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Buy a principal residence, but reject the condo form of ownership

Posted by John T. Reed on

Big announcement

I have decided I oppose owning condos. It sort of goes without saying that I also oppose timeshares.
When I first got out of the Army, my first job was selling condos. I worked seven days a week for about six months, sold 18 of them, and never got paid a penny.
The appraiser said they were not worth what I sold them for. “Eighteen, not two,” I said. He was not impressed. The lender that had committed to finance the sales refused. They were all cancelled. And the building was turned into a rental apartment building.

Rare in America in the early 1970s

During that time, condos in America were rare. They had been around for centuries in Europe. I attended the homeowners meeting of one of the rare existing ones in South Jersey where I was living then. It was horrible. Owners screaming malfeasance and misfeasance and every other possible accusation at the volunteer board and demanding they sue the builder.
Some saw me taking notes and assumed I was a reporter. They begged me to tell the world how horrible their builder was. “Are you aware that you are telling prospective buyers of your condo not to buy it?” They had not thought that far ahead.

The condo management industry

I have been to other homeowners association meetings. It only took a few to convince me to stop going and to never volunteer on any of them. In the real estate industry, there is a subset called property managers. They originally managed buildings owned by landlords and occupied by tenants. They still do.

Leaving at nine PM

But property managers who manage condominiums arose as a somewhat separate specialty. I remember reading that it is standard for them to put a clause into their contract with the condo that although they will attend the meetings of the association that they will leave at 9PM. Why? Because those associations are notorious for staying there until the wee hours of the morning screaming at each other.
My late friend Leigh Robinson who wrote the Landlording books volunteered to be the president of his homeowners association. I told him he was nuts to do that. I do not recall if he later admitted I was right, but he did say that one old woman there seemed to dedicate her life to libeling him. He did not run for reelection.

Many owners want detached home freedom in a condo

Many condo owners are outraged over issues like their not being able to paint the outside of their unit the color they want and not being able to plant their own private garden and other refusals based on their inability or refusal to accept that a condo is not a detached single-family home. “Detached” means there is only one housing unit in the building.

Forget condos

Initially, it was extremely difficult to finance condo purchases. Accordingly, I told my real estate investors readers not to get involved with them. Later, the FHA and other lenders agreed to finance them so I lifted my “don’t buy them” ban.

Realtors® separate condo prices from house prices

I later noted that the Realtors® separated condos and townhomes from existing homes in their monthly news release about home values. Why? Because condos appreciated far less than detached, non-condos across the street, The condos just sat there at the same value year after year as the detached fee simple appreciation at great rates.

We owned 125 non-condos

I later reported that they were appreciating more like detached homes.
I bought 117 units of housing including houses, duplexes, triplexes, a 12-unit apartment building, a 36-unit apartment building, a 25-unit apartment building, and a 33-unit apartment building. We also inherited five houses and a triplex all of which we immediately sold.

de minimis PUD

None of those was a condo. We bought our current home in 1983. It is a de minimis Planned Unit Development. The houses are detached. The streets and sidewalks are owned by the county. About all the homeowners association does is plow the “green space” behind every home to make firebreaks every year.
It is still a bit of a pain in the ass. When we got a slate roof to replace our wood shingle one, we had to get permission. Before we bought, I had to get permission to have a business in my house. Ditto tree removal, yadda yadda.

No effect on ability to get mortgages

But it has not affected our ability to get a mortgage or our resale value. So although I am not opposed to de minimis PUDs, all things equal, buy the house that does not have one.
In 2017, we bought our first condo jointly with our youngest son. We were totally unable to get a mortgage there because the association was being sued and bought for all cash in a hot market. We are now about to sell that and I am concerned about the buyer being able to get a mortgage. It is 800 units. A place that size will always be being sued in America in 2020.

Perfect, but it is a condo

Furthermore, we immediately found a perfect new place for him—a much nicer, newer condo with a much shorter walk to the commuter railroad station. HOWEVER, in the fine print in all the documentation were the words “not eligible for FNMA or FHLMC financing.”
Excuse me, what was that?
FNMA and FHLMC and FHA and VA have rules that ban all sorts of condos from being financed by FNMA, FHLMC, VA, and FHA, which is the vast majority of the market. You may have heard the word “non-conforming.”

Jumbo mortgages

It usually is triggered by the amount of the mortgage.
“For 2020, the limits for non-jumbo loans are: $510,400 for a single-family home in most areas of the country. $765,600 for high-cost areas, like Washington, D.C., and some parts of California, where single-family home prices tend to be above average.”
Non-jumbo means non-conforming. Jumbo loans are what we needed for OUR home. They may cost a little more and may have some other restrictions that are not in conforming loans (under $510,000), but having to get a jumbo is no big deal.

‘Conforming’ most liquid

Real estate is generally condemned as illiquid. True, but that is overstated. A single-family detached house at a “conforming” price level is an extremely liquid hard asset as hard assets go. Conforming-loan-sized houses are the most liquid real estate there is. You should try to be in that category until it is too low for the size home you can afford.
Freddie Mac Single Family Seller/Servicer Guide chapter 5701 prohibits the following:
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• hotel or similar type transient housing
• a single deed evidencing ownership of more than one unit
• more than 25% of total for non-residential tenants
• HOA or builder is being sued for safety structural soundness, functionality, or habitability of the building
• In two to four-unit condo, no one owner can own more than one unit; in five to 20 units, no one owner can own more than two, units; in 21 or more unit building, no one owner can own more than 25% of the units. (In the condo we liked, the original developer owns 46 of the 181 units—25.4%.)
• mandatory dues to use amenities
• many rules on HOA budget and reserves
• no more than 15% of residents more than 60 behind on dues
• at least 50% owner-occupants, not tenants
• at least 10% of HOA dues go into reserves
• units must have at least 400 square feet each
• cannot be offered for daily rentals or have hotel type amenities
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That was a PARTIAL list of what’s prohibited in Chapter 5701.
94% of condo mortgages are Fannie Mae, Freddie Mac, VA or FHA. If you cannot get one of those you are in a tiny percentage of the market for condo loans.

No one owner can own a lot of units in the condo

No single entity can own more than two in a five to 20 unit building or 10% of the units in a 21 or more unit building when the lender is other than FHLMC.
FHA has a limit of 30% of the units per building. For example, in a 100-unit building, they will not insure more than 30 units in that building. First come. First Served.
Condos typically have long lists of deed restrictions, covenants, conditions, and rules. I do not recommend that you even read such things, let alone agree to them.

Detached house lets you escape all this nonsense

Nothing on that long list applies to single-family detached homes other than the jumbo mortgage limits.
All the conditions above apply to you getting a mortgage when you buy. But what about when you sell? A given building may pass muster when you buy, but deteriorate afterward when you try to sell.
One entity might buy too many units. Too many units be go delinquent on their dues. Too many units may become rentals. Some owners might start doing Air BNB overnight rentals.
You have no control. Again, none of this nonsense applies to detached homes with no HOA.

Keep it simple

One of my books is titled Fundamentals of Real Estate Finance. Chapter 3 of that book is Reed’s Rules of Real Estate Finance. Reed’s Rule #1 is “Simple is better than complex.”
At best, real estate finance is not very simple. But condos are off the too-complex end of the scale.

No group ownership

I have also long been against all forms of group ownership unless the group is you and your spouse. I have heard hundreds of horror stories about partnerships and corporations between you and your college roommate and you and your Army buddy or you and a work colleague. The wives are often the thing that ends the partnership or one partner has a situation change because of health or a divorce or a death.
Whatever the reason, no group ownership.
A condo is group ownership. The group co-owns the necessary common areas and the group indirectly manages the property. I used to be a property manager. It is a real full time job when the building is bigger than around 40 units.
The condo owner group also needs to agree on capital expenditures on the property like a new roof, new asphalt pavement, new pool surface, and so on. The typical condo includes people who have plenty of money for their condo obligations and others who want to spend as little as possible even to the point of not making the stitch that saves nine.

If anyone has a problem, everyone has a problem

Another problem is that if anyone in the condo has a problem, everyone has a problem. Time and again I have heard of condo owners suffering because a fellow owner in their condo owners group had a landslide or a title error or some other problem that would not affect them if they were just a neighbor, not a fellow condo member.

Condo sues and gets sued

Condo owners associations frequently sue their developer. That would generally screw up selling or financing there, not to mention bad-mouthing the construction of their homes. Condo owners frequently sue their own association, and that, again, ends financing there until the suit ends. I suspect they and their lawyers use the fact that their suit is blocking sales or refis to extort settlements from an HOA pressed by homeowners who are desperate sell or refinance.
This is all nuts. You don’t need it.

May fit your price and lifestyle but...

Yes, the condos are the cheapest starter homes. Yes, the basic idea fits the lifestyle desired by many singles and seniors. Yes there may be far more condos that detached home in downtown urban areas. But the problems are too numerous and intractable.

Condo is not the only way to accomplish these ends

If you do not want to maintain a property, buy one with zero maintenance building materials. We have a slate roof. It should last forever. We don’t have aluminum siding here in northern California, but it was pretty standard back east and ended maintenance like painting. Concrete pavement generally never needs replacing; asphalt does.
If you do not want to take care of a lawn, you can buy a zero-lot line house or you can landscape with low or no maintenance like rocks, bark chips, ground cover that does not get mowed, and so on.

Condos subject you to more risks

When you have a condo HOA, you pick up risks that are not present in a regular detached house, like fidelity risk—the risk that employees of the HOA will embezzle or steal from it, incompetence risk—the risk that the management company does not know what it is doing, laziness risk—the risk that the HOA employees will steal from you via arriving late, long lunches, leaving early, and taking time off for personal business.
You also have the risk that fellow members of the HOA will negligently or deliberately misbehave. That can cost you and the other members in various ways including repairs, litigation, having to make up money owed but not paid by fellow owners.

Financial difficulty for some is financial difficulty for all

In hyperinflation, expenses other than the fixed rate mortgage would skyrocket. Some condo owners my lose their source of income. Seniors often rely on pensions and annuities like Social Security. Those become worthless in hyperinflation.
In depression, the values of the condos plummet and people lose their jobs and may be unable or unwilling to pay their dues. A healthy condo could turn into a large stack of empty foreclosed condos.
If you own a detached house with no HOA, you may hear about problems your neighbors are having, but unlike with the HOA, they are not your problems and will likely not affect you. In an HOA, they will damned sure affect you. They could bring you down.

Condos appreciate less than detached homes

Here is a sample of a Dave Ramsey web site:
“Do Condos Appreciate in Value?
“Yes, condos generally appreciate in value. But, if you’re trying to decide between a condo or a house, keep in mind that a single-family home is usually going to grow in value faster than a condo will.
“For example: From 2017 to 2018, the median price for condos grew by 3% while single-family homes grew by over 5%.”
The web site Pocketsense says, “condos tend to see slower appreciation than regular homes do.”
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There is more, but that ought to be enough.
My initial reaction to condos in the U.S. back in 1972 was correct. I should have stuck with it.
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If you don’t have a condo, don’t buy one. If you do have one, sell it.

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