Filed Under (Real Estate) on 12-01-2011
By Douglas S. MacGregor, J.D., M.S.W.
Right now, savvy buyers can find tremendous opportunities in the condominium market. But condos may come with hidden strings attached. Without doing your homework, you might find yourself paying far more in association dues than expected or suffering under onerous rules. Here are some questions to ask before making an offer:
1. Is it really a condominium? The form a community takes is important. There are three types of communities in Colorado: condominiums, cooperatives, and planned communities. It is not always apparent which is which. Distinguishing among them is important because each type of community brings unit owners different property rights. When you buy a condominium unit, you receive an ownership interest in the unit as well as an undivided interest in all the common elements. However, when you buy an interest in a cooperative, you own no real property. The association owns all the property, including all the units, and you get a right to occupy a designated unit.
Remember that just because units are attached does not mean that a project is a condominium. Attached townhomes could be developed as condominiums or a “planned community” governed by a homeowners association. A high-rise is probably a condominium, but could be a cooperative. Also, just because a salesperson refers to a development as a condominium does not mean that it is. There is only one way to tell if the project is a condominium: read the association’s governing documents. Colorado law requires declarations to state whether a community is a condominium, cooperative, or planned community.
2. How stable and responsive is the governing board? If you buy a condominium, you are subjecting yourself to another level of “government.” That government is called the condominium association. The association is run by an elected executive board. In some condominiums, the board is made up of intelligent, thoughtful people with business or professional experience. Other boards can be dictatorial. They may mismanage the community or be “litigation happy.” Warning signs include recent attempts to recall some or all of the board members. If possible, attend a board meeting to judge if the board members seem fair and responsive to unit owners.
3. Have there been recent special assessments? Condominiums pay for ongoing operating costs by charging unit owners a fee, usually on a monthly basis. If the governing board plans poorly or lacks reserves, the board may be forced to levy special assessments on a regular basis. If there have been several special assessments in the past five years, take it as a warning sign.
4. Does the association have adequate reserves? All property requires maintenance. A detached single-family house periodically requires new paint and roof repairs. Condominium developments are no different, except they may also have large mechanical components—for example, elevators or back-up generators—that require expensive maintenance or periodic replacement. A well-managed condominium project has adequately funded reserve accounts to cover these costs. You can determine if reserves are adequate by looking at the most recent annual budget or audit. Take note of how the reserves can be spent: can the governing board “raid” reserve funds without unit owner approval, or must owners vote on large capital expenditures?
5. What are the rules? Are pets allowed? Can units be leased? Are there guest restrictions? Find out if rules are stated in the Declaration—which can be difficult to change—or have been merely adopted by the governing board. Obviously, if you are buying a vacation home to use part time and rent part time, it is critical to know whether your right to rent out the property is protected by the Declaration.
For more information see Colorado Community Association Law: Condominiums, Cooperatives, and Homeowners Associations, by Douglas S. MacGregor, J.D., M.S.W.