Monday, September 2, 2013

Before You Buy a Condo: Know the Costs of Ownership


Before you buy a condo, consider the financial costs added to the sales price through maintenance and other issues. While condos often appear to be cheaper than townhouses or single-family properties, the hidden costs can actually make the price of owning a condo higher than the price of owning comparable single-family properties. 

In my opinion, condo timeshares like the one above are next to extortion. You own the condo for one or two weeks out of the year. You pay a condo fee and in some cases, they just go up every year to the point where you are paying $1,000 or more a year just to stay for 1 or 2 weeks. If you want to sell, good luck. No one will want to buy them because of the fees.

Condo in Heron Harbor, Havre De Grace, Maryland

Homeownership for living all year around is a different situation. But you better know the cost of what you are getting into before you get into it. The Condos in the picture above cost $589,900 to $799,900 to buy. The condos in Heron Harbor cost $256 per month in maintenance fees. Total taxes per year $9,925. Plus you have your utilities and insurances.

Below is information that I got from the Independence Financial Portal.   
    
#1 Condo Association Fees

The first consideration is the association fee required by a condo or homeowner's association. In many areas of the country, these fees can be moderate, such as a few hundred dollars each month. If you are purchasing a condo in a highly desirable area, though, the condo association fees can be prohibitive. It is not uncommon to find fees that represent 50 percent of your total mortgage cost along coastal areas or in the hearts of cities. Since you do not own any space other than what is inside your condo, these fees can often be wasted on improvements that do not raise the value of your property.

#2 Private Mortgage Insurance

If you buy a condo with less than a 20 percent down payment, you will be required to pay private mortgage insurance (PMI). Some mortgage companies will make this requirement on even higher down payments. Surprisingly, it can be hard to secure private mortgage insurance for some condominium purchases. This occurs because the value of a condo is highly variable based on the value of the building and comparable sales within the building at the time of sale. Since these factors can be unpredictable, many insurance companies refuse to insure condo mortgages. Having a mortgage without PMI may not be an option; where it is possible, it is expensive.

#3 Homeowner's Insurance

A condo is defined as a property with more than two shared walls. In a condo, you may have residents above or below you. You do not own public spaces around your condo, and this leaves them open to other residents of your building or even those passing through. As a result, condos are viewed as less secure than comparable townhouses or houses. Your homeowner's insurance will increase based on the safety rating of your condo. Further, if there is a claim anywhere in your building, you may see your personal homeowner's insurance rates go up as a result. This does not occur as directly in a neighborhood as it does in a multi-family complex.

#4 Resale Value

At the time you sell your condo, the sales price will be heavily dependent on the desirability of the building as a whole. Even a very desirable building will suffer if too many units are for sale at the same time. In this case, supply will be greater than demand, and the sales price of your unit will decrease. This is particularly true if the various units in your building are extremely similar. In this case, it is very difficult to differentiate your listing in a competitive market. Further, even if you make improvements to your property, you must always be vigilant about out-pricing the building. There is a price ceiling on most condo sales. 

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