Do not buy a condo—ever.

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.

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Realtors® separate condo prices from house prices

I later noted that the Realtors® separated condos and townhomes (row houses) 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 homes appreciated at great rates. I later reported that they were appreciating more like detached homes. We owned 125 non-condos. 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.

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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 SAFE MLO exam web site says a de minimis PUD is a Planned Unit Development (PUD) in which the common property has less than a 2% influence upon the value of the premises. The 2% rule of thumb is calculated by dividing the dollar amount of amenities by the total number of units within the development. Our houses are detached. Our 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. (required by California law) 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.

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No effect on ability to get mortgages

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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 other things being 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. So we bought for all cash in a hot market.We sold that about four years later. I was concerned about the buyer being able to get a mortgage. One who needed a mortgage offered full price of $339,000. But she chickened out when she read the condo litigation information.It is 790 units. A place that size will always be being sued in America in the 21st century. We ended up selling to all-cash buyers from China for $325,000.

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Extra transactions costs

When you buy or sell condos, there are generally extra fees for producing large quantities of disclosures for the buyers. Another reason not to buy them. We had to pay $250 at closing to sell the condo. I believe we had to pay another such amount for materials required to be shown to prospective buyers.

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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 mortgage market. You may have heard the word “non-conforming.”

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Jumbo mortgages

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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.”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.

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‘Conforming’ most liquid

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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.The 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 days 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 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.

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A million rules

Condos typically have long lists of deed restrictions, covenants, conditions, and rules—maybe an inch or two inches thick. I do not recommend that you even read such things, let alone agree to them.

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I used to attend real estate conventions and made speeches at some. Realtors® home builders, REITs, condos. In the exhibit area of the condo convention, there were a number of law firms, none at the other conventions. I asked them why they were there. They said homeowners associations were very litigious as were condo owners. The new associations frequently sued the builder. And individual homeowners were frequently suing their fellow owners by naming the HOA as the defendant.

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In the 790-unit HOA, it seemed like they were always being sued and the plaintiff would always claim habitability problems which triggered the lender prohibition against condos in an association being sued for habitability. I wonder if some lawyers do not make their whole living by suing a few local HOAs.

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I had a friend who bought a condo in Moraga, CA where we lived in a detached 1970 era house. The condo had a slide. They sued the builder and no one in the whole condo association could sell or refinance. Had a house near OUR house slid down a hill, it probably would have had no effect on our house. Entire associations get thus locked up because of a problem with one house or some problem common to all in documents or some such. Another in my area had a title problem which prevented sales in that HOA for years.

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This nonsense is all but unheard of in detached single-family houses.

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There are about ten million condos in the U.S. Sorry, folks. Could be worse. You could have bought a time share, which I NEVER recommended. How can I denounce 10 million condo homes? I just listed the reasons. As I said, the Realtors® long ago separated them from detached homes with regard to price appreciation figures.

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We now live in a de minimis PUD. Those are okay, but the last house we bought with our son was built in 1949. No HOA. If I ever buy another home for myself, I will not even consider a de minimis PUD. Give me an old-fashioned, detached pre-HOA (around 1980).
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Also, no mid-rises or high rises. Do not buy a home over three stories high. Very simply, you cannot afford to pay for a structural engineer to evaluate the safety of the building. FL passed a law about this after a fatal collapse of a mid-rise. Now regular inspections are required and they often demand a multi-million dollar retrofit. HOA members are having to pay tens of thousands or hundreds of thousands for such retrofits.
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Today’s paper also reports that HOAs are getting hit with tremendous insurance premium increases including some that violate limits on how high the HOA’s dues can go.
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