Do your homework before buying a condo

With home prices in many parts of the country rising more rapidly than wages, condominiums and co-ops, which typically cost 10% or so less than single-family homes, are in high demand.

The National Association of Realtors says the median condo/co-op value rose 5.2% in the 12 months through August, compared to 4.7% for single-family homes.

In the Northeast, condo values rose 1.4% vs. a 0.7% decline for single-family homes. In the West, the median condo value was up 6.5% vs. 5.6% for single-family homes. Millennials find the lower price point a way to get into a first home, and their boomer parents are at an age where a low-maintenance condo has appeal when downsizing.

But beware. Condos suffered bigger losses during the housing crash, as they were popular targets for flippers and investors. And with the gap between condos and single-family homes narrowing, the condo price advantage is on the wane in many markets. The real advantage can be in lifestyle (less to take care of) and location. If you and your career are mobile, it pays to at least consider other cities.

Buying a condo means getting financially married to your fellow owners. Work with a real estate agent who has experience in condo deals. Bonus points if the agent knows the building you’re looking at. Through your agent you will want the seller to cough up important documentation so you can make an eyes-open decision.

Do owners live there, or is it an Airbnb hotspot? This isn’t just about the building’s vibe. Do you care about living among tourists? It could also impact your financing options. As a general rule, conventional and FHA-insured mortgages require at least half of the units be occupied by owners, though it can go as low as 35% in certain situations.

There are also limits on how many units any one person can own. For example, if the condo development has five to 20 units, no single entity (person or LLC/corporation) can own more than two units, for standard loans. For larger developments, no more than 25% of all units can be owned by a single entity.

Does the building have a large business/shopping element? If you want a standard mortgage, Fannie Mae, Freddie Mac and FHA typically require that no more than 35% of the square footage of the project be commercial .

Is everyone paying their dues? Condos have monthly shared expenses, often called homeowner association fees, that everyone contributes to — or are supposed to contribute to. For a conventional or FHA-insured loan, the general rule is that at least 85% of owners must be making on-time payments. Ask for an accounting of the change in HOA fees over the past 10 years. If it’s much higher than inflation (8.5% over the past five years and 20% in the past 10 years), consider that a yellow light.

What’s the reserve situation? A portion of a condominium development’s HOA fees should be set aside for future repair and maintenance costs. For government-backed loans, the requirement is that 10% of the development’s budget is for the reserve fund. Even if you’re paying cash, or getting a private loan, keep the 10% reserve rule in mind; anything less leaves you financially exposed.

You also want to ask if there have been any special assessments in the past 10 years. These are charges above the HOA fee that are levied when the development doesn’t have enough cash to cover unanticipated bills or bills it didn’t save for in a reserve fund.