condo or town home, the entire condo or townhome complex must be HUD approved. If the complex is not HUD approved, you cannot use a low down-payment FHA loan to purchase.
The second consideration for Condos and Townhomes is the percent of owner’s who are occupying the property as their primary residence. If the condo/townhome is FHA approved, the percent of the units that are owner-occupied must be more than 50%. If you are purchasing a condo or town home with less than 20% down using a conventional mortgage, the owner-occupancy must be more than 70%. If you are purchasing with 20% down (or more) and you are going to occupy the unit as your primary residence, the percent owner-occupied doesn’t matter.
The third consideration is the monthly HOA Dues delinquency. No more than 15% of the owners in the entire complex can be more than 30 days late on their monthly HOA dues. Why is this so important? The monthly HOA dues not only pay for the ongoing maintenance of the complex but also contribute toward the required reserves for future major repairs such as roofs, siding and the community facilities such as a pool. If more than 15% of the owners are late on their HOA dues for any length of time, the HOA falls behind on their required reserves which triggers the need for a “special assessment” on all owners within the complex. Paying the special assessment isn’t optional and becomes a lien on the property.
If you are purchasing a condo or townhome as an investor (to rent it to someone else), it is imperative that you ask if the HOA legal documents (Covenants, Conditions and Restrictions, commonly known as CCRs) limits the number of units that can be rented. The legal documents of many condo and townhome complexes limits the number of units that can be rented to 25% of the total units. If 25% of the units are already rented, the remaining owners who wish to rent their units are placed on a waiting list for the right to do so.
HOA Documents you should review during the inspection time-frame provided in your purchase contract:
- Covenants, Conditions and Restrictions (CCRs). These are the legal documents that specify the use restrictions and responsibilities of of the owners. This document will specify the number and size of pets you are allowed to have, whether or not you can rent the property in the future, the type of property improvements that require approval of the Architectural Control Committee, where you can park your cars.
- Rules and Regulations. This document typically specifics the rules and regulations for use of the common areas.
- HOA Budget. The income for the HOA budget is entirely from HOA dues. The written budget shows specifically where the funds are spent.
- HOA Reserve Study. THIS IS IMPORTANT. Now that you are aware that under-funded reserves could result in a “special assessment” to all owners within the complex, it is important to review and confirm that the reserves are sufficient for future major repairs.
- Collection Policy. This document specifies the procedure the HOA follows to collect the delinquent HOA dues.
- The minutes from the HOA Board meeting for the last 12 months. You are entitled to receive the minutes from the HOA Board meetings to help you determine if the Board has approved future increases to the HOA Dues, authorized major repairs or special assessments or changed any of the Rules and Regulations.