Have the Fundamentals of Condo Ownership Changed?

I don't think the fundamental rules of house or condominium ownership have changed. Ownership always should have been about affordability, which is about making a choice between renting or owning and making the financial decisions required by those two modes of living. In recent years, those who can consider buying has changed, primarily because house and condominium ownership is now considered a long term venture. That makes highly financed, short term purchase difficult or impossible, and has raised the bar on financial requirements for ownership. Condominium ownership makes sense for a lot of people, but not for everyone. This might be for the better in condominium associations.

Today, lenders may again require the ability to demonstrate sufficient stability and financial wherewithal to meet the obligations of the loan and ownership for a number of years. Certainly, the home ownership calculators I have used indicate that ownership for less than 5-6 years with modest appreciation is the minimum break even when compared to renting. However, during the "housing bubble" home buying became gambling. The gamble of the owner was the ability to flip out before all of the appliances broke or significant maintenance was required, and move into something else, with minimal additional cost. It was musical chairs and there was an illusion of little risk. How wrong the experts were!

Condominiums continue to be a viable option for home ownership, especially for those looking to downsize, or younger people who won't or can't get involved in the maintenance issues. With an aging population, there should be a lot of people who do want to downsize. The problem according to some experts, is a housing market in which they can't easily sell their current home.  However, the state of the housing market is not the consideration of this post.

Condominium ownership isn't for everyone. There are trade-offs for achieving the benefit of minimal maintenance by the condominium owner. Some maintenance is required by the owner, in particular for their unit and the "elements" for which they are entirely responsible, and the cost of such is entirely by the owner. A condominium unit is not an apartment with a superintendent, and the board and management are not substitutes. When purchasing a condominium, the new owner gives up most maintenance and specifically exterior maintenance and upkeep headaches. In exchange, the owner surrenders some self determination. True, the owner can decorate and within the rules, can remodel the kitchen or bath, paint, alter the type of flooring or carpeting, and get the satellite TV of his or her choice. Modifications to walls, etc, may carry risks to roof or building supports and such improvements or alterations require association approval. Such approval is not guaranteed.

That wonderful view from the patio may change over time. As the trees mature, the canopy may spread and become more dense and grass in new shade may become more sparse. Mature trees will age, and may die or require extreme pruning or removal. The replacement will certainly not be a mature, 20 year old tree! Those and many other decisions are carried out by the board, which is looking at maintaining the entire association with the fees collected. Is it fair? Well, if you purchase a unit and two or three years later the building in which your unit resides receives a new roof, how was that paid for? Certainly the fees paid by you were inadequate. The fees of all owners, over a period of years, were accumulated in reserves so roofs can be replaced on all buildings. It is immaterial if an owner has been on the property for one year or twenty.

If you had purchased a house, the cost of such re-roofing would be your responsibility. You would have to save or get a second mortgage in order to pay for it. So for the condominium owner in "manor style" homes, there is a real advantage to living in a large community in which all contribute. That is a fundamental requirement in condominiums. All owners are equal and all must pay their fees. Failure puts an unfair burden on the other owners. So condominium owners have a real interest in the financial well being and capacity of their neighbors. Any owner who is over extended, is a risk to the financial health, stability and maintenance of the association. Long term owners have the knowledge and financial experience gained while living in the association. New owners don't have that benefit.

Other maintenance and operation expenses are paid for with the monthly fees to support them. As costs increase, so do the fees. When, or if, fees increase there is no choice for the owner. After a few years, even newer owners, who apparently are caught unawares or ill prepared, may complain "our fees are too high!"

In a condominium association, most units are similar, or there are only a few choices in floor-plans. At BLMH, there are a variety of views, from water to lake to green-space, and there are choices including first floor patio with walking to the green, or second floor and possibly better security, and different floor plans. Some of those differences are a matter of preference, and so it's up to individual buyers to decide that preference. But the interior basics because of floor plans, are similar.

When an owner decides to sell, there may be several competitive units also for sale. So amenities and improvements, the condition of the interior, age of furnace and appliances and so on, may all have an impact not only on the selling price, but also for how long a unit may be on the market. Owners who are attempting to sell a unit are competing with their neighbors, who share similar units, and are also selling. So what can an owner do? One thing is keep the unit up to date without overspending. That's been my personal preference and I get the benefits of enjoying the upgrades as I install them. I also have an opinion that incremental improvements are easier on the pocket book and provide choices. I'd never want to be in the situation of an aging furnace, hot water heater, and other potentials for problems, all at the same time. These are however, personal decisions, which are a benefit to the owner in a condominium; there are some decisions we can make and others we cannot.

What about the finances of condominium ownership?
The financial decision includes not only the basic purchase price, but also the cost of servicing the loan, taxes, fees and other owner paid unit maintenance. In the current real estate market, one of the reasons some house owners are squirming is because they are now living in older properties requiring exterior maintenance, and possibly with high debt load, or appliances from furnaces and air conditioners to hot water heaters, stove and microwaves all aging and in a few cases, falling apart. And many don't have the financial wherewithal to pay for these things. Some didn't save enough. Others never did and never intended to. So they didn't plan or prepare adequately. Home owners now say "I never thought it would get this bad."

The good news for owners in our association is, the association is doing some of that planning and preparation for us. House owners who did not save for major exterior repairs, are not as fortunate as we are. If an association is run reasonably well, and there are no catastrophes, then fees collected and saved as reserves will handle those big ticket items, such as roofs, driveways, entryway improvements, etc.  

When considering condominium ownership, it's prudent to not only include the cost of real estate, taxes, insurance and association fees, but to also consider the maintenance cost of the amenities of the owner's unit, including major appliances, the furnace and air conditioning, and hot water heater and even bathroom vent fans. These will age and over time will require repair and/or replacement. I've put together and posted a budget elsewhere in this blog. It might be a bit of a shocker, if a condominium owner thinks they are living in an apartment. The real issue is determining how long things will last, which is to say, at what time should certain items be replaced. That in turn, determines how much I should be putting in a cookie jar to handle these repair and replacement items. Of course, a loan may be an alternative, and furnaces can be paid over time.  Another way to look at this is, if at the time of purchase there is a possibility to live here for a decade or more, it would seem to be prudent to plan on paying for some of the maintenance or replacement of the stuff included in "my" unit.

The good news is, in our association, exterior maintenance is the association's responsibility, with the exception of cleaning the patio and optional painting of patios between normal cycles. There's minimal snow shoveling (e.g. individual patios) and snow melt by owners. Other normal exterior maintenance is by the association, including gutter cleaning, tree trimming, lawn care, exterior painting, etc.

However, if an owner doesn't plan on maintaining the remaining things that are integral and included in their unit,  including some of the plumbing or even the electrical wiring and fixtures, then when problems do occur, it can be difficult or a surprise.

A problem for some owners is the realization that when one purchases a condo, one gives up most of the maintenance and upkeep headaches in exchange for losing financial and other self determination. Exterior maintenance is by the association. Owners can advise management of problems or issues, but the determination of the "when and how" of exterior maintenance is out of the individual owner's hands. There are monthly association fees to be paid, and if the association increases them, there is no choice for the owner. It's great to live on 40 acres with two lakes, manicured and landscaped grounds, hundreds of trees, waterfalls, central patios and walking paths. But those too have to be maintained, and operating costs do increase from year to year, even if only by 1%. If electricity goes up, fees for lighting, etc. must go up to accommodate this. If gasoline prices go up, so does the costs of maintenance and landscaping. Etc., etc., etc.

Real estate taxes have also increased and even with a terrible economy, in the three recent years, taxes went up by 5.4%, 3.7% and 1.3%. That's something an owner needs to budget for. In a terrible economy, those future wage increases may be smaller than expected. Ditto if that Adjustable Rate Mortgage, or ARM does in fact, adjust upwards. So how does one pay pay for these cost increases? After a few years, even newer owners, who may be caught unawares or ill prepared, may complain "our fees are too high!"

One of the advantages at BLMH is a lack of special assessments. This is due to good management and financial planning. But things can go wrong, and it is possible for unforeseen or unanticipated events to occur.  If they do, a special assessment may someday in the future be a necessity. I have friends, who have owned condos in other associations and they have received a special assessment. I have not, to date!

To special assess or not, may also be the result of long term board philosophy. I know owners who don't like fee increases to cover reserves. The alternative is worse, in my opinion, and would require assessments from time to time. Some associations seem to prefer such assessments, or may be unable to avoid them. Everyone does their best, but outcomes are not guaranteed. The skills sets of managers and boards have considerable variation.

For a comparison, when owning a house, it's possible for the owner to defer certain maintenance if their personal financial situation won't allow it, or if the owner decides to put their money elsewhere. As a house owner, one can patch the roof indefinitely, let the driveway degrade, paint rotting wood and generally let the property go into ruin. A house owner can choose to ignore the Americans with Disabilities Act. Condo boards are required, as fiduciaries to maintain the property 'within reason' and associations are held to a higher standard than are individual homeowners.

The bottom line for me
I purchased a condominium about 10 years ago. Am I glad I did? Yes, overall I am!

Prior to that I was once a homeowner, and I rented apartments for several years while debating a condominium purchase and looked for an acceptable association. So I have had a range of experiences.

It is true that in the past 10 years the fees have increased, and it is also true that the association isn't perfect. However, I've been able to keep my financial head above water, and I've also been able to say my unit was a good purchase, as in "a wonderful place to live for the past 10 years."

Am I happy with the current situation and the economy in the U.S.? Of course not. It's been very difficult for many, and I've experienced the consequences of it. But one has to live somewhere, and all of those alternatives have pros and cons. Life is imperfect, and so is house or condo ownership, in my experience. I should also say that I have had reasonable expectations. If my expectations were unreasonable, as in "no fee increases" or "fee increases of 1% forever" and no maintenance issues, perfect neighbors, a forever spiraling real estate boom with ever increasing home values, etc., etc. then I would probably be unhappy today. I assume "unreasonable expectations" is why so many people in the popular press are unhappy. Of course, I suppose one could choose to make the argument that their personal expectations are reasonable, and that life and the economy are unfair.


Could I sell today for more than I paid for my unit? 
That's one of the measures of success in real estate, some people tell me. The personal answer is difficult to say, because the simple question is "would today's sale price, after Realtor commission be more than the price of purchase?" However, to be realistic and honest, I should compare the price of rental of an equivalent unit with indoor and close parking for the past 10 years to the price paid including fees and real estate taxes. Of course, there is also the "cost of money and inflation." There are also intangible benefits. We not only have the benefit of the park across the street, the grounds, parking, etc. but we also got the ability to upgrade the kitchen to something we considered acceptable, and painted and did other improvements to our liking. I couldn't do that in the apartments I looked at, and we really like our kitchen and the views. In fact, I have an award winning gardening friend, and she loves the views I have, including from the kitchen window and the living room. I doubt I could have matched that in a rental; I certainly tried. So what are those views, the trees, and so on, worth to me? Ditto for the proximity to the college nearby. These are personal perspectives and we each have an answer for what we want. For example, in Chicago, there are condo owners who have a wonderful view of the lake, or Grant Park, or both! They are paying for that location and view.

I will say this. At the time I purchased, I included what I believed were realistic fee increases over the next decade in my purchase decision, and real estate taxes with modest increases. I also included the cost of certain anticipated improvements and possible maintenance items (such as a new water heater).

To date, when comparing buy versus rent, I can say that I have saved enough "rent" to pay for the cost of ownership to date and the improvements I have made. I will also say that I didn't use the Zillow rental estimate, but compared the price of more basic and lower cost rental units. Note: Zillow wasn't available as I recall in 2001. One of my favorite calculators is as the New York Times, and it has improved with age:

Link to New York Times buy-rent-calculator

Disclaimer
It's important for each and every one to honestly evaluate their personal financial situation. It's also important to do your homework thoroughly when considering any condominium purchase. This blog is neither an endorsement nor a recommendation for a lifestyle or an association. It is a statement of my experiences, perspective and opinions.