Frequently Asked Questions - Condos
What is a condo?
What kind of insurance do I need?
Who buys condos?
What is a special case condo?
What is the difference between a condo and a townhome?
Why does Peterson Homes have preferred lenders?
What does the homeowners association’s insurance cover on my condo?
Can my insurance company cover my condo?
Are there other issues for lenders on condos?
Words to the Wise?
What is a condo?
A condo, or condominium, is usually a building that looks suspiciously like an apartment building or complex, but these apartment-like units are sold individually. Buying a condo unit gives you ownership interest in the three-dimensional space that is your home. It also gives you partial ownership interest in the common areas and, in some cases, a parking place. As the owner of the home, you agree to be a member of the homeowners association, which provides maintenance for the common areas and the structure itself. This includes open spaces, pools, roofs, staircases, balconies, etc.
There was a humorous X-Files episode about a homeowners association for a planned unit development in which folks pay, shall we say, the “ultimate price” for painting their mailboxes the wrong color. Most associations are somewhat less . . . intense, and while they do plenty for you – fix the roof, paint the outside of the structure and mow the lawn – they don’t do everything. The stuff inside your home is your responsibility. While their roof may leak, it’s your sink that leaks and your carpet that needs replacing. Additionally, the homeowners association provides insurance for the entire structure and liability insurance for the common areas.
[ top ]What kind of insurance do I need?
For your personal items, you’ll need personal property insurance, which will pay you if, for example, your TV is stolen. However, if someone falls down the steps or damage occurs to the unit that you did not cause, the homeowners association’s insurance will take care of it.
Your rights to your unit come with CC&Rs (Covenants, Conditions and Restrictions). This is typically a gigantic document that spells out in great detail what the "rules" are. While on the surface the extensiveness may seem absurd, the purpose is to diminish the possibility of expensive litigation. You should familiarize yourself with your CC&Rs and avoid surprises later when you learn about restrictions on Christmas light placement, unauthorized modification of the interior of the structure and other restrictions an association may choose to include in its policy.[ top ]
Who buys condos?
Condos are ideal for at least three groups of people:
1) Young couples who want their own house but cannot afford one. Condo ownership brings them many of the advantages of home ownership without the steep price.
2) A young single person who doesn’t want the maintenance responsibilities of a home or a landlord to deal with but does desire the economic advantages of home ownership.
3) Older folks who no longer need their four-bedroom home and the maintenance problems associated with it.
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What is a special case condo?
In addition to the standard apartment-style condo, there are styles that one might call "urban condos." Some urban areas feature condo-like units. For instance, New York City has many buildings that were built for manufacturing, commercial or warehousing purposes. During the 1980s, it became apparent that they were no longer economically valuable for commercial purposes but that younger people wanted to live in them. Thus the transformation.
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What is the difference between a condo and a townhome?
Condos can be known as townhomes or flats (stacked), but “condo,” in specific real estate terms, refers more to the method by which one takes ownership. Generally, townhomes are similar to a flat condo in ownership method, but are not stacked. You might or might not own the land under your townhome. Townhomes are attached on one or more sides to another unit.
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Why does Peterson Homes have preferred lenders?
There can be challenges in getting mortgage loans on condos as some lenders feel the associated economic risk is too great. Lenders traditionally are not as comfortable with having a condo (as opposed to a standard home) as loan collateral, because there have been times when condos have depreciated in value faster than single-family homes. Fortunately, over the last 20 years, this has not been the case in the greater-Salt Lake and Utah markets. However, in all cases when financing a condo, both the buyer and the project must be approved to qualify for funding. Peterson’s builder project-approved lenders have already approved the project and need only qualify the buyer.
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What does the homeowners association's insurance cover on my condo?
Read all documentation provided by the association so you will know exactly what you own and what the association owns. Regardless of the division, make sure to determine that between you and the association the entire structure is insured. Many condo documents are drafted to shift the risk away from the association and onto the individual unit owner. And that’s not necessarily bad: it keeps the association's insurance premiums – and your condo fee – lower.
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Can my insurance company cover my condo?
If everybody understands what's going on and the individual owners purchase the appropriate insurance, this usually isn’t a problem. A problem can arise if the insurance agent doesn’t understand the legal description that separates the individual owners' interest from the association’s. Know the facts – don’t settle for a "box of air" legal description from your agent. Even if you must wrangle, make sure to get a coverage level of about $150 per square foot, which is generally what it would cost to rebuild most condos. This way, in the event of a big loss, you can take the money and go elsewhere.
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Are there other issues for lenders on condos?
Yes, and here are three of the most common.
1) Loan-to-value. In some cases, there are slightly tighter restrictions on loan-to-value ratios on condos.
2) Owner-occupancy ratios. If the percentage of owner-occupied units in a condo project falls below 70 percent, you will not be able to get a FHLMC- or FNMA-conforming loan. This could result in a higher interest rate. If the homeowners association determines that owner-occupancy is in danger of dropping below 70 percent, it could dictate that you may sell only to a buyer who will occupy the unit as his or her primary residence.
3) New projects. It can be difficult for any builder to get approval on the first few buyer loans on a new condo project. Generally, a non-conforming investor is brought in, but even then they may only make available a limited number of loans on a given project.
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Words to the Wise?
Find out these things about a condo project before you sign a contract:
1) What is the current owner-occupancy percentage? What is the target percentage set by the homeowners association?
2) Is the association involved in litigation as either plaintiff or defendant? Has it been in the past? What was the result of the proceedings?
3) Make sure you can live with the Covenants, Conditions & Restrictions (CC&Rs). If you need to put on music by Metallica to be able to sleep at night or want to keep your pet moose or camel in the living room, and the CC&Rs prevent these actions, you’ll probably regret it later.
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