High-Rise Condo FAQs
When you're thinking of buying a condominium, there are many important factors to consider. The most common concerns often include questions about homeowners' associations, special assessments, condo insurance, financing, resale certificates, the specifics of condo ownership, and different types of condos. We've answered several of the most frequently asked questions here to help you make informed decisions about condo ownership.
- What are HOA Fees?
- How Much are Typical HOA Fees?
- Are HOA Fees Worth It?
- How Often do You Pay HOA Fees?
- What Happens if You Don't Pay HOA Fees?
- Do I Need Condo Insurance?
- How Much is Insurance?
- What Does Condo Insurance Cover?
- What Does the Building Insurance Cover?
- What's the Difference Between Homeowners Insurance and Condo Insurance?
- What Kind of Insurance do I Need?
- What is HO-6 Insurance?
- How Much Does HO-6 Insurance Cost?
- Do I Need Owner's Title Insurance for a Condo?
- How Much Condo Insurance Should I Get?
- What is a Condo Special Assessment?
- Are Condo Special Assessments Tax Deductible?
- What are "Common Elements"?
- What Part of the Condo and Building do I Actually Own?
- What are the Rules and Guidelines for Financing a Condo?
- What are Some of the Common Condo Financing Options?
- Is Condo Financing Harder Than Financing a Traditional House?
- What Does it Mean When Condos are FHA Approved?
- What are the Requirements for a Condo to be FHA Approved?
- What is the Definition of a Condotel?
- Is Condotel Financing an Option?
- What is a Resale Certificate?
- Do I Need a Resale Certificate, and How Do I Get One?
- Resale Certificate vs Sellers Permit: What's the Difference?
Condo HOA Fees
An HOA fee means a periodic charge collected by a homeowners' association (HOA) from each condo owner. You may also hear an HOA fee called an assessment. HOA fees cover the maintenance of the common areas and services as well as the wages of building staff; in some condos, some of your utility costs, such as sewage, water, or trash removal, can also be included under an HOA fee.
Average HOA fees can range from $200 to $400 a month. How much your HOA fees will cost is based on the square footage of your condo, whether you live in a high-amenity or low-amenity building, and other factors. Typically, higher-service condos include higher HOA fees because they need to cover more staff and amenities. Conversely, a low-amenity condo includes lower HOA fees, since the HOA doesn't need to pay for full-time staff, a pool, a gym, etc.
Ultimately, whether you feel that the amenities you get for your money are worth it is up to you. But if you decide to live in an HOA community, it is very important to pay your HOA fees on time. Homeowners' associations can put liens on your property and can even force a foreclosure in order to collect past-due HOA fees.
Typically, you will pay HOA fees monthly, but in some associations, your HOA fees are due on a quarterly or annual basis. When your HOA fees are due will depend upon the rules of your specific association; be sure to ask whether you'll pay monthly or less frequently before you buy.
When a condo owner fails to pay the required HOA fees, the association will first attempt to collect past-due fees by means such as collection letters and phone calls. Eventually, if the fees are delinquent for a set amount of time specified by your state, the HOA can impose a lien on the property, file suit against the homeowner, or conduct a foreclosure of the condo.
Is condo insurance mandatory? The short answer is yes, in almost all cases. In general, an HOA's master insurance policy covers building exteriors and common areas. This coverage is included as part of your HOA fees. Insurance coverage for the interior of your condo and its contents is your responsibility. In nearly all cases, you will not be able to secure a mortgage on your condo until you purchase HO-6 condo insurance, which will cover your individual unit.
How much your condo insurance coverage will cost depends on a variety of factors. On average, condo insurance costs most homeowners between $100 and $400 a year, in addition to your HOA fees.
In most cases, you will be covered under two insurance policies. Your condo's homeowners' association will have a master insurance policy that covers damage to the exterior of your condo and damage to the property's common areas. You will also be covered under an individual policy (called an HO-6 policy) that insures the interior of your condo from damage and insures your personal possessions.
Condo building insurance, also known as your condo association or HOA's master insurance policy, only covers the external structure of your condo building and common areas like a pool, parking garage, or clubhouse. Whether or not any of your unit's internal structures are covered under this policy will vary from property to property and from state to state. Always check with your HOA and find out what's covered by your dues before purchasing an insurance policy.
Typically, should a covered event occur and your condo building is damaged, you will be liable only for the cost of rebuilding the interior structures of your unit and replacing your personal possessions under your condo insurance policy, while the rest of the property is covered by your HOA. Under a traditional homeowners insurance policy, you would need enough coverage to rebuild the entire house. For this reason, condo insurance is typically cheaper than homeowners insurance.
There are four types of condo insurance you need to be sure are included in your individual policy. These are:
- HO-6 condo insurance, which we will explain shortly
- Liability insurance, which protects you from liability if someone is injured inside your condo
- Condo contents insurance, which insures your furniture, electronics, or other personal possessions
- Loss assessment coverage, which will protect you if you are required by your HOA to contribute to a large master insurance deductible in the event of damage to common areas
Your condo HO-6 insurance policy covers the internal structures of your condo. Depending on your HOA's master insurance policy, you may need to cover all internal features, such as kitchen and bathroom fixtures, countertops, and flooring. This is called "walls-in" condo insurance. Other HOAs may have "all-in" or "all-inclusive" policies, which cover the majority of internal structures and only require the condo owner to pay for damage to specific features. Either way, you will always need to have condo contents insurance, which insures your personal possessions, and personal liability coverage.
Your individual HO-6 condo insurance cost will vary depending on where you live, the value of your personal possessions, whether your HOA has a "walls-in" or "all-in" policy, and whether you choose a high- or low-deductible plan. Currently, the average monthly price of an HO6 condo insurance policy is around $480 per year.
Owner's title insurance protects you in the event that someone files suit against you due to a claim against the home that occurred before you purchased it. Without owner's title insurance, you will be held liable for this claim. If you have a mortgage for your condo and a lender is involved, the lender will often require title insurance before they will approve the loan. Even if you have a situation where title insurance is not legally required, it is highly recommended that you purchase it anyway to protect your interests and your investment.
At this point, you may be asking yourself: "Exactly how much condo insurance should I buy"? To figure this out, first, take an inventory of the value of your personal possessions. Expensive items like furniture, appliances, jewelry, or electronics may require special additional coverage. After you have determined the value of your personal property, check your HOA's master insurance policy and see if there are any gaps in the coverage of your condo's internal structures; be sure to include the cost of replacing these if your HOA's policy leaves you liable.
Sometimes, your HOA will have to pay for something that isn't part of its usual budget. A special assessment, also known as a special levy, can fund a capital improvement, like a new roof or upgraded air conditioning, or it can cover unexpected circumstances like an extreme winter with a lot of snow removal. When a condo association special assessment occurs, the association can levy a fee on the individual condo unit owners. This can affect the value of a condo, and if a condo is being sold after an assessment has been announced, this must be disclosed to the buyer. This is one of the reasons why it's important to work with a Realtor who knows the building well: If there's even a rumor of an assessment, some owners may sell to attempt to avoid paying it. A local agent who is familiar with the building and the HOA may know about an upcoming special assessment and advise buyers accordingly.
Usually, special assessments levied by your condo association are not tax-deductible. However, if a special assessment was levied for capital improvements to the property, you may add the amount to your condo's tax basis, which increases the resale value of your condo.
Common Elements and Ownership
Common elements of a condo are all of the areas and amenities in your condo building or on the property that are available for all residents to use. Examples include swimming pools, lobbies, parking garages, or fitness centers. Some condo properties have what are called "limited common elements." These are elements that are the property of the condo association but are for use only by specific owner(s), not everyone in the complex. Examples of limited common elements include exterior doors, windows, patios, and balconies.
You own the "air space" in your individual condo unit, from the wall paint to the wall paint. You may also own your parking space if it is deeded to you, as well as other amenities like a bike garage or storage unit.
Condo financing rules vary depending on whether you apply for a traditional bank loan or a Federal Housing Administration loan backed by the government. In general, you will need to undergo a credit check, and your condo association will need to meet requirements set by the FHA. No matter which type of loan you are seeking, the lender will want to see that the condo association has adequate reserve funds, has adequate insurance coverage, does not have any pending litigation against it, and collects HOA dues on time.
The most common condo financing options are conventional bank loans and FHA loans. With a conventional bank loan, you borrow money from a bank, credit union, or mortgage broker. An FHA loan is still borrowed from a traditional financial institution, but it is insured by the federal government. Many buyers find FHA loans beneficial because they allow a lower credit score than a conventional loan, they usually have little or no adjustment to their interest rates, and mortgage insurance can often be bundled into the loan. FHA loans are usually favored by first-time buyers.
Not necessarily, but there are more factors to consider than with a traditional single-family home. A lender will look at how many rental units there are in the building, the fiscal health of the HOA, and if there are any active lawsuits against the HOA or developer. Any of these factors could cause you to be rejected for a loan, despite the fact that they are out of your control. But as long as the building is mostly owner-occupied and has a healthy HOA, financing a condo won't be any harder than a single-family home. This is another case where it makes sense to work with an agent who specializes in local condos: They'll know which buildings can and can't be financed easily.
An FHA-approved condo is a condo that is eligible to be purchased with FHA loans. In order for a condo building to be FHA-approved, there must be a certain ratio of owner occupants vs. rental tenants. This ratio fluctuates, so a building that is FHA-approved today may not be six months from now.
Getting a condo FHA-approved requires the following:
- At least 50% of condo units must be occupied by their owners (as opposed to rental units).
- No more than 50% of a property can be used for commercial purposes.
- No more than 15% of condo owners in a complex may have delinquent HOA dues.
- At least 10% of the HOA's income must go to a reserve fund.
- The HOA must have a master insurance policy that covers 100% of the cost of replacing the building(s) and have general liability insurance.
- The HOA must allow unit owners the right to lease their units.
Condotels, or hotel/condos, are hotel buildings where each hotel room is classified as a condo and is owned by an individual. That individual owner may stay in their condo a set amount of nights per year, and when they are not there, the hotel rents their condo space as a hotel room. This can be a good investment if you invest in a condotel in a city you enjoy visiting frequently but do not want to live in all year. You can stay in your condo when you're in town, and it makes money for you while you're away. The rates charged by the building and the fees associated with this arrangement vary wildly, so you'll want to clear all of that up ahead of time with your agent.
Condo/hotel financing is often not an option through the FHA, as most condotels do not meet the FHA approval guidelines. However, some banks will grant condotel loans through conventional lending programs. The income and credit score requirements for a conventional loan are usually higher than with FHA loans.
Resale certificates are a set of legal documents that provide information about a condo before you buy. When your application to purchase a condo is approved, you will receive a packet of information disclosing everything about the building's HOA, including the budget, reserves, meeting minutes, and more. You'll also receive the building's covenants, conditions, and restrictions. You'll be able to review all of these documents before you close on the sale. These documents can run into the hundreds of pages and can be overwhelming, but a good buyer's agent can help you navigate them and look for the most important items. Also, be aware that there is typically a cost associated with receiving these documents, and it is nonrefundable if you decide not to purchase the condo.
Yes, you need a resale certificate in order to understand the terms of your condo purchase. You will also need to apply for a resale certificate if you are selling a condo. The steps for how to get a resale certificate are as follows:
- Determine if you are legally required to have a resale certificate by your state.
- Find out which government agency within your state accepts applications.
- Collect all of the necessary documentation required by your state.
- Pay the required fee, if applicable.
Sometimes, you may hear the terms "resale certificate" and "seller's permit" used interchangeably. However, they are not exactly the same. A seller's permit is issued by a state and authorizes a person or business to make sales of tangible property. Once you are in possession of a seller's permit, you can obtain resale certificates for specific transactions.