Buying/renting overview, and lots of advice on BUYING a CONDO.
Mar 16 '01 (Updated Jul 20 '01)
The Bottom Line Much of the buying vs. renting decision depends on your current situation, but in general, I feel buying is always a good investment, IF you do your homework first.
REAL ESTATE MARKET OVERVIEW
I have owned my own condo for ten years now. I have never actually RENTED an apartment from a landlord, so I have no first-hand experience in that matter. That said, following is my take on the pros/cons of Owning versus Renting.
First however, as to the general question of when is a good time to buy, I recommend that, as soon as you think that somewhere down the road you might be interested in buying property, you should immediately make it a point to regularly follow the R.E. market in the neighborhoods you are interested in. This can be done by checking the R.E. section of the newspaper each Sunday, or by going on the internet and doing a search for Real Estate websites. What you want to look for are properties comparable (2BR home, 1BR condo, etc.) to what you might like to buy, and follow them over a few years to see what the trends are..... are the prices going up or down? how long are properties on the market before they sell - a few days, or a few months?...... does the number of properties available for sale seem to be dwindling or increasing? The fewer properties on the market, the more competition among potential buyers to submit the winning bid, which usually means the owners can ask higher prices. It's all about supply and demand.
The reason to follow the market over time is that you will then be better able to understand fluctuations in the market. You will know when prices were at their lowest, and when they were at their highest. I believe that (like some say with regard to the stock market) it's best to buy low and sell high. So once you are armed with a better knowledge of the HISTORY of your local market, you'll be in a better position to know when is a good time to buy, and what is a fair price for a certain type of property.
If you see that home prices are in a downturn, but still too high for you to afford to buy right now, continue renting, if you believe the market has not yet bottomed out. Buy when it reaches a point where there are properties you can afford. If however, you feel that the market has in fact bottomed out, and you STILL can't afford to buy, but really want to at some point, you need to do some creative thinking. If the market at this point can go no place but UP, and you are paying rent every month that goes into someone else's pocket, how can you expect to buy when prices climb UP again, particularly if you can't even SAVE money, because you're paying rent every month? You need to weigh how long you should wait out the market versus throwing away money every month, money that could be paying-off your own mortgage.
Many cities have special home buying programs for first-time buyers. Look for a mortgage on the internet. Many banks also have special programs for first-timers, requiring smaller down payments. Maybe you need to look into a different temporary living situation, to enable you to save some money. Instead of living in your own apartment at a cost of say $1,000/month, why not swallow your pride and either move to a cheaper apartment more outside the city, or else look into a roommate situation? You may be able to cut your rent in half, thereby saving $6,000 over one year. This could be enough in some instances to cover a down payment on a condo.
Now the Pros and Cons on Owning versus Renting...
OWNING (AND LIVING IN SAID PROPERTY)
PROS
- You get a tax write-off.
- In 20/30 years, you'll really OWN own the property, and will owe nothing to a bank (mortgage). You'll then have one less LARGE bill to pay each month, and are essentially living rent-free.
- You can use any equity in the property as collateral for future loans.
- You can make whatever changes you want to the property....paint the walls any color you want, etc.
- It gives you the satisfaction of being your own "boss"..... you feel like a grown-up! :)
- If something is wrong with/broken in your home, you don't have to badger an absentee landlord to get it fixed. It's completely up to YOU when you want to fix it.
- If property values go up and you decide to sell, you can make a "killing".
- In the case of a single-family home, you have your own yard in most instances, and there are no noise issues with upstairs/downstairs neighbors.
- You don't have to worry about your rent going up, and possibly being priced-out of finding a new apartment (mortgage payments may only increase if you get a variable rate mortgage)
CONS
- When something breaks, you have to find a contractor to fix it, which can be a job in an of itself - finding someone who's reputable, who'll do the job RIGHT, who won't rip you off, and who you'll be able to contact AFTER you've paid them, should the work they do "disintegrate" shortly thereafter.
- You then have to PAY said repair bills.
- If you decide a few years down the road that you want to move somewhere else, it's not as easy as just picking up and renting another apt. You have to spend time selling, or else finding a new tenant for your current home, before you can move.
- If you need to sell quickly, depending on the current R.E. market, you could lose money (although depending on the amount of your home's lost value, this loss could be nullified by virtue of the fact that you had been paying down your mortgage principal, as opposed to paying rent towards another landlord's mortgage).
- In the case of a home (not a condo), you are responsible for general outdoor maintenance, like shovelling, gardening, roof drainage, etc. When you RENT, your landlord takes care of all that.
RENTING
PROS
- Requires a substantially smaller down-payment versus that required for purchasing property.
- You are not as tied-down to your present living arrangement as you would be if you owned it.
- You are not responsible for maintenance of the plumbing, electrical, or the outside of the building/house.
CONS
- In competitive rental markets (like NYC), it may require your paying a broker 15% of your annual rent just to find you an apartment. The competition to find a place to rent is alot higher than finding a place to buy, because there are more people numbers-wise looking to rent.
- There are lots of unscrupulous landlords out there. You may find yourself constantly calling your landlord to fix things, and nothing ever gets done. You may find yourself having to "settle" with sub-par living conditions, and wondering exactly what your rent is paying for!
- In most instances, you are not allowed to paint the walls.
- If there is a yard, chances are you do not have the freedom to use it at your discretion.
- If the rent is raised to an unacceptable level, you are stuck having to find a new apt. This is a problem owners generally never have to face. Monthly mortgage payment amounts rarely go up (except in cases where you may have a variable rate mortgage - the mortgage may go up, but then it could just as easily decrease as well....)
BUYING A CONDO TO LIVE IN
Having 10 years experience of living in a condo building, I have learned ALOT. I've been dying to pass what I've learned on to others, and always pored through the Personal Finance category, and never saw any advice question regarding What to Look for When Buying Property, or anything like that. I'll take this opportunity here to give you some advice on condos. While condo rules may vary slightly from building to building, I think my comments on how condos are run is pretty standard across the board. (These notes may also apply to co-ops, which have somewhat similar rules to condos.)
When I first looked into buying a condo, all I ever heard was "owner occupany rate". People clearly put a lot of importance on it, but I never quite understood why. Now I know.
My condo building has 35 units in it. 5 units are Owner Occupied (the owner lives in the unit they own), and the other 30 units are Investment units (the owners live elsewhere, and rent out their units.)
When someone buys a property to LIVE in, it requires more of a "personal" investment on their part. This is somewhere they are going to LIVE. So they obviously want to know that the place is well-run, quiet, safe, and that the "common areas" (hallways, basement, sidewalks, trash disposal system, washer/dryer room, heating/water systems, elevator, roof, fire alarm system) are taken care of. When you buy a condo, you personally are responsible for INSIDE your unit only. The Condo Association (which is all of the unit owners, collectively) is responsible for maintaining all the common areas. The maintenance of these common areas is paid for by all the owners, who pay a monthly Condo Fee. These fees are collected, either by elected Trustees of the Condo Association, or by an outside Property Manager, who was HIRED by the Condo Association.
While a person planning on LIVING in their condo will care about the "common areas", an INVESTOR (or absentee landlord) will NOT care as much, since they are living somewhere else. So long as the building is not falling apart, the Investor knows that most tenants will put up with the hand they are dealt. Someone who rents will probably not complain so much if the paint in the hallways is peeling and unsightly, or the washing machine is often broken down, whereas an Owner Occupier (who pays a fee every month SPECIFICALLY for such areas to be maintained) should be very angry that their money is not being well-spent.
I have found that certain neighborhoods with condo buildings are more desirable for owners to LIVE in, while other neighborhoods with condo buildings may appeal more to INVESTORS, who don't necessarily want to live in the neighborhood themselves, but who know that the area is a magnet for those who cannot afford, or don't want, to buy.
My neighborhood is one such neighborhood. All the condo buildings in the area have low owner-occupancy rates. People who have been around for a while in the condo market know that such buildings are perfect targets for being taken advantage of, either by dishonest Trustees of the Condo Association or by an outside hired Property Manager. They do this by "misappropriating" funds, either deliberately, or because they are simply incompetent.
When a building has few Owner Occupiers, that means that only a handful of people live there for a good number of years. The rest of the people in the building are "transient" renters, and the units may have new tenants moving in and out every year. As such, there is no sense of community in such buildings. People don't get a chance to know each other, or just when they do, the renter moves on to another place or city. In addition, renters have less of a motivation to CARE about the building. Couple this with the possibility that their landlord isn't treating them well, and it makes for an unhappy tenant. This overall does not create a nice environment in the building.
Compare this to a building where the majority of owners LIVE in the building. They presumably live there for a good number of years. Everybody knows one another. In addition, they are alot more passionate about the appearance of their home (i.e., common areas, such as the hallways). Such buildings are more apt to hold monthly meetings, to discuss issues, etc. My building NEVER has meetings, except for our Annual Meeting where we elect new Trustees of the Association.
Another problem with my building is that, of all the owners I DO know (both Owner Occupiers and Investors), I am not "on the same page" with any of them with regards to building issues. At the meetings, I find that the other owners are either plain "dumb", or else they become overly emotional when they begin to hear about building problems. Our annual meetings are usually three-ring circuses. Add to this the fact that, for many of the OWNERS, English is not their first language. Now I have nothing against immigrants, but it certainly makes matters much more difficult when you have people from many different countries all getting emotional during what is supposed to be a constructive meeting!
Many of the RENTERS in my building also do not speak English very well. I think this fact ALSO makes our building more ripe for being taken advantage of by the Property Manager that takes care of our building. I think that if people don't speak English well, if they DO complain about something to the property manager, they are more easily "dismissed". In addition, if these people came here from countries with lower standards of living, they may find any problems in our building (like a lack of hot water for e.g.) to NOT be a problem, or they may not speak up simply because they are not confident with their English-speaking capabilities. I think the Property Manager recognizes this as another opportunity for them to slack off.
So what would I tell you to look for if YOU are looking for a condo in which to live?
LITTLE THINGS CAN SAY ALOT
Look at at least 10 different buildings before you decide to make an offer on a place. Take note of little things: are the grounds kept clean? Is the area around the trash dumpster neat, or is the dumpster overflowing? Do you see cobwebs in the stairwells/hallways? If a building takes care of the LITTLE things, chances are they take care of the BIG things as well. But if a building does NOT have a nice outward appearance, it could be a sign that they're not taking care of more important matters either.
OWNER-OCCUPANCY RATE
Once you see a place you might like to buy, find out the owner occupancy rate of the building. If the rate is below 25%, I'd say that is bad, although there are certainly other factors to look at also. A low owner-occupancy rate doesn't NECESSARILY mean the building is poorly-managed, but more often than not, it does. If the rate is 50% or higher, I'd say you're OK.
THE CONDO ASSOCIATION/ELECTED TRUSTEES
When you have found a place to buy, and you have signed an Offer to Purchase, wait and see if the Condo Association Trustees say that they need to meet with you first, before you can be approved to buy a unit in the building. While some may see this as overkill, after my experiences, I'd say this is a POSITIVE sign that the other owners CARE about the building, and who else they will be sharing it with. If they DON'T ask to meet with you, then you should ask to meet with them. They should only be too happy to sit down with you. If they seem irritated, or say that they have no time, this could be a bad sign. If they have no time to sit down with a potential new owner in their building, how do they possibly find the time to oversee the management of their building? This could mean that the persons managing the building, be they Trustees of the Condo Association or a hired Property Manager, are able to mismanage the funds, because they know none of the other owners have or take the time to oversee them, and how they are spending the Condo Association's money.
You should also ask to meet with at least one other owner that is NOT a Trustee. The reason for this is that, since the Trustees are responsible for overseeing the management of the building, they may be more apt to make it seem as if everything is going fine. Certainly they wouldn't want to admit to you that they've been doing a bad job. However, someone who is NOT a Trustee may see the building situation quite differently. Also remember that the owners with the most knowledge of what's really going on (other than the Trustees) will be owner-OCCUPIERS, since they see the building on a day-to-day basis, unlike the Investor owners.
Ask the Condo Association if they have regular meetings, independent of the people who are assigned to manage the property, to discuss any possible problems with the management of the property. If they look at you like this is overkill, or like your question is ridiculous....bad sign.
Find out if a Condo Association meeting is scheduled in the near future, and if you can sit-in on it before you have signed the Purchase and Sale Agreement. This way you can observe if the meetings are conducted in a professional and constructive manner.
Ask to see a list of all the condo owners' names. If the names look like a list of the "United Nations", while that may be nice to live with people from all over the world, it may not be so nice if nobody is able to relate to or understand each other during a meeting, due to language barriers. Remember, this is BUSINESS. You are making a huge financial and personal investment here.
Another thing you can tell by looking at the list of condo owners is whether or not any people own multiple units in the building. If you see the same owner name more than once, this means they are an Investor, and you can assume that they probably don't live in the building, and that they live elsewhere. It is also very possible that this person is a "seasoned" Investor. He/she may own many other condo units throughout the city. While not ALL such people are bad, you need to beware of people who own multiple units in the building, as they may be crooked landlords who are only out to make a fast buck, with no regard for the property itself. If any of these such people are Trustees of the building as well, beware.
On a related note, you need to know that each unit owner also owns a certain PERCENTAGE of the building, and that the more percentage of the building they own, the more influence or weight they have when it comes time to voting on issues related to the building itself, particularly when electing Trustees. The more units in a building that an Investor owns, the more "say" they have. So if you have one corrupt Investor in your building who owns 10% of the total units there, and another corrupt Investor "working with him" that owns 15% of the building, they may collectively have enough "pull" to sway any decision-making in their favor. In addition, PRIOR to the annual meeting where new Trustees are elected, very savvy Investors will go around to other Investors in the building - Investors who never participate in meetings and who clearly don't care - and these corrupt Investors will ask if they can be their proxy (or legal stand-in) at the meeting. If these other Investors could care less - which they often don't - they just say "yeah, sure...you can be my proxy." The more proxies these corrupt Investors collect, all the more pull they will have at the annual meeting. It can get to the point where one or two Investors can virtually make the decisions for the entire building, and even if a number of other owners at the meeting disagree with them, there is nothing they can do. It's all a numbers (percentage) game.
IF THE CONDO BUILDING IS MANAGED BY A PROFESSIONAL PROPERTY MANAGER
If the Condo Association Trustees HAVE assigned the day-to-day operations of the building over to a professional Property Manager, you should ask to meet with them also. You want to go to the Property Manager's office. Does it look orderly? Is their staff professional? Remember, if a Property Manager takes care of the common areas of your building, THEY are the ones you'll need to call when there is a problem. If you have no hot water, you will have to call their office. If their office staff seems rude, this can become an unpleasant experience having to deal with them if you repeatedly have problems. Ask them how their office works after-hours? Do they have an in-house answering service, or do they hire out for that? Who is the primary contact person there for your Condo Association? Are they available 24-7? Can you page them directly yourself? If so, that's a good sign, that they are dedicated to their job. Or do you always have to go through the after-hours answering service? (Some such services can be very unprofessional, as they are handling calls for multiple companies after-hours. My building's Property Manager uses such an after-hours service, and I am usually kept on hold for so long that I end up just hanging up!) Can you see a copy of the Condo Association's monthly financial statement? Is it easy to understand? Is there any money in reserves/ savings? How often are meetings held? If it's just once a year, that can signify that issues are not dealt with in a pro-active manner. It can also mean that no one cares, or "has the time" to meet, either monthly, or even quarterly. Bad sign. I feel that meetings should be held at least quarterly. If you have to badger people to agree to this, bad sign. If people truly CARE, they should WANT to meet.
CONDO ASSOCIATION RESERVES/SAVINGS
If you will not be hiring your own lawyer to help you through the buying process, you will have to look through the Condo Dox (budget for the coming year, recent financial statement...) yourself, which can be obtained through the managing Trustees or managing Property Manager. What you want to look at, among other things, is whether or not the Condo Association has any money in reserves (or savings). If they do NOT, this could mean that they have a pattern of living month-to-month, where they collect condo fees, and then turn around and pay bills with it, with nothing left over. This would indicate poor management.
Compare the monthly condo fee to similarly sized condo buildings, by asking around. Are your fees lower in comparison? If so, then maybe the Association needs to raise its fees, if it has nothing in savings. IF however, the building's fees are comparable to or higher than other condo buildings, and yet they still can't manage to save any money, I'd say that's a bad sign. Having reserves is very important. Remember, all the condo owners essentially OWN the building, and just like someone that owns a private home, you will all be responsible, should the building need a new roof (costing in the range of $50,000), new furnace ($10,000), etc. If there is no reserves/savings, all the owners will have to come up with the additional money. A well-run building always ANTICIPATES problems, and has money set aside to handle them as they occur. Also find out how often the building has changed Property Managers. If the building changes managers every few years, this probably indicates that the Trustees are not adept at picking good ones. If a Property Manager they chose turns out to be bad, this can usually be realized within a few months' time, and at that point they should just FIRE the manager. If however, it took them a few years to fire them, that indicates that all the Trustees were just too lazy or apathetic to act sooner.
EXACTLY WHO ARE THE TRUSTEES?
You also want to know if the current Trustees are Investors or Owner-Occupiers. Often times, if the Trustees are Investors (who may own lots of other property throughout the city), they do not truly care about the building. They may be a Trustee purely for corrupt reasons, possibly working out some kind of a "deal" with the Property Manager that has been hired to manage the building. I can't tell you how these "deals" might work, but I'm sure underhanded stuff is going on in my building. Investors in my building are Trustees, yet they have made it VERY apparent that they could care less about how the building is managed, so long as the building isn't falling apart. So one has to wonder WHY they volunteered to be a Trustee in the first place. It's ALWAYS better if the Trustees are Owner-Occupiers, as they will always think of the condo building as their HOME, and as such, will have its best interests in mind.
Find out the ratio of Investor to Owner-Occupier Trustees. If there are say three Trustees, two of which are Investors, and one of which is an Owner-Occupier, if there are other Owner-Occupiers in the building, try to get in touch with them, and tell them that you are curious why THEY are not Trustees, since THEY of all people should care the most about how their building is managed. It could be that they are not Trustees because they have become jaded with their continuous building and management problems. Also ask any Investor Trustees why THEY chose to be a Trustee, just to see how they answer you.
MY TAKE ON "PROFESSIONAL" CONDO INVESTORS
Let me give you an example of HOW and why many Investors are ABLE to not care so much, while at the same time knowing that their investment (the condo property) is not really at risk. This way you can understand why alot of Investors in your condo building is NOT a good thing.
Take an Investor who's been "in the business" for 20 years. He started buying a piece of property here and there, perhaps buying up some run-down units cheap, and then fixing them up himself. Perhaps he paid cash for some of the properties. He turns them around and rents them at a good price. Maybe he refinanced some of his mortgages later down the road, so that the term of the mortgage decreased from 30 to 15 years. Chances are that the rents he is taking in not only cover his mortgage payments and the condo fees, but he's left with extra money each month (income). While some landlords might have to spend some of this income for repairs, a good number of others are natural "handymen". Not only that, but they get to know alot of other people in the business, such as contractors, and are able to work out good deals when they need to hire somebody to do some work. As years pass, some of this investor's mortgages have now been paid up. Rents for those properties are now going directly into the Investor's pocket (minus the monthly condo fees, which could range anywhere from roughly $125-$300, depending on the building). If the average rent for a 1BR in my area is $1100, that's a monthly income of about $800 for the landlord, and that's just for one of his rental units. Pretty nice, eh? Perhaps rents in the area are on the rise, so he can now command more money for his rental units. As the Investor's income and savings increase, he can then buy MORE property, particularly when the market is down. Exponentially, his income just starts to multiply.
So when it comes to this Investor's actual condos located throughout the city, he knows that, so long as the building isn't caving in, he will always be able to find a willing renter. And even IF one of the buildings he has property in suddenly needs a new roof, for which the Condo Association has no reserves/savings, it would only require each of the owners coming up with say $1,500. To this Investor, that is pocket change.
FINAL THOUGHTS
I made a huge mistake of buying my condo with my head in the sand. I did not understand a thing about real estate in general, nor did I understand how condos were run. I didn't understand the role of Trustees, Property Managers, and why owner-occupancy rates were important. I didn't understand how R.E. Brokers worked, and that some work FOR the seller and that others work FOR the buyer. I always prided myself on being independent, and didn't want anybody's help when deciding on buying a condo. Now I realize that my pride ending up being my downfall. Do NOT rush into such a big financial decision. Ask lots of questions, and do NOT let R.E. brokers, Condo Associations, Trustees or Property Managers make you feel dumb, or like you are being overly-worrisome about taking the plunge. If you don't feel good after meeting with a Condo Association or its Property Manager, look elsewhere at other condo buildings. You need to check out alot of condos to be able to begin making comparisons, and to be better able to differentiate between well-run and poorly-run Condo Associations.
Perhaps you think me jaded? Maybe you think I'm telling you to be overly-zealous in checking out every possible angle with regard to a condo? EVERY building has the potential for problems, but the better managed it is, and the more the owners care, the less chance for problems. Let me give you an example of just SOME occurrences in the 10 years I've owned my condo.
We have a person living illegally in the basement of the building. The Property Manager has been told about this on numerous occasions, but just looks the other way for some reason.
We had no hot water on 14 separate occasions in the past year - one time for 3 straight days. Each time they sent someone out to "fix" the problem, the Condo Assoc. got charged, for a grand total of about $1,000. I wrote a letter to the Property Manager outlining all the dates of no hot water, the "excuse" we were given for that particular incident, and the amount we were charged. I copied all the Trustees and some of the key Unit Owners. Not one person called me to discuss it, or to express their outrage as well.
We've had about 7 different Property Managers in 10 years. Only one was good. With that one Manager, we had $35k in Reserves, AND they installed replacement windows in the entire building, low flow toilets in every unit, purchased a new furnace, and put a canopy over our front door entrance. I liked these people alot. Foolishly, the (dumb!) Trustees in place at the time fired them, because apparently one of the Trustees had a "personality" conflict with them. OK, whatever...!! We hired a new Property Manager, and a year later, our $35k in Reserves "disappeared". No one can "explain" where the money went! Then we got another Manager, who increased our condo fees by $40/month 12 months ago to "help correct the financial situation". A year later, our condo fees are still $40 higher, we still have $0 in Reserves, and owe about $6,000 to creditors (oil, water, etc.). A month ago, all owners received a letter without warning saying that "due to financial problems, blah, blah, and in an effort to get this building on track, and make improvements (yeah, right!!), condo fees will be DOUBLED (to $430/month!!) for the next five months." No discussion about it. Nothing. I was so angry, I called other unit owners to discuss, and oddly enough, I appeared to be the only one who was fuming. (Again, presumably because I have to work hard for my money, whereas the majority of the rest of them just sit back and collect their big fat rent checks each month.)
For the past year, I was one of four Trustees in my building. The other three Trustees could care less, and two of them I do not trust at all. I sent them repeated copies of my notes on problems with the Property Manager, copies of any letters I sent to the Property Manager, comments on the monthly financial statements with regard to charges that didn't look legitimate, etc. None of them EVER called me to discuss the building situation. I was an army of ONE, fighting a losing battle. Once I got the letter about the condo fees doubling, I decided enough was enough, and that I would sell my condo. Nobody cares people! Low-owner occupancy.
I am now in the process of selling. In 5 weeks, I have had 6 offers on my property, for AT or just below asking price. It is clear people LIKE my unit, and are willing to pay top dollar. However, once they saw the building financials, every person backed out. So now, even though the market is GREAT for sellers, I am having a hard time selling, solely because of the poor management of my building!
In addition, I have always been vocal of my dislike for the current Property Manager. As a result, he (the owner of the Property Management company) does not like me. Their records of my condo fee balance have been incorrect for a year now. They show I owe $550, which I do NOT. I have made repeated efforts to correct this, and have sent them a few letters outlining my condo payments versus charges (condo fees/special "assessments"), along with copies of all my cancelled checks. My balance has never been corrected, despite my constant badgering. They say they'll look into it and get back to me, and they never do. So this too may cause a problem in my ultimately closing a deal on my condo. I cannot turn the condo over to another owner unless the Property Manager fills out an official document indicating that the condo fees on my unit are current, and paid in full. And since the Property Manager hates me, he has no incentive to take the time and sit down and review my condo fee records. He wants to "stick it to me" until the very end!
And that is my tale of woe! I hope you'll heed my advice folks, and do lots of research, so that you will never find yourself in my situation!
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yippee1999
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