Buying a condo can be an exciting step towards homeownership, offering a convenient and often more affordable alternative to traditional houses. However, being vigilant about potential financial red flags that may impact your investment is crucial.
It is always vital to ask questions before buying a condo.
We will discuss common financial warning signs to look out for when purchasing a condo. By understanding these financial drawbacks, you can make better purchase decisions.
Non-warrantable condos
A non-warrantable condo refers to a property that does not meet the criteria set by Fannie Mae or Freddie Mac. These properties may have specific characteristics that make them ineligible for conventional financing.
Buying a non-warrantable condo can limit your financing options, potentially requiring higher down payments or cash purchases. You will likely need a non-warrantable condo loan. Lenders demand higher interest rates or stricter terms for financing non-warrantable condos due to the increased risk associated with these properties.
This typically includes condos with certain characteristics, such as commercial space exceeding a specific percentage, excessive investor concentration or ongoing litigation.
Before proceeding with the purchase, understanding the implications and challenges associated with non-warrantable condos is essential.
No FHA loan approval
Federal Housing Administration (FHA) loans are popular among first-time homebuyers due to their low down payment requirements. However, some condo communities may not have FHA loan approval.
Getting on the FHA-approved condo list is essential.
You will have limited options if you plan to secure an FHA loan for your condo purchase. Lack of FHA approval can restrict the pool of potential buyers when you decide to sell the property, affecting your ability to attract a wider audience and potentially impacting resale value.
FHA loan approval requires thoroughly reviewing the condo project’s financial stability and management practices. The lack of FHA loan approval may deter some buyers, potentially impacting the future resale value of the condo.
FHA loan approval requires thoroughly reviewing the condo project’s financial stability and management practices.
Delinquent condo fees
Before purchasing a condo, it’s crucial to inquire about the community’s financial health. Owners who fall behind on their condo fees can pose a significant financial risk. Delinquent condo fees could indicate poor financial management, a lack of community adherence to rules, or even potential legal issues.
This scenario may result in increased fees for all owners or a decline in the property’s overall value. Requesting financial statements and reviewing the community’s collection history can help identify potential red flags.
Insufficient reserve funds
Condo associations should maintain reserve funds to cover unexpected expenses, repairs, and maintenance. Inadequate reserve funds can be problematic, as it may lead to special assessments or increased monthly fees to cover unexpected costs.
Insufficient reserves can also impact the ability to secure financing or refinance the condo. Review the association’s financial statements thoroughly and consult with a professional to ensure the community has an adequate reserve fund.
Special assessments on the horizon
When buying a condo, one must be aware of the possibility of special assessments. A special assessment is an additional fee that condo owners may be required to pay for unexpected expenses or major repairs that the reserve funds do not cover.
These assessments can be a significant financial burden, often requiring owners to pay a large sum within a specified timeframe. These assessments can be a hidden cost when buying a condominium.
Special assessments can occur if there is a need for significant repairs or renovations in the building, such as fixing structural issues, replacing the roof, or upgrading common areas. They can also be imposed if the condo association faces a financial shortfall or legal matters requiring additional funds.
Before purchasing a condo, reviewing the association’s financial statements and inquiring about any upcoming special assessments is crucial. Understanding the community’s financial health and the potential for additional fees can help you decide whether the condo is good.
Final thoughts
When purchasing a condominium, you must be aware of red flags that may impact your investment and the overall buying experience. Non-warrantable condos, special assessments, and the lack of FHA loan approval are critical factors to consider.
By thoroughly researching and understanding these potential red flags, you can make an informed decision and ensure a smooth and successful condo purchase.
Remember, it’s always better to be cautious and well-informed than to face unexpected challenges down the line.
Bill Gassett is a nationally recognized real estate leader who has been helping people buy and sell MetroWest Massachusetts real estate for the past 35 years.
