37237061 condominium basics

8/8/2019 37237061 Condominium Basics

1/47

Condominium BasicsThe complete and easy to understand guide

to owning and purchasing condominiums.

By Sterling K. Kekoa

Disclaimer

The information contained in this guide in no way should be considered legal advice. Wheneverreal estate transactions are performed a competent attorney should be consulted.


2/47

Condominium Basics

CONDOMINIUM BASICS

To my mother, A. Eileen Kekoa, who gave me the confidence to pursue my dreams andwho led me to cherish the profound nature of the human mind.

Special Thanks to:

Nancy Gershenfeld, Mark Zappone, Theresa Van Sickle, Kevin Pope and all those at the ParkSummit Condominiums who helped along the way.

Third Edition

Copyright 2010, Sterling Kekoa. All rights reserved. Printed in the United States of America. No part of this bookmay be used or reproduced in any manner without legal authorization with exceptions for brief quotations as part ofcritical reviews or articles.

Kekoa Publishing1236 Kelewina PlaceKailua, Hawaii, 96734E-mail: [email protected]

ISBN: 0-9963416-0-0

2


3/47

Contents

About this book 5Introduction 6

PART ONE: Condominium Basics

What is a condominium? 7Condominium definitionDifferent types of condominiumsNew Construction and conversionCo-operativesCondo or condominium?Apartment or condominium

Common Area 9What is common area?Percentage of ownership

Homeowners associationLimited Common Area 11

What is limited common area?Why is it considered common area?Why is it limited?Routine maintenance

Private Domain 13Which areas are private?Use of private property

PART TWO: Condominium Management Basics

Legal Foundation 16The DeclarationKey featuresThe bylawsRenting regulations

Homeowners Association 19MembershipVoting proceduresHomeowners meetings

Board of Directors 21Who they areElection of board members

Board responsibilitiesManagement Companies 23

Reasons for management companiesServicesResident managersLegal Support


4/47

Condominium Basics

PART THREE: Condominium Financial Basics

Maintenance Fee 25Homeowners monthly feeList of expensesThe annual budget

The auditReserves 30

The need for reservesReserves as part of the budget

Special Assessments 31Use of special assessmentsPower to pass a special assessment

Insurance 32Insurance coveragePremiumsHomeowners coverage

PART FOUR: Condominium Investment Basics

State laws1. Is a Condominium for you? 35

Condominiums vs. HousesConversion vs. New ConstructionsOther types of condominiums

2. Who, What, Where and How Much? 37Finding your price rangePre-approved loansYour mortgage paymentFinding a locationInside the condominiumWorking with real estate agents

3. The Paper Chase 41Checklist

4. The Final Act 43Attorney assistancePrivate property inspectionThe purchase offerWhat is escrow?Financing

Glossary 46

figure 1: Condominium unit floor plan 13figure 2: Sample annual budget 27figure 3: Sample ownership percentages 29

4


5/47

Condominium Basics

About this book

The primary goal of this book is to provide simple, yet comprehensive information aboutcondominiums. Although much of the text is written with the residential buyer in mind, many of

the topics will also be useful to commercial and business interests.

The first three parts contain basic information on aspects of condominium ownership. Theyinclude:

What a condominium is Who owns what within a condominium The legal foundation for a condominium How a condominium is managed Explanation of condominium dues Types of insurance coverage

The final part is designed to help the novice condominium buyer, through a step-by-stepprocedure.

1. Is a Condominium for you?

The pros and cons of owning a condominium Understanding the different types of condominiums

2. Figuring out where to start

Matching your desires with your purchasing power Things to look for when you are shopping around

Working with real estate agents

3. How to track down important information

Finding the necessary documents Learning about the financial stability of a condominium Discovering the maintenance condition of the condominium

4. Final considerations before making a purchase decision

The aid of an attorney Property inspection

Understanding FHA and VA approval How to begin the purchasing process

5


6/47

Condominium Basics

Introduction

Condominiums represent a rapidly growing portion of the real estate market today. As landbecomes increasingly scarce, multifamily dwellings represent a greater percentage of newhousing construction-especially in urban areas. In fact, the United States government predictsthat half of all households will be living in some form of condominium by the end of this century.Because condominiums are relatively new, you may be among many potential buyers who knowlittle about them.

It is important to realize that condominiums have certain fundamental differences from

other forms of real estate, such as the more traditional single-family house. You will avoid manypotential problems and surprises before you buy into a condominium by knowing more aboutthese differences.

The dual purpose of this book is to give you a basic, comprehensive understandingabout condominiums as a whole and to help you effectively evaluate a potential purchase.Unlike other publications, you will find a few simple step-by-step suggestions on what to look forin a condominium and how to find helpful background information before signing a purchaseagreement.

6


7/47

Condominium Basics

Part One:Condominium Basics

What is a condominium?

Condominium definition

Condominiums are a form of ownership, not a type of building. There are several different kindsof condominiums, both commercial and residential. Business parks, private housingcommunities, apartments, parking stalls, horse stables, marinas, and townhouses are a fewexamples of possible condominiums. In other words, all condominiums do not look alike. Thekey to understanding a condominium is to realize that it is special form of ownership.

The word condominium is a Latin derivative that translates to mean joint dominion orcommon ownership. All condominiums do, in fact, contain something known as commonproperty or common area. In a condominium complex, common area can include such thingsas hallways, roofs and elevators; also, recreational facilities, such as swimming pools or tenniscourts. It is this concept of common property that distinguishes a condominium as a uniqueform of real estate ownership.

When you purchase a condominium not only are you buying a piece of private property,

you are also buying a percentage of common space that is an integral part of the whole buildingor complex. If you buy a condominium, it is essential that you understand what the commonareas are and how they are managed.

Different types of condominiums

Most people associate condominiums specifically with urban areas or vacation resorts. The factis that condominiums are created and designed to accommodate a variety of business andindividual needs. Regardless of intended function, a condominium is a form of ownership thatconsists of both privately and commonly owned areas.

If a condominium is both privately owned property and commonly owned property, thenany other real estate situation that meets this condition, by definition, would also be a

condominium. This means that townhouses and private housing communities are alsocondominiums because they own and manage adjoining or adjacent areas.To illustrate this point, consider the private housing community. The lots and houses

within such communities are privately owned. However, the streets and sidewalks are owned incommon. You may also find that some of these private communities will own other commonproperty such as parks, pools, clubhouses, and golf courses.

New construction and conversion

7


8/47

Condominium Basics

In general, condominiums fall into two distinct categories. The first are known as conversions,such as an apartment building that has been converted into condominiums. The second arethose that were originally designed and constructed to be condominiums. Each of these hascertain unique characteristics that should be taken into consideration. These characteristics willbe reviewed in finer detail in Part Four: Condominium Investment Basics.

Co-operatives

As a point of reference, co-operatives are entirely common area. There are no privately ownedspacesper se. When you purchase into a co-operative, you are buying a share or percentageof the whole building. It is similar to buying a share in any other business. The lack of privatelyowned apartments is the fundamental difference between co-operatives and condominiums.

In a co-operative, the unit that you occupy will bear a direct relation to your percentageof ownership in the corporation that holds title to the building. You rent the unit from thecorporation, who will in turn pay any mortgage on the property. As a result, this type ofownership can have many different ramifications as an investment. Should a co-operativeinterest you, it would be wise to investigate these differences further.

Condo or condominium?

Condo is to condominium what TV is to television. Both words, condo and condominium, areuse interchangeably. In the interest of simplicity, this book will use the original term-condominium. Additionally, this book recognizes that the word condominium commonly refers toboth a unit as well as the entire complex.

Apartment or condominium?

In some areas of the country, there is a very distinct difference between what is meant by acondominium and by an apartment. For example, in Seattle, condominiums are individually

owned, whereas apartments are seen strictly as rentals. Of course, you can rent acondominium from the owner, but it is still considered a condominium if it is part of acondominium complex.

This is not the case in Manhattan. If you own a condominium in a building in New York,you will most likely refer to it as your apartment. And, why not. After all, it really is an apartmentin the sense that it is a separate dwelling within a structure--the definition of apartment.

These differences are simply the result of colloquial usage. Call it what you will, thebottom line is that a condominium is a form of ownership that includes both privately andcommonly owned property, whether or not it resembles an apartment, in all parts of the USA

8


9/47

Condominium Basics

Common Area

What is common area?

A broad way to describe common area is to say that it is everything that belongs to the

condominium complex and grounds, excluding the space and materials reserved specifically tothe individual apartment, unit or other private residence. It is called common area because it isproperty that is owned in common by all homeowners in the condominium.

Common areas in a multiple unit condominium will many times include the tracts of land,air space, easements and rights as lawfully recorded by the condominium. Items such aswindows, roofs, foundations, columns, girders, studding, joists, beams, main walls, chimneys,and any other structural part of the building will be named common area. Installations of centralservices such as power, light, gas, hot and cold water, heating, refrigeration, air conditioningsystems, main intercom systems, security devices, master television cable and antennae, pipes,conduits, wires, elevators and shafts, trash collection receptacles and chutes, fire alarm andsprinkler systems, gutters and drain spouts, sanitary and storm sewer drainage, ventilation fansand ducts, compressors, and all other similar items intended for common use will also fall under

this category.As a rule of thumb, anything that is used by more than one owner of the condominium

will invariably be viewed as common area. All other items that do not follow this rule will beprivate property. Hence, those wires and pipes that function entirely within the boundaries ofyour unit will belong to you-not to the common areas. The chapter titled Private Domain willexplore the privately owned elements in finer detail.

Percentage of ownership

As an owner of a condominium you should be aware of two interrelated facets of commonownership. The first is to know your percentage of ownership in the common property. Thesecond is to realize the necessity for a cohesive and effective way to manage the common

areas.With respect to the first of these two aspects, you will find that an exact percentage of

common ownership will accompany each unit in the condominium. There are two forms offiguring the ownership percentage. It is the developer who initially decides which method isused. However, once the percentages are calculated, they cannot be changed except through aunanimous vote of all the owners in the condominium development.

Of the two, the more common method is determined by comparing the percentage offloor space or square footage in each unit. The other method arrives at a percentage accordingto the unit's original purchase price. Due to the fluctuations in the housing market, the lattermethod of establishing the owners' percentage of common area is not as popular.

In either case, the actual quoted percentage should appear in the condominium'sofficially recorded documents-referred to as the declaration and bylaws in this guide. The sum

total of all the percentages ascribed to each of the units will equal 100%. To put it another way,all the owners combined will own all of the common property.

Homeowners association

Common areas, like all physical improvements, require maintenance and attention in order topreserve their intended function and state of repair. As a result, condominiums manage andmaintain their common property through an organization called the homeowners association.Each condominium owner will be a member of the homeowners association by virtue of his or

9


10/47

Condominium Basics

her percentage of ownership in the common areas. In turn, an elected board of directors headsthe association.

The board of directors will directly supervise all common areas within the condominium'sboundaries. The association will often establish specific rules, bylaws and policies that willoutline the operating functions and day-to-day management of the complex. Consequently,there are likely to be general rules pertaining to pets, laundry, and pools. Rules can vary from

one condominium to another according to the spirit of the inhabitants.In new construction, the developer usually functions as the association. When a certain

percentage of the units or homes have been sold, the developer passes control of the complexto the owners and the homeowners association.

The maintenance costs for these common elements are shared according to eachindividual's percentage of ownership. The homeowners association will create an operatingbudget that will account for these expenses. For a number of reasons, it is a good idea tobecome familiar with the basic functions of the condominium homeowners association andboard of directors. You can find more information in Part Two: Condominium ManagementBasics.

10


11/47

Condominium Basics

Limited Common Area

What is limited common area?

Condominium owners should become familiar with another form of common area, namelylimited common area. In simple terms, it is common area that has been assigned to a specificunit. A basic list may include such things as decks, parking spaces, storage lockers, mailboxesand fireplaces.

Because limited common areas are, in essence, still part of the common area, they areincluded into the percentages of ownership and are governed through the homeownersassociation. You can locate the apartment's percentage of common ownership in thecondominium's declaration or bylaws.

Why is it considered common area?

The underlying reason why limited common areas are described as common area is that theycan directly affect other owners in the building or complex. If they were declared as privateproperty, many unpleasant and perhaps dangerous situations could arise. For example, anowner may decide to renovate or make an addition to his deck that may alter the original lookand design of the building. Another owner may neglect to inspect and clean his fireplace thatcould result in a chimney fire and spread to units above. These are only a couple of examplesby which private control of these limited common areas could provoke considerable duress tothe other owners in the condominium complex.

Why is it limited?

On the other hand, if these items were simply common area, another owner could rightfullyclaim access to those areas. Imagine if someone came to your door and demanded to use thedeck that happens to be attached to your unit. Under these circumstances you may agree thatit could easily become tiresome to have other people roaming across your living room to use thedeck. This scenario could cause you undo anxiety. This example demonstrates the need torestrict orlimitthe access to these particular types of common area.

All limited common areas assigned to your unit will fall under the control and supervisionof the homeowners association and the board. Changes in use or appearance will be subject totheir approval. If you intend to purchase an apartment in a condominium project, ask whatpolicies will directly determine the acceptable use and expected conditions of the limitedcommon area connected to the property. There may be regulations concerning the rentalarrangements for parking spaces or restrictions on patio furnishings. It is better to find out whatthe limitations are before you move in.

Routine maintenance

Condominium associations sometimes elect to delegate part of the responsibility for theselimited common areas. Homeowners may be held responsible for the routine maintenance forthe limited common areas to which they have exclusive access. This routine maintenance canbe loosely interpreted to mean any form of up-keep that will sustain the useful life of that area.

For example, the owner may be asked to keep his deck in a presentable condition or hisparking spot free of debris. As for fireplaces, an association may arrange to have the fluescleaned and pass the costs on to the respective owners.

11


12/47

Condominium Basics

In one sense, you can view this as a trade-off for having restricted access to thesecommon areas. You may find it helpful to know if your condominium homeowners associationintends to pass the costs for routine maintenance on to you.

12


13/47

Condominium Basics

Private Domain

Which areas are private?

For almost anyone who purchases a condominium, the primary objective is to own and control aspecific space or apartment. The rights and responsibilities of ownership by fee simple title,conveyed through a deed, grants the condominium owner exclusive jurisdiction over variouselements within the condominium apartment. Therefore, it is important to recognize andunderstand the principal parts and boundaries of your private domain.

The declaration, the official document that establishes and proclaims the complex as acondominium, should provide a detailed description of the exact dimensions of each individualspace. It should also contain provisions that detail the specific features that constitute theprivate domiciles. Incidentally, if you are not familiar with condominiums, you may be surprisedto find out that you may not own everything you see.

For the most part, if you share it-you don't own it. This means that only those things thatserve or support the individual apartment will be considered homeowner property. It can beconfusing because there is a fine line between what is private property and what is commonarea.

The illustration depicts several items within a condominium floor plan in order to provide youwith a better idea of which elements are private and which are not. A simple residentialapartment condominium is used because of the close proximity of both common and privateareas. Each lettered item is as follows:

13


14/47

Condominium Basics

A. MAIN WALL- (Common Area) This wall separates the apartments from one another or fromthe outdoors. It will often have support beams and other inter-structural elements.

B. BALCONY- (Limited Common Area) This space is used by only one owner but also affectsthe exterior appearance and structure of the building.

C. SUPPORTING INTERIOR WALL- (Common Area) This wall may contain pipes that serveother units and may also have supporting struts. However, the wall surfaces are generallyconsidered private property.

D. FRONT DOOR- (Common Area) This door can effect both overall appearance and fireregulations within the building.

E. FIREPLACE- (Limited Common Area) The flue will often extend through other areas eventhough one unit owner uses it.

F. SLIDING GLASS DOOR- (Common Area) This glass door separates the balcony from theapartment. It will affect the exterior appearance of the complex.

G. COUNTERS- (Privately Owned) The counter has no significant bearing on the structuralintegrity of the building.

H. REFRIGERATOR- (Privately Owned) This appliance will not endanger the structural integrityof the building.

I. WATER HEATER- (Privately Owned) The water heater serves only this apartment and will notjeopardize the other common elements within the building. However, should your water heaterburst, you will be responsible for all damage that result because it is your property.

J. TOILET- (Privately Owned) This amenity will only affect the occupant of this apartment and

will not threaten the structure of the building. Because it is private property, the owner will beresponsible for damage that originates from a problem with this fixture.

K. WALL ADDITION- (Privately Owned) This line represents a wall partition that you or aprevious owner (excluding the developer) has erected. It should have no significant influenceon the structure of the building.

L. CLOSET DOOR- (Privately Owned) This partition does not compromise the other structuralsupports of the building.

Use of private property

If it belongs to you exclusively, you will be free to do what you want with it. For the most part, aslong as it does not affect the support structure or main operating systems in the building, youmay pursue any interior design that you wish. Keep in mind that others may not share your zealfor the eccentric and unconventional design renovations may hinder your ability to rent or sellthe condominium in the future.

In rare instances, an association will attempt to restrict your freedom if a change in yourliving environment will directly affect the other owners of the condominium. For instance,accumulating trash and garbage in your apartment to the extent that it becomes unsanitary forthe building. Similarly, you may be asked to remove a sign that distracts from the aesthetic

14


15/47

Condominium Basics

charm of the residence as a whole. With the exceptions of certain extreme circumstances, youwill be left to your own creative energies as the supreme ruler of your estate.

15


16/47

Condominium Basics

Part Two:Condominium Management Basics

Legal Foundation

The Declaration

Condominiums, as a unique form of real estate ownership, are essentially a combination ofprivate and collectively owned property. The legal instrument that establishes the building,project or complex as a condominium is termed the Condominium Declaration and Covenants,Conditions, Restrictions, Reservations, Easements and Deed, or more simply--the Declaration.It is also referred to as the Master Deed. The name varies from state to state. Allcondominiums should have a master copy recorded on file with the county clerk or the landrecords office. It is public information and available to anyone.

With the knowledge that all the provisions in a declaration are important, there arecertain noteworthy features that can shed some light on a condominium's physical and workingstructure.

Key features

CONDOMINIUM PROCLAMATIONOften at the beginning of the document, this is the provision that affirms and declares thisresidential or commercial project a condominium.

DESCRIPTIONSThere should be a full description of the building and apartments within the condominium. This

section may show any assignment of limited common areas; those area that have restrictedaccess such as decks, storage lockers and parking spaces.

COMMON AREASThe description of common areas and general regulations throughout the complex may be listedin detail.

LIMITED COMMON AREAS

16


17/47

Condominium Basics

A description of the limited common areas and general restrictions will be included.

COMMON AREA HOMEOWNER PERCENTAGESListed percentages of ownership in the common areas for each apartment owner will berecorded. Voting strength and fiscal responsibilities are determined from these percentages.

HOMEOWNERS ASSOCIATIONThere will be provisions for the fundamental responsibility and authority of the homeownersassociation. There will be conditions under which the developer transfers control of thecondominium to the association. There will also be procedures or guidelines for meetings andvoting.

BOARD OF DIRECTORSAuthority, responsibility and term of officers are established here. Board meeting procedureswill be outlined. The management duties of the board can be named in this provision.

GENERAL CONDOMINIUM REGULATIONSYou may find regulations on vehicle parking, common walks and drives, interior apartment

maintenance, exterior appearance, pets and acceptable activities such as laundry and poolhours.

COMMON EXPENSES AND ASSESSMENTSA list of expenses and payment procedures by owners for common areas will appear. Punitivemeasures for non-payment of homeowner fees may also be described.

INSURANCEA provision for condominium insurance coverage of the condominium complex and commonareas in the apartments will be found in this document.

Amendments or changes to the declaration can be made by the homeowners association. For

this reason, you should make sure that you receive the most recent copies of this document.

Important: These are only a few principal elements that will have a direct effect on thehomeowner. The content and size of the declaration can differ significantly from onecondominium to another. Though many of the points in the declaration may seem ratherobvious, the aid of an attorney experienced in real estate law is strongly suggested wheninterpreting this document.

The bylaws

During your quest for the perfect condominium, you may find that many associations also followa set of bylaws that have notable points of interest. These bylaws include more specific

regulations and concerns of the condominium. Such items may include pool hours, petrestrictions and board meeting procedures. The provisions in this document can describe newrules or amendments to others in the declaration. Check to see if the condominium has a set ofbylaws. It is well worth the effort.

As with the declaration, the bylaws can be changed or amended from time to time. Thecurrent set of bylaws should incorporate all additions and revisions.

Renting regulations

17


18/47

Condominium Basics

The declaration and bylaws should contain the basic guidelines that the homeowner shouldfollow. It is customary that control over renting procedures rests with the board of directors.

Parking space rentals are often subject to the board's approval, because they are oftenclassified as limited common area. In order to insure security for the vehicles belonging toowners in the complex, those who intend to rent parking spaces will often be screened. If youare assigned parking spaces with the purchase of your condominium unit, you will find it

valuable to learn the renting procedures that have been established.Renting your private apartment can be less restrictive. Check the declaration, bylaws

and renting policy for the proper requirements for renting your apartment or home. Forinstance, you may find that your property cannot be rented for less than one month and that theprospective renter must demonstrate a satisfactory income.

Renting is often an area of contention for many condominiums. Unfortunately, it hasbeen observed that renters are not as conscientious as owners and frequently do not respectthe condominium's grounds and facilities. For this reason, condominiums often have specificprocedures for owners who rent their property.

In addition, if you are shopping for a condominium, it may be wise to consider the rentervs. owner ratio. Knowing how many renters there are in a complex, will give you an idea of thegeneral atmosphere. Lenders who finance condominiums will often have guidelines as to the

maximum percentage of renters in a project that they will deem acceptable.

18


19/47

Condominium Basics

Homeowners Association

Membership

The homeowners association is exactly what it means, an association of homeowners.Ownership of an apartment or space is the sole qualification for membership in the homeownersassociation. By parliamentary procedure, the association will regulate and operate thecondominium and all common property under its jurisdiction. The condominium's declarationshould contain a provision that describes the fundamental obligations and official operations ofthe homeowners association.

Most condominium associations function in a similar manner, but the people of onecondominium may differ greatly from those of another. The methods and goals of theseassociations will differ as well. For example, a lakeside resort with many recreational facilitiesmay attract leisure-oriented residents and it is reasonable to expect that the goals of thiscondominium will reflect their constituents' priorities.

Voting procedures

Each owner's total voting weight is equal to his or her percentage of common ownership. If youown more than one apartment then your votes are equal to the combined percentages. Thismay seem a bit lopsided until you take into consideration that higher ownership percentagesalso translate into higher monthly maintenance fees.

In some cases, the owner has the right to delegate their vote to a representative. Thisperson does not have to be an owner in order to cast a vote by proxy. If you intend to haveanother person vote in your stead, the board of directors will request proper notification of yourproxy through a predetermined procedure. The declaration and bylaws should spell out theserestrictions and procedures for individual owners voting rights.

In those instances where there is more than one owner of a property and the individualowners cannot agree in which favor to cast a vote, the board will disqualify the vote. Whenconflict occurs within a membership vote, disputing co-owners may not be allowed to castfractional votes.

Homeowners meetings

Condominium owners will assemble for two types of meetings. The more fixed of these will bethe annual meeting. On special occasions, the association or the board will call for a meeting inorder to discuss and attempt resolve issues involving the condominium. Proper method ofnotification for either type of meeting is often established by regulation in the condominium'sdeclaration or bylaws.

The annual meeting commonly falls at the end of the association's fiscal year. Theagenda for this meeting will include certain customary items. There should be an audit of thepast year's books as well as a summary of the previous budget's performance. The board willalso present the new budget. It is common that an election of new board members will alsotake place. Other topics of interest can be pursued during these meetings.

Special meetings are called to inform, discuss and resolve problems and issues that areimportant to the homeowners. These meetings can range from an ordinary board election to aspecial assessment. Special meetings can be called by either a group of homeowners or by theboard. A quorum of owners is required to be in attendance before any homeowners meetingcan officially conduct business. The declaration or bylaws establish the number of members

19


20/47

Condominium Basics

that constitute a quorum.Condominium homeowners meetings, where the entire ownership body is call to attend,

are infrequently heldoften only once during the fiscal year. Therefore, if you can spare thetime and energy, it is a good idea to attend these meetings or to submit a proxy as the topicsand resolutions will, in all likelihood, have a direct effect on you and your property.

Most associations adhere to standard meeting procedures such as Robert's Rules of

Order. If you have never attended a board meeting or a stockholders meeting, you may findyour first homeowners association meeting somewhat confusing. Who can make a motion andwhen? How is a resolution adopted? These are only a couple of examples that demonstratethe necessity for a clear and precise method for conducting a formal meeting. You should beable to find a copy of the latest edition of Robert's Rules of Order at a local bookstore orlibrary.

20


21/47

Condominium Basics

Board of Directors

Who they are

There are many names for a board member and for the governing entity. In somecondominiums, the board is referred to as the Board of Governors, Board of Directors or theBoard of Trustees. The individual members are sometimes called Officers or Administrators.Whatever their title, they hold the same responsibility to the association-to help guide andprotect the collective interests of the condominium.

In effect, to be on a condominium board is to be a fiduciary. As a member of the board,the elected individual is, in essence, a trustee of the association. The association gives theboard the power and authority to conduct the condominium's business affairs and bestows eachdirector with the legal ability to contribute to the actions of the board.

Election of board members

In order to become a director you must be nominated and voted for at a homeowners meeting.The number of directors in an association is usually specified in the declaration or bylaws. Thesize of the board will vary according to the size of the condominium.

Each member sits on the board for a set period of time. A term between two and threeyears is more widely recognized. Of course, there are different lengths of tenure in differentassociations. It is generally agreed that a two or three year time span is preferable, because itis long enough to provide continuity and short enough to prevent burn-out. It will also providethe homeowners an opportunity to vote in new members on a regular basis.

Some board posts have an intrinsic role and title. Traditionally, there are four seats:President, Vice President, Treasurer and Secretary. Other members will serve as a Member-at-Large and their duties can be tailored to suit the individual. On smaller boards, it is notuncommon to see combinations of formal positions, such as a Vice President /Treasurer.

A final note on elections, it is wise to attend the meetings when there is a board electionscheduled. A condominium board is only as good as the people who serve on it. If there is littlescrutiny of the nominees at the time of board elections, you may find yourself at the mercy of aless-than-objective or perhaps worse, an incompetent board. Knowing that the actions of theboard will greatly affect your property, it is a good idea to pay close attention to the individualsthat volunteer to serve.

Board responsibilities

The board has three general points of responsibility in order to insure that the condominium isproperly managed.

The formation of a budget and the appropriate collection of dues from the homeowners isone of their most essential actions. Included are the necessary tasks of the bookkeeping,yearly audits, taxes and fiscal records.

The board sets the tone for the living environment. In order to anticipate and mediatehuman nature rules and regulations must be formulated and enforced.

The board concerns itself with the present and future maintenance of the condominium'scommon property.

In these areas of concern, a board will retain legal assistance, arrange for insurance coverage

21


22/47

Condominium Basics

and attend to the security of the complex. The duties of a condominium board can increase withthe relative size of the complex and the extra facilities that are part of the condominium.

In large condominium developments, where the population provides sufficient ownersupport, a board will delegate some of their workload to committees. Committees are formed bythe President in order to research and make recommendations to the board. For instance, acommittee might be created to evaluate and make a formal report on the security needs of the

condominium.

22


23/47

Condominium Basics

Management Companies

Reasons for management companies

The actual work in relation to board participation is different for every condominium. Somecommunities are either too small to have enough members to satisfy the basic requirements orhave directors who do not have enough time to donate and cannot adequately meet the needsof the complex. Whatever the reason, many associations retain the services of a professionalmanagement company. When you consider the numerous duties necessary to operate acondominium you can understand why management companies are frequently employed.Consider some of the various duties that a professional management company provides:

Bookkeeping and filing General banking needs Records of homeowners and renters Yearly budget and periodic financial statements On-site management and repairs General offices and communication needs

There are condominiums that do run their own shop without a management company. This typeof homeowners association is aptly termed a self-management condominium. Neither methodis preferable over the other. If the condominium is functioning properly, it doesn't matter whodoes the work so long as the work gets done.

Services

All homeowners associations have a fiscal year in which they plan for their expenses andincome, or in accounting jargon-a budget. Unless there is someone within the condominiumwho is willing and able to construct a budget, the management company will help to provideone.

Security is a legitimate concern for many associations and a good managementcompany can help evaluate and provide useful services and suggestions. Where there is aneed to locate and employ contractors, plumbers and electricians, the management agent cangenerally offer some assistance.

Bookkeeping, files and records must be properly maintained for all financial transactionsconducted on behalf of the association. The normal transfer of money and other bankingrequirements can be done through the management agent. Current records of all owners andrenters are also part of the management duties. Most of the administrative work that mostcondominiums have can be accomplished through the management company. These are someof the services a professional management company would provide.

Resident managers

It is reasonable to assume that someone should be available to handle the various dailyresponsibilities that are necessary for the proper function of multiple unit complexes. Thesetasks may include: checking to see if the garbage and recycling bins are emptied on schedule,making minor repairs as needed, and keeping tabs on the many residents to insure that therules and regulations are being observed.

Large condominium associations with many such duties will often employ a resident

23


24/47

Condominium Basics

manager; and when necessary, also an assistant manager. Resident managers perform on-siteassistance for the association. The managers in the condominium work in direct contact withthe management company in order to carry out the instructions of the board.

Without question, the healthy state of a condominium is heavily dependent on the qualityof service of both the resident mangers and the management company. A bad managementteam can cause a great deal of damage and chaos. Remember, tidy common areas and frugal

spending policies make for happy condominium owners.

Legal support

An equally essential element to effective condominium management is proper and competentlegal assistance. The very nature of real estate ownership can be complicated andcondominiums, by virtue of their common property, can make things even more confusing. Mostassociations will find it necessary to retain legal counsel to aid with the conflicting issues thatinvariably arise.

These issues can range from advice on how to pursue delinquent accounts to theappropriate methods of deploying a special assessment. An association will also find that goodlegal support can help to make prudent decisions on contracted work and other binding

agreements.

24


25/47

Condominium Basics

Part Three: CondominiumFinancial Basics

Maintenance Fee

Homeowners monthly fee

This is the infamous and mysterious condominium fee. It is a common misconception thatcondominiums are overpriced or too costly to own and maintain because of this monthly fee. Inreality, this fee represents many basic expenses, some of which are also paid by the averagehouse owner. Regardless, it is important to note that this fee is not included in your monthlymortgage payment.

Other condominiums will have different names for this fee. They may include,condominium dues, monthly maintenance dues, ormonthly assessment. Whatever it is called,this fee represents the percentage of responsibility that each homeowner has for themaintenance of the common areas as well as other share expenses. These costs are projectedin the annual operating budget, and directly determine each owner's monthly maintenance

assessment. At the end of this chapter you will find a sample budget and ownershipbreakdown.

As a precaution, in a newer condominium you should check to see if the monthlymaintenance fee is set at a reasonable level according to similar properties. Developers willoften attempt to attract buyers by offering lower maintenance fees. If inadequate sums arecollected and fail to meet the condominium's expenses, a large increase will inevitably occur inorder to satisfy these obligations. If the maintenance fee seems too good to be true, it probablyis.

You should note, however, that it is inevitable that your monthly fee will increase as thecost of utilities and services increase. These increases should reflect the normal rise in the costof living.

List of expenses

Garbage pick-up, water supply, sewer, electricity, landscaping, and insurance are all expensesthat the privately owned residence might have. Condominiums have other expenditures suchas payroll, taxes, supplies, security systems, cable TV and management fees. However, youshould be aware that a condominium monthly maintenance fee could have a couple ofsurprising benefits.

Discounts due to volume can cut the actual cost per household. There are other costs

25


26/47

Condominium Basics

that a condominium has that a privately owned residence may not, but a condominium may beable to absorb these costs with lower group discount rates. Therefore, take a good look at thebudget and find out what the expenses are and compare them to what you might pay in ahouse. In some instances, by paying this monthly fee you may actually save money.

In the case of line items such as insurance, the premium is collected in small amountsover the course of a year as opposed to making quarterly or annual payments as you might

ordinarily as a private house owner. This could be advantageous for the individual who hasdifficulty budgeting for large amounts.

The annual budget

Each unit's monthly fee is calculated by the percentage of ownership in the condominium'scommon area. The association anticipates what it will cost to operate the condominium for theyear ahead and will bill the owners monthly for their share of expenses. Naturally, it is better tohave more income than outgo and a properly formed budget will exhibit this characteristic.

In general, condominiums operate as nonprofit organizations and the primary goal of thebudget is to cover all the financial expenses without having to dip into the reserve account or tolevy a special assessment. Therefore, a well-designed budget will account for all normal

expenses and include a small contingency for inflationary increases.Budgets are different everywhere, so take a good look at what it includes. It wouldn't

make sense to pay for the expensive health club facilities if you don't expect to use them. Onthe other hand, you may find it desirable to live in a place with these amenities. In either case,by reviewing the listed items in a budget, you will know what you will get for the money you willpay as part of your homeowners monthly dues.

The following figure illustrates what a budget should look like. The second figure showsthe unit ownership percentages and the monthly amounts assessed to each unit.

26


27/47

Condominium Basics

Figure 2: Sample annual budget

LONELY PINES CONDOMINIUMS 98/99 ANNUALBUDGET

100 Pine StreetPine City, USA

INCOME

Maintenance fees $100,000Laundry $900Late Charges $1,000

TOTAL INCOME $101,900

OPERATING EXPENSES

Payroll-Salary $12,300Payroll-Taxes & Insurance $2,500Accounting & Audit $1,400Insurance $7,400Legal $2,000Maintenance & Repair $5,000Maintenance fee manager's unit $1,000Cleaning $2,100Management Fee $10,000Supplies $2,000Income Tax $2,500Miscellaneous $600Landscape maintenance $2,000

Rent-manager's unit $7,650Cable TV $7,400Electricity $6,500Elevator $3,000Telephone, Security intercom $1,000Water, Sewer & Garbage $14,300

TOTAL OPERATING EXPENSES $90,650

RESERVE SAVING

Capital Repair Reserves $11,250

TOTAL OPERATING EXPENSES AND RESERVES $101,900

NET INCOME (LOSS) $0

27


28/47

Condominium Basics

figure 3: Sample ownership percentages

LONELY PINES CONDOMINIUMS100 Pine StreetPine City, USA

Total Annual Budget: $ 100,000

PERCENTAGE OF MONTHLY

UNIT OWNERSHIP ASSESSMENT

101 1.32 $110.00102 0.92 $76.67

103 1.34 $111.67104 0.91 $75.83105 1.33 $110.83106 1.26 $105.00107 0.98 $81.67108 1.09 $90.83109 0.97 $80.83110 1.37 $114.17

111 1.32 $110.00112 0.92 $76.67113 1.34 $111.67114 0.91 $75.83115 1.33 $110.83116 1.26 $105.00117 0.98 $81.67118 1.09 $90.83119 0.97 $80.83120 1.37 $114.17

page one

28


29/47

Condominium Basics

The audit

Condominiums function primarily as nonprofit organizations and must file a tax report at the endof their fiscal year. The declaration and bylaws should stipulate the requirement and procedurefor conducting an audit, usually performed by an independent firm. The audit will review the

associations' books and accounts for tax purposes, as well as to ensure that the condominium'sfinancial operations were properly maintained.

As an owner or prospective buyer, you will find the audit report a good source ofinformation. The audit will detail the associations' assets, reserves, income and expenditures.These figures will allow you to determine the financial health of the condominium complex. Youwill be able to obtain a copy of the most recent audit from the management agent or the board'streasurer.

29


30/47

Condominium Basics

Reserves

The need for reserves

All physical improvements have a limited useful life. As with houses, condominium roofs don'tlast forever; nor do hallway carpeting, garage doors, or elevator cabs. They are good only for aspecific length of time and will eventually need to be replaced or repaired. With a reserve plan,a condominium can anticipate and arrange to pay for these inevitable costs.

From the start, homeowners associations should commission a professional analysisthat will list the specific parts and materials that will need attention. This study should projecteach item's useful life and the estimated costs for both maintenance and replacement. Byknowing the total projected costs, a fund can be established. With a properly establishedreserve account, the condominium should be able to meet the financial needs of the future.

Reserves as part of the budget

The easiest way to pay for the future is to save for it now. This is the basic principle behindreserve accounts. As a member of the association, each property owner will be obligated tohelp pay for these anticipated costs. The monthly maintenance fee, which pays for the generalmaintenance of the condominium, should also include these reserve payments. The estimatedreserve amounts should be prudently calculated and included into the annual budget as ashared expense of the condominium's homeowners. A comprehensive reserve plan is a goodsign of a well-run condominium.

A condominium with adequate reserves will be less likely to assess owners when thetime comes to pay for needed improvements. This is another good reason to locate a copy ofthe budget and the reserve plan. Before buying, you should examine the items that areconsidered part of the reserve analysis, and whether or not the association is properlymaintaining sufficient balances to meet these projected costs.

The declaration or the bylaws may specify the need for a reserve account as well as theappropriate method of funding. Regardless of the information in the official documents, areserve account is extremely important for any homeowners association. By anticipating theinevitable, you and your fellow owners can lessen the frustration and financial burden of futurecosts associated with the normal maintenance requirements or necessary replacement ofproperty owned in common.

30


31/47

Condominium Basics

Special Assessments

Use of special assessments

Special assessments are known to be the nemesis of the condominium homeowner becausethey are frequently used as way to pay for the unexpected. In an imperfect world, problems doarise and condominiums are no exception. A special assessment is the primary tool by whichthe condominium raises the needed funds to pay for extraordinary large or unexpectedexpenses.

Frequently, in newer condominium projects, a special assessment results from problemsdue to deficiencies in construction. When a developer cuts corners or improperly rushesconstruction, defects appear that can become more severe as the building ages.Condominiums that suffer from poor fabrication often develop serious problems that a buyermay not always be aware of, until it is too late.

Homeowners associations who are caught in difficult situations will find that unless theycan effectively raise funds from an outside source, they will be obliged to pass a specialassessment in order to rectify an eroding situation. Example situations may include everythingfrom a leaky roof to replacing shabby siding. Whatever the problem, an unfortunate turn ofevents can force an association to assess the homeowners in order to effectuate the necessaryrepairs.

Architectural disasters are not the only motivations for special assessments. A majorityof owners may fancy the idea of lounging around a pool and propose that one be installed. Aspecial assessment could be the preferred method to accomplish this task. This situation is farless common, however; special assessments usually occur as the result of extreme problemswithin the complex that require large sums of money to resolve.

Power to pass a special assessment

Who has the authority of the pass a special assessment? It is different from condominium tocondominium. In some associations, where the expense is a necessity, not a luxury, the boardhas the exclusive power to assess homeowners without membership approval. In othercondominium associations, all special assessments must have the approval of a majority orquorum of homeowners. The declaration will outline the exact procedures by which a specialassessment can be implemented.

Special assessments are rarely popular as they usually represent unplanned financialobligations. Before you purchase a condominium, you should contact the managementcompany and the board to find out if the condominium complex may face a special assessmentdue to any current problems. Further, you should also be aware of any past special assessmentthat were the direct result of structural defects or improper construction.

31


32/47

Condominium Basics

Insurance

Insurance coverage

In general, the coverage of the condominium's insurance policy will extend to the commonareas, limited common areas as well as the equipment and tools that belong to the association.Along with compensation for damage and loss, the insurance policy should provide for liabilityprotection. The declaration should outline the specific insurance requirements and extent ofcoverage.

In contrast, the individual private apartments or homes will not be included into theassociation's insurance coverage. Therefore, each owner will be responsible for his personaland real property.

For example, if part of the siding on the condominium were damaged from a fallen tree,it would be covered by the association's insurance policy because it is common area.Conversely, if your stereo were stolen it would not be the association's responsibility and shouldbe covered by your own insurance policy.

Premiums

The annual premium for the association's insurance policy is paid by all the owners. It will be abudgeted expense and the cost is distributed according to ownership in the association. As ahomeowner, your monthly fee will include the insurance for the condominium. It will notincludeany insurance coverage for your own property and personal affects. You will have to pay foryour individual homeowners insurance separately.

If you intend to purchase a condominium, you should make an effort to acquire a copy ofboth the budget and the association's insurance policy. The budget will show the amount of thecondominium's insurance annual premium. A copy of the insurance policy will also allow you todetermine the details of coverage.

Homeowners coverage

Knowing that the association's insurance ends at your doorstep, your private property will beyour responsibility. Many insurance companies have a homeowners policy for the individualcondominium owner. When you do obtain this kind of policy, make sure that it does notcontradict the association's master policy. For this reason, you may wish to consider using thesame company that holds the condominium's master policy. Incidentally, it is important not toconfuse this type of insurance with mortgage insurance payments.

Typically a homeowners insurance policy will cover the private elements within theapartment, your personal property and liability coverage. For a more detailed description ofwhich elements and spaces within a condominium are considered private property, refer to thechapter titled Private Domain.

You will discover that such things as appliances and wall coverings will belong to theowner exclusively and should be covered in an individual homeowner's insurance policy.Homeowners insurance may elect to cover most of your personal items, such as clothes,furniture and other objects in your possession. A typical homeowners policy should offerliability against injury of visitors while on your property.

Individual homeowners insurance premiums and recovery amounts will vary radicallyfrom one condominium to another. There are a number of variables that will affect yourparticular costs. These may include location of the condominium, the type of security system,

32


33/47

Condominium Basics

smoke detection devices, and fire protection systems. Therefore, you should investigate thecosts of a similar homeowners policy for the condominium before you make a purchasedecision.

In addition, you may wish to discuss the ramifications of renting your property with aninsurance agent. Subject to the nature of occupancy, your homeowners policy may also beaffected by converting your condominium into a rental, and it would be wise to anticipate this

potential costs.

33


34/47

Condominium Basics

Part Four:Condominium Investment Basics

The final section of this book is dedicated to the first time residential condominium buyer. Inorder to fully illustrate the suggested step-by-step procedure in detail, the following informationprimarily focuses on the apartment condominium. You will find, however, that most of theseinstructions will also apply to other types of condominiums as well.

If you are unfamiliar with the basic functions of a condominium, you may overlookessential information that could have a critical bearing on your purchase decision. This sectionsummarizes one method from the initial considerations to the point of purchase, in four basicstages.

State Laws

Having read the first three parts of the book you probably realize that there is more than meetsthe eye in the condominium market. The lack of available information and generalmisunderstanding of the public has lead to many serious problems.

It is precisely for these reasons that many state legislatures are beginning to adoptstricter guidelines for the proper development, management and transfer of condominium realestate. For the buyer, some of the information is delivered according to current laws in what issometimes called a resale certificate.

As state laws vary so do these certificates. Some will be more complete than others.Obviously the more detailed the information, the better off you are as the potential purchaser.

In the event that the information in your certificate is difficult to understand, or worse,your state has no requirement for the previous owner to provide essential information, thefollowing steps will give you the basics you should cover.

34


35/47

Condominium Basics

1. Is a Condominium for you?

Condominiums vs. Houses

Given the wide array of residential options in today's real estate market, is a condominium rightfor you? Don't forget that those private housing developments with their clubhouses and golfcourses also fall under the condominium umbrella. There are so many different types ofcondominiums, designed to accommodate a myriad of tastes that to own one is more a questionof fundamental compatibility with this form of ownership rather than personal appeal for aparticular type of residential structure.

The most notable difference between a condominium and a house is the bindingrelationship between you and your neighbors. Obviously, shared ownership of commonproperty will include shared responsibilities. It requires cooperation with others. If you arefiercely independent and want to make all the decisions, chances are that a condominium is notfor you. If on the other hand you dislike doing everything yourself or enjoy the advantages andsecurity of a closed and private community, a condominium could be an ideal choice.

Conversion vs. New Construction

Most condominiums can be separated into two distinct categories-conversion and newconstruction. Conversions are basically renovated space that was used for something beforebecoming a separately owned residence. New constructions, projects that were originallyconceived as condominiums, represent the other facet of condominium development. Each ofthese two types often has certain inherent characteristics that the new homebuyer shouldrecognize.

Because some conversions were intended to be something prior to becoming acondominium, they can have a few built-in drawbacks. You may notice that somecondominiums of this genre are frequently advertised as having a certain old worldcharm. Lookcarefully because this "old world charm" could be more old and less charm than you expect--such as no washer and dryer in the apartment.

If the necessary installations aren't there when you move in, there is a strong possibilitythat you will have to do without those modern conveniences. Renovating the architecture of thepast and bringing it into the future can be wonderful, but make sure you notice theidiosyncrasies that come along for the ride.

New construction also has its unique set of problems. Poor construction and cheapmaterials have been known to plague a new condominium owner. A few homeownersassociations have been forced to make expensive repairs because they just don't build 'em likethey used to. If it's new, pay attention to the quality of workmanship and materials. In addition,it would be wise to learn something about other complexes that may have been constructed bythe developer.

These are only words of caution, intended to make you aware of the fact that these twodifferent types of condominiums have their own unique discrepancies. You will find there aremany condominium owners, on both sides, who love and cherish their respective abodes.

35


36/47

Condominium Basics

Other types of condominiums

There are various other types of real estate that are technically condominiums. On the surface,they may appear to have little in common with the apartment condominium, but they oftenfunction in very much the same way.

A townhouse may share a wall, walkway or a fence. Such items will be viewed as acommon area and there will be a set of regulations that will establish the legal percentage ofownership as well as outline the proper maintenance and management procedures. In anotherinstance, you may locate a group of weekend country homes that look more like the averagehouse rather than a city apartment. On closer inspection, you may discover that each residentand owner in this community holds membership rights in a recreational facility or county club.

Their common ownership and participation will demonstrate the need to establish andfollow a collective form of government. In both circumstances, the townhouse and the vacationdevelopment, you will find that it is beneficial to explore these opportunities with similarstrategies.

The other varieties of real property that fall under the condominium category can alsodiffer significantly from the apartment condominium. However, by understanding the common

elements that bind them together, you will be better informed when you undertake your initialinquiries.

36


37/47

Condominium Basics

2. Who, What, Where and How Much?

Finding your price range

Everyone's idea of home is different. You will ultimately find that your desires will be balancedagainst your financial capacity. Knowing what you like and what you can afford will give you agood place to start.

Dreaming about what you would like to have, is probably the best part of buying a home,take the most important aspects that appeal to you and rank them in order of priority. Is a poolmore important than a parking spot? Is a deck better than a fireplace? Try to keep your feet onthe ground, few people get everything they want--at least not right away, so a little compromiseis usually necessary.

Figuring out what you can afford is equally important. If you are like most people, yourincome and financial assets will determine the upper limit of your purchasing power. It is a goodidea to know the home price and mortgage monthly payments you can reasonably handlebefore you start looking around.

In order to project a realistic idea of where you stand financially, you should consider twothings. The first is to recognize how changes in the real estate market (e.g. home prices) willaffect your purchasing power. The second would be to know the current interest rates offeredthrough qualified lenders. These two factors will determine the maximum borrowed sum, for areal estate loan, a lending source is ultimately willing to extend. It will be based as well on yourestimated ability to satisfy this financial obligation.

Although lending institutions have specific guidelines and formulas they employ to arriveat the largest loan amount they feel they can offer; you should also carefully construct a regularmonthly budget on your own, including every realistic expense you normally incur. In the end,you should arrive at a reasonable payment you are sure you can comfortably meet.

There are many useful and popular software programs on the market that can assistyou. Be conservative, giving yourself enough room to pay for rises in futures costs and thatunexpected expense that has a funny habit of hitting you at the worst time. Often, optimism andthe intensifying need to own the property you saw only yesterday, leads some to overestimatethe real debt they can realistically carry. Incidentally, don't forget to include the condominiummaintenance fee your property will demand. It will not be included in your monthly mortgagepayment.

Depending on the type of condominium, the monthly fee will represent some of theexpenses that you may already pay. Make sure you know which ones, because eachcondominium is different. For example, if you are looking at a private housing development themonthly fee may also include your dues to the county club and golf course.

Pre-approved loans

You may wish to consult a local lending officer in order to get a rough estimate of yourpurchasing power. Be aware that banks, saving and loans, and other lending institutions canvary radically. It is always a good idea to shop around.

In addition, competitive lenders are willing to pre-approve and extend a stipulatedcommitment on a loan during a specified period of time. Commonly, this is based on a brief butcompressive review of your current financial status and history. This option is worthinvestigating because it will save time expediting the purchase transaction. It may also help youpursue a reluctant seller to accept a lower price knowing the sale will not be encumbered by aloan disqualification.

37


38/47

Condominium Basics

Your mortgage payment

You may ask, what exactly is included in my mortgage payment? In real estate jargon, it is oftenreferred to as PITI.

P - principalI - interestT - taxesI - insurance

These four items are quite simple to understand. Principal is the portion of the payment that isactually goes toward the ownership of the property. The interest is the amount that you pay forborrowing the money, the cost of the loan. State property taxes are often paid as part of themortgage payment. The mortgage insurance is the portion that you pay to the lender forprotection against a default on the real estate loan. This insurance amount should not beconfused with the other forms of insurance pertaining to the condominium unit and complex.

Your lender should also explain to you the various elements of your mortgage payment

and the escrow officer should also make you aware of your monthly payments at the time ofclosing. For more information on the closing process you can turn to the section called Escrow.

Finding a location

Once you have a good idea of what you are looking for and what your price range is, you willhave practical idea of where to look first. Location is a very important consideration in terms ofboth life style and investment appreciation.

If you owned a boat, it would seem logical to consider waterfront property with moorage.It is equally important to remember that the location of your property will have a significant effecton its value in the future. Almost all real estate is by nature, immobile and so its value will riseor fall according to the advantages or disadvantages resulting from where it is build. Although

this factor is often difficult to determine accurately, your equity and the value of your propertyover the long run will reflect your condominium's location.

With these two factors, your purchasing price range and the selected geographiclocation, you should be able to narrow the field enough to make a few outings into the market. Iffor some reason your imaginary domicile doesn't match the real estate available, you will haveto reevaluate your priorities.

Inside the condominium

Now that you have a pretty good idea of the type of place that will suit your needs, your nextstep will be to get out and look at a few available condominiums.

One method is to review the classified section of the newspaper, call up an agency and

arrange for a rendezvous. Or you can take the drive-by and drop-in approach. Many listingscan now be found throughout the Internet. Open houses are frequently used by real estateagencies to provide opportunities for prospective buyers to view available condominiums.

Selling real estate is big business and you shouldn't have a problem finding an agent tohelp you shop, but read the follow chapter on agents before you decide to make your firstouting.

Whatever your style, there are a few tips you should know when you take a tour inside acondominium. The general idea is to notice some of the signs that a condominium is welldesigned and well maintained. Consider the following list of questions and observations:

38


39/47


40/47

Condominium Basics

assume you would get all the information you may need.If you don't ask, you won't find out--so ask. An agent may not always volunteer

information on the ins and outs of condominium real estate. When you demonstrate a seriousintent to buy, you will be surprised how many agents will walk over hot coals to get you thematerials you ask for. You will find it useful to work with an agent or broker who is familiar withcondominiums. It will save you time trying to explain why you need some of the seemingly

obvious information.There is another aspect beneficial to working through a real estate agent. If there is a

way to obtain financing in order to make the sale, they can help you find it. This doesn't meanthat an agent will work miracles or that every agent you meet will be willing hold your hand. Themore experienced agents will know something about financing and have connections in thelending industry. This could be a benefit to you, but also note that it may not always be in yourbest interest. Before you decide to have an agent locate financing for you, do some exploringon your own first.

40


41/47

Condominium Basics

3. The Paper Chase

At this stage, you may have selected a few properties that have the overall appearance andelements you desire. But, before you fall in love or let an agent persuade you into signing onthe dotted line, stop and make sure you do not skip this critical step. It is absolutely essentialthat you take a few necessary precautions in order to avoid the booby traps that manyunsuspecting buyers have fallen into before you.

Condominiums, like all good institution, thrive on paper. Ironically, this knowledge canbe extremely useful to you as the buyer. If you know what you are looking for, it should berelatively easy to gather the appropriate information and documents. In most instances, it issimply a matter of a few phone calls and some copying charges.

If you are entitled to a resale certificate or are covered by laws requiring the basicinformation be disclosed to you, then double check to see if all the information is there.

The following check list will help you identify the most essential pieces of information thatyou need in order to have a precise picture of the property you would like to consider. Youshould not make a purchase decision until you receive, review and understand all of theinformation below.

Checklist

1. Declaration and BylawsYou should have both the declaration and bylaws for the condominium. Theamendments, if any, should also be attained.

2. Rules and regulationsThe rules and regulations that cover the condominium and all amendment to these rulesshould be reviewed.

3. RestraintsYou should find out if anyone has the right of first refusal or other restraints that mayinhibit the smooth transfer during a sale.

4. Monthly and special assessmentsYou should know how much money will be due the association each month as well asany special amount that have been levied against the condominium dwelling.

5. Delinquent assessmentsIt is also wise to learn about the how much money the association is owed by delinquenthomeowners.

6. Association debtsKnowing the current debts and obligations of the association will aid in your assessmentof the association.

7. Fine scheduleYou should know the specific penalties, amount and terms applied for delinquentpayments and other violations.

8. Miscellaneous fees

41


42/47

Condominium Basics

Does the association have other fees, such as move-in or move-out fees?

9. Future repairs or replacementsDoes the association have plans for replacement or repairs to the condominium thathave not been specified in the budget or reserves?

10. ReservesYou need to know if the association has plans for the proper replacement and repairsthat will be needed in the future.

11. Annual budget and auditA copy of the budget and the latest audit will aid in understanding the financial health ofthe association.

12. Monthly or regular financial statementsThe monthly or periodic financial statements should reveal how the condominium isdoing in comparison to its budget.

13. Law suitsAre there any lawsuits or judgments that involve the association?

14. InsuranceA copy of the insurance policy will help you discover the various elements of thecondominium that are insured and the extent of the coverage.

15. Property alterationsHas the unit or home you intend to purchase have any alterations that violate provisionsin the declaration?

16. Developer control

How many units does the developer still hold and is the developer in control of thecondominium's homeowners association?

17. Code violationsAre there any know building or health code violations?

18. Leased propertyDoes the association lease land or property that has a direct bearing on the owners ofthe condominium?

42


43/47

Condominium Basics

4. The Final Act

You should be able to make a few decisions after visiting a few places and reviewing thebackground information. At this stage you can eliminate some of the condominiums that didn'tlive up to your expectations. Hopefully, you will have a couple of attractive options that you canpursue with the serious intent of purchasing.

Attorney assistance

To start, you should have an attorney who understands condominium law, review thedeclaration, bylaws and all other pertinent documents. This is an expense that is worth everycent. It could be very unpleasant to learn that you had misinterpreted a provision in thedocuments that results in a disagreement between you and another party over your control orownership rights.

A good real estate attorney can be an indispensable asset when you are in the market tobuy property. An attorney who is familiar with the area should also be knowledgeable aboutspecific state statutes that pertain to condominiums. The regulations and legal requirements ofcondominium construction differ from state to state. Some states have strict building codeswhile others may have none. If you do intend to purchase real estate, it will be wise to spend anequal amount of energy to procure an able attorney.

Private property inspection

After you are confident about the purchase of a condominium, you should consider aprofessional inspection of the private property. If the seller will not provide this courtesy, thenthe responsibility to inspect the private elements in the development will be yours. Unless youhave an educated understanding of construction, it is advisable to pay for an inspection prior toa purchase decision.

It is important to note even though a condominium has been inspected and approved forFHA and VA loans, it does not mean that the building is sound and will not have any seriousstructural defects. Such bureaucratic forms of acceptance are not guarantees of quality andsafety. Many complexes have been known to suffer amazing disasters that passed inspectionby city, state and federal agencies.

The purchase offer

Once you have taken all the necessary precautions and have found the condominium you wishto buy, you will need to make a proposal to the seller that outlines your intent and the conditionsunder which you will purchase the property. This proposal is often called the Purchase Offer,Purchase Agreement or the Earnest Money Agreement. It will have an expiration date beforewhich the seller will either have to accept the offer or make a counter proposal or reject the offer.

Commonly, the real estate agent will have a standard purchase agreement form. Theseforms are standardized in most states and are preprinted in the proper format with routineinformation. If you do not use an agent and wish to conduct the sale on your own accord, youshould be able to buy the preprinted forms with the fill-in blanks at most business supply stores.There may be a special purchase offer form for condominiums in your area. Unless you haveextensive knowledge of real estate transactions and condominium law in you area, it is notconsidered prudent to make such an offer without consulting a competent attorney.

The offer is traditionally accompanied by a token sum of money. In some states, one

43


44/47

Condominium Basics

dollar is enough to validate the purchase agreement. Traditionally, however, the token amountorearnest money, as it is frequently termed, is usually more. There is no set amount, but theidea is that the money is a token of your intentions. The earnest money is commonly returned ifthe seller does not accept the offer, but is often applied toward the down payment if the selleragrees to the terms of the sale.

What is escrow?

When your offer is accepted, an escrow account is opened for the purposes of conducting theproper procedures that will insure the legal transfer of the property's ownership. Escrow is alsosometimes referred to as closing or settlement. Even experienced investors often are confusedabout the multiple tasks that must be completed during escrow. As new homebuyer, you shouldenlist the services of an attorney who can guide you through this process.

Escrow is where the terms of your purchase agreement are resolved. If your purchaseis subject to obtaining financing, you will have to make arrangements with a lender at this time.Generally, a title search will be conducted in order to insure that the seller has the legal right tosell the property. Any other restrictions or requests will be resolved during the escrow period.When all the necessary steps have been successfully completed, you will be asked to sign the

proper papers, which will ultimately result in your ownership in the property.

Financing

Most people finance the purchase of their homes. You will find that you can buy a condominiumin the same way that you buy a house. You may arrange for financing before or after you makean offer to purchase. By qualifying for a home loan prior to a purchase you can avoid manyheadaches. Keep in mind that the lending industry is extremely competitive in this area and it isworth a look around for the most favorable terms and interest rates.

Home purchase financing has become more creative, flexible and elaborate than everbefore. This is primarily the result of deregulation and competition among lending institutions.Remember that it pays to shop around. You should also be aware that loans do not always

come from banks. There are loan brokers who also have a keen interest in your creditworthiness.

Consequently, it will be to your benefit to become familiar with all the financing optionsopen to you. This is important enough to repeat. There are many of financial options,everything from government insured programs to individually designed rent-to-own contracts -often termed lease option agreements. In some situations, the owner may have enough equityin the property that he or she can act as a lender and create a purchase contract with youdirectly. These are only a few ways to handle the financial transaction of real estate andknowing more about them will almost certainly leave you in a better financial position.

A final word on financing. Don'tget discouraged. New homebuyers often find that theyare not only overwhelmed by the complexity of real estate ownership, but also frustrated by thehigh prices. Many people have bought homes for very little cash, through both hard and soft

markets. You will be surprised how far a little creativity can take you. The real estate industryprofits through the exchange of property. Remember this and take advantage of it.

If you are currently renting, you may find it interesting to calculate how much money youwill spend over various amount of time. Rent is money that you will never see again. Part ofthe money you spend on mortgage will be applied to the principal and will become your equity.The interest on home financing can often be deducted off your taxes.

44


45/47

Condominium Basics

Glossary

Annual Homeowners Meeting A meeting of the all the owners in condominium held usually atthe end of the associations fiscal year.

Assessment A sum levied on a property either based on an appraisal or a percentage ofownership in the condominium.

Audit An examination of the association's financial records.

Board A group of elected homeowners charged with the responsibility of operating and insuringthe overall welfare of the condominium complex.

Budget A financial plan, which projects the future expenses and income of the condominium.

Bylaws A set of additional regulations and procedures that govern the internal operation of thecondominium organization.

Capital Reserves A fund set aside for the repair and replacement of the common areas of acondominium.

Closing See Escrow

Committee A person or group of persons appointed to study, investigate and form arecommendation on specific issues.

Common Area Materials and space that are jointly owned by all owners in a condominiumproject. See also Limited Common Area

Condominium, Condo A type of real estate ownership that consists of both commonly ownedand privately owned areas.

Conversion A condominium that was transformed from a previously different purpose.

Co-operatives, Co-op A type of real estate ownership that consists entirely of commonly ownedareas.

Declaration The financial instrument that establishes the foundations of a condominium.

Deed A legal instrument that conveys real estate to a purchaser.

Director A condominium owner who is elected by the association in order to contribute to theactions of the board.

Earnest Money A sum of money given as a pledge that accompanies a purchase offer.

Easement A privilege with limitations to occupy or use a specific area within an estate.

Equity The portion of value in a property that is not financed or compromised.

45


46/47

Condominium Basics

Escrow A neutral third party whose purpose is to oversee that the proper conditions are metaccording to the terms of the sale in order to insure the legal transfer of property.

FHA The Federal Housing Administration, a branch of government that insures real estateloans from default by the buyer.

Fiduciary A persons who functions as a trustee. See also Director

Fiscal Year A twelve-month period in which a complete accounting is made.

Homeowners Association The collective body formed by the constituent owners of acondominium.

Homeowners Insurance Policy A separate insurance policy which protects the individualowner's property.

Insurance Premium A sum of money paid to maintain insurance coverage.

Limited Common Area Material and space that are owned by all owners in a condominium butare restricted in access and use.

Maintenance Fee An assessment, a sum of money, which is charged to an individual unit orproperty in order to pay for the expenses as described in the association's budget.

Management Company A firm that is employed in order to aid in the operation of acondominium complex.

Minutes A written transcript or summary of a meeting.

Mortgage A conditional transfer of property to a creditor as security for the repayment of aloan.

Officer See Director

Parliamentary Procedure The rules and practices by which a deliberative assembly isconducted.

Principal The original sum of money borrowed excluding the interest.

Property Manager Representative of a professional management company.

Proxy A person or document that acts on behalf of another.

Purchase Offer A prospective agreement outlining the terms under which a sale of a specificproperty can occur.

Quorum The number of members of a group that must be present in order to legally transactbusiness.

Reserve Report An analysis of the condominium's common property which projects the

46


47/47

Condominium Basics

necessary funds to make repairs or effect replacements. Also called Reserve Analysis.

37237061 condominium basics

Documents