When shopping for a condominium, brand-new condos have the widest appeal to prospective buyers. However, buyers of brand-new condos should be aware most new buildings have construction defects. The best builders and developers quickly correct any construction problems. However, many defects aren’t discovered until several years later.
Then it is up to the homeowner’s association, or HOA, to sue the builder and/or developer to remedy the construction defects. Reportedly, more than 80 percent of California condo HOAs have brought construction-defect lawsuits against their builders and developers. When a HOA is involved in a lawsuit, most mortgage lenders refuse to originate new mortgages in that condo complex, thus virtually halting resales except to all-cash buyers.
Purchase Bob Bruss reports online.
EXAMPLE: The building where I own my second-home condo developed serious water leaks into the underground garage from the landscaped area above. The concrete construction had not been properly waterproofed by the builder, who probably figured it would be several years before leaks developed — and by then he would be long gone. However, at that time we had as our HOA president a retired attorney from General Mills who had lots of time on his hands. He went after that builder and the developer with a vengeance! As a result, our underground garage was dug up and correctly waterproofed without any litigation costs for the HOA.
Another drawback of a brand-new condo or PUD complex is the developer often sets the initial monthly fees very low to attract buyers. When all the units have been sold and the developer departs after turning over the management to the new HOA, it is frequently discovered by the HOA members the monthly fees assessed against each condo owner are far too low to cover operating expenses and establish basic replacement or maintenance reserves. At that time, the HOA is forced to raise the monthly fees or risk insolvency.
Incidentally, in most states a HOA cannot file Chapter 7 bankruptcy (although some HOAs have gone into receivership where a court appoints a receiver to operate the HOA and bring it back to solvency.)
Buying a condo unit that is several years old is usually more predictable than buying a brand-new unit. After a few years, the “kinks” of defective construction have usually been resolved. Of course, older condo complexes have problems, too, usually related to repairs or replacements and the need to provide for an aging complex with increasing monthly fees.
When buying a condo that is several years old, before making a purchase offer be sure to ask several current resident-owners, “What do you like best and least about living here?” A related second question to ask several existing owner-occupants is, “How is the soundproofing – Do you ever hear your upstairs, downstairs or adjacent neighbors?” To minimize sound transmission, it’s usually best to buy a condo on the first floor or the top floor of a multifloor condo building.
Condo owners I’ve encountered are usually quite friendly and eager to talk about their likes and dislikes.
Whether buying a brand-new or a resale condo, when you become seriously interested in a particular unit ask the seller or the sales agent for a copy of the condo CC&Rs (covenants, conditions, and restrictions), by-laws and rules. Check especially for restrictions on pets and rentals. You might disagree, but I recommend condos that prohibit or at least restrict pet size, and that make rentals very difficult and expensive for owners who want to rent their units.
My personal opinion is I prefer owning a condo in a complex that is several years old so you can observe how the property is “aging.” Is it filled with owner-occupants with similar lifestyle interests to yours? Or are the residents completely different, indicating you might not fit in?
MINIMIZE YOUR RISK BY GETTING A MORTGAGE. One of the biggest mistakes I’ve observed buyers of new or resale condominiums make is paying 100 percent cash and not obtaining a mortgage. The big problem, if you made a wrong choice, is reselling your “bad condo” might be very difficult or even impossible. Meanwhile, you have your cash tied up. For this reason, be sure your condo purchase offer contains a mortgage contingency finance clause.
EXAMPLE: I still remember the letter I received from an elderly condo buyer who foolishly paid all cash. Only after moving in did she discover her condo’s drawbacks, such as a large number of renters (about 50 percent, as I recall); the HOA was involved in a lawsuit; the soundproofing was poor; and she could smell the cooking of the neighbors adjoining her condo. She wanted to sell and move out! But then she learned no mortgage lender would make loans in that complex because of all the problems (especially the high percentage of renters and the lawsuit). If that buyer had first read this special report and made her purchase with a 20 percent cash down payment (or less), contingent on obtaining an 80 percent mortgage, she would have learned before purchase that she was buying a bad condo that couldn’t be easily financed. Instead of making an easy resale, she could only hope another “sucker” could be found who would pay her 100 percent cash for her bad condo.
(For more information on Bob Bruss publications, visit his
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