The Invisible Expenses of Condo Purchase

Talia Lee-
June 07, 2024

As single-family home prices soar, condominiums have emerged as a more affordable option for both first-time and experienced home buyers. With the growing appeal and cost-effectiveness of condos, it’s important to shed light on the “hidden” costs associated with condo ownership. This understanding can help you decide whether the investment is truly worthwhile.

While homeowners associations (HOAs) have become widespread across various types of communities over the past few decades, they are perhaps most common and impactful within condominium complexes.

A homeowners association (HOA) is a board of residents that governs a community, usually a complex of condominiums or townhomes. These boards collect monthly or yearly dues from residents, which are used to maintain amenities and common areas. This maintenance can include repairing elevators, mowing lawns, or repainting the exterior of the development. The fees also typically cover utilities and pest control for the entire complex.

For more information about HOAs, check out our previous articles on the pros and cons of these organizations and how fees can differ when applied to single-family homes.

HOAs also establish and enforce rules and regulations that residents must follow. Violating these rules can result in extra fees and fines. If residents fall behind on their HOA payments, the association may impose additional fees and, in extreme cases, place a lien on the resident’s condo, which could lead to foreclosure.

Condo fees can vary widely, ranging from $100 to $1,000, paid either monthly or annually. Several physical factors can influence these fees, including the age of the complex, the number of amenities offered, the size of the complex, and the number of units it contains.

Just as individual condo units can be priced differently based on factors like square footage, floor plans, and views, residents within the same complex may also be charged different HOA fees. Typically, residents with larger floor plans pay more than those with smaller units. Additionally, units with more amenities or appliances might incur higher fees due to the increased maintenance required.

HOA fees are almost as crucial as the monthly mortgage payment when it comes to condos. Mortgage lenders take these fees seriously, often including them with the mortgage payment when calculating a potential borrower’s qualification ratio.

A qualification ratio is used by mortgage lenders to determine if a borrower is a reliable candidate for a loan. Including the HOA fee in this calculation can sometimes make certain properties or complexes unaffordable for some borrowers. Therefore, factoring these fees into your monthly condo expenses early on can save you time and effort during the pre-approval process.

Condos require significant maintenance to stay in good condition for residents. While HOA fees typically cover routine repairs and general upkeep of the complex, some repairs demand more funds than the association has available, especially in emergencies.

To address these situations, many condos occasionally levy special assessment fees on residents to quickly raise a large sum of money. These fees are used for costly projects such as repaving a parking lot, replacing a roof, or repairing a shared amenity.

Homeowners associations typically impose special assessments when their reserve funds are insufficient or nonexistent. Similar to regular HOA fees, special assessment fees may vary among residents, with owners of larger units often contributing more than those with smaller units.

Since special assessments are usually reserved for emergencies, these costs are not regular or monthly. Each special assessment fee can vary depending on the nature and severity of the project.

Like regular HOA fees, special assessment fees are mandatory. Residents must pay their share on time. Failure to do so can result in the homeowners association placing a lien on the condo unit, potentially leading to foreclosure.

In most condominium complexes, a portion of residents’ HOA fees goes toward insuring common areas and the complex as a whole in case of theft or natural disaster. This insurance, often called a master policy, covers only the shared areas of the complex. Personal items inside individual units are not covered, meaning residents must obtain separate insurance for their belongings.

Condo insurance, or HO-6 insurance, protects residents’ possessions, as well as the interior walls, ceilings, and floors of their unit against theft, fire, inclement weather, vandalism, frozen pipes, or smoke-related damages. HO-6 policies also offer personal liability coverage, protecting residents if someone else is injured or suffers damage while on their property. This coverage typically ranges from $100,000 to $500,000, depending on the chosen policy.

When selecting a policy, it’s important to choose one that covers as much of your unit’s interior as possible, rather than opting for the cheapest plan available.

While condo insurance wasn’t always mandatory, mortgage lenders now usually require customers to purchase an HO-6 policy to safeguard against financial loss in case of a disaster. Similarly, lenders require borrowers to invest in homeowners insurance when buying a single-family home, highlighting one of the many similarities between purchasing a condo and a standalone house.

Condos can be an attractive alternative to single-family homes, especially for those who prefer urban living with convenient transportation options. However, condo owners often trade off some freedom, privacy, and personal space for a lower mortgage payment. Although mortgage payments for condos tend to be less expensive than those for single-family homes on average, homeowners association (HOA) fees can add significant costs, making monthly expenses challenging to manage.

Excessive costs can come with any form of homeownership, not just single-family homes.

If you find purchasing a condo a worthwhile investment, be aware that each condominium complex operates differently, depending on the property developer and the HOA in charge. Additionally, condo laws vary from state to state, so it’s essential to review the condominium act and other relevant documents that apply to your home state.

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