Condo vs. House

[V]

Hello,

My husband and I are currently debating the idea of buying a condo and paying it off within a year and saving the majority of our income or buying a house.  We are currently working on living below our means and saving my income in it's entirety.  It has worked out well for us so far, but we are really trying to grow our nest egg.  We just started out, so we don't have much right now.  We currently rent an apartment, so we are wanting to cut that expense significantly.  Any advice would be much appreciated.

[BPA]

What are the condo fees like?  The biggest road block I have to buying a condo is how I would have no control over the heating, electric, or water bills (at least for most places where I live).  Having no real control over special assessments and condo fee increases would make me crazy (but that might be because I currently pay bills on a freehold house).

[seattlecyclone]

Why not just keep renting until you have enough saved to buy a house? There are some pretty significant transaction fees involved with trading real estate (realtor fees, inspections, title insurance, appraisals, etc.). For that reason I would be surprised if owning a condo for just a couple of years before selling it to buy a house would actually be a better financial decision than saving for a house while renting.

[totoro]

Where I am houses appreciate faster because of the larger land component (improvements are depreciating assets).  Something to consider.

[Mr. Frugalwoods]

I'm not a huge fan of condos.  They seem like the worst of both worlds of apartment renting and home ownership.  But if you are looking at condos here are some common pitfalls to watch out for:

• Condo fees: You mentioned these already, but it's worth noting that this is a big chunk of buying (or saving!) power you are giving up
• Condo Assessments: When something big needs fixing like the roof, the boiler, or all the windows, the Condo association can levy an assessment on all of the owners.  This is a lump sum of money you have to pay.  I've seen major assessments run into the $15-20k range.  The Condo association can tell you whether they have anything immediately planned and this can be a point of negotiation in a sale.
• Condo association financial Health: When evaluating the above fees and potential for fees it can be useful to know how the Condo association is doing financially.  Do they keep a big reserve to cushion or prevent big assessments?  Has the fee been steady for many years?  Are their any units that are behind on their dues or past assessments?  All of these things can play into how likely it is you'll be hit with unexpected costs.
• Condo association Rules: Man these can be the pits.  Everything from whether you can use an antenna for TV to the color you can paint your front door.  Common ones are pet restrictions and restrictions on renting out your unit.  Maybe these don't bother you... but it's worth giving them a hard look beforehand.
• Condo Governance: Some associations are really chill and nice.  Other are run by Atilla the Hun.
• FHA lending Rules:  If you need an FHA loan (and if you do, you probably shouldn't buy until you don't need FHA) then buying a condo comes with additional restrictions on the condo project.  There are many, but the big one is that at least 50% of the units need to be owner occupied.

Also don't forget to check out the neighbors all around you (including above and below you unit, if applicable).  Are they rented?  Do they contain a shut in hoarder?  Buying a condo is a much bigger commitment than renting an apartment and you could be stuck with these people for a long time.

[Wolf_Stache]

Having owned a condo before, I would recommend you keep renting while saving for a house. Like Mr. Frugalwoods mentioned, you could be stuck with these people for a long time.

Here is my horror story (I owned this place less than 2 years and the unit lost 60% of its value during this time) - my unit was a corner ground unit, and there were only 8 units in the complex:

• 4 out of the 8 units were forclosed on within a month of me purchasing
• Neighbors would take over the entire lawn around the complex holding giant parties until late, leaving the entire complex strewn with beer cans and bottles
• Neighbors next door would play tv/music so loud it would vibrate the pictures off my walls (no joke)
• Neighbors above me were too lazy to take out there trash, so they threw it out the back window - where it would land directly in front of *my* window, so I ended up having to go out weekly and clean up after them
• Turned out the condo association was dead broke because only 2 owners out of 8 regularly paid their association fees - to the point where the water kept getting shut off
• Neighbor's boyfriend got in a shootout with the cops inside his unit

[ShortInSeattle]

Condos and houses offer very different experiences. Do you want a separate space with a yard? Do you want a lower maintenance space with amenities?

We've done both and we love our condo. Our fees are high and cover almost all the maintenance, full time concierge, a nice gym, etc. The board is excellent and there is a healthy fund for planned replacements. I haven't mowed a lawn in years. We like our small easy to clean space.

Condos can be great if you find one with a strong board and good financial management. But I wouldn't buy a condo if what you really want is a house. And if you do look at condos, read the board meeting minutes and reserve fund documents for the past few years.

SIS

[m8547]

Have you tried the Rent vs Buy calculator? Make sure to go into advanced settings and put in condo fees; it makes a big difference.
http://www.nytimes.com/interactive/business/buy-rent-calculator.html

It might seem like if you're paying X amount now, and a mortgage would be Y amount, then you are "saving" some of Y because it's going to principal. But the transaction costs and hidden costs are so high that you won't save money unless you want to stay in the condo long-term (or keep it if you can rent it out for a profit). Plus the non-monetary costs like all the stress and work of owning a house.

[imustachemystash]

Hi.  I live in a 2 bedroom condo with my husband and 2 young boys. We live in a high cost of living area and pay less in mortgage, taxes, and HOA dues than we would renting.  Our condo has a huge open backyard and is in the suburbs.  Where we live there are a huge number of newer homes that have even tinier back yards than ours and are so close together you can stretch your arms out and touch both homes.  Those homes are going for over $400,000!  We plan on living here for about 8 more years until FI and then moving into a house somewhere with a lower cost of living. Here are some positives about living in a condo:
*Housing costs are lower so you can add more to your stash (we are able to save 60% of our take home pay)
*You don't have to spend your weekends doing yard work.
*Less space means less time spent cleaning and filling it with "stuff".
*All the maintenance on the exterior is taken care of.

I joined our HOA board in order to become involved with the important decisions.
Keep in mind the other's warnings as well.  Our home equity is not rising as fast as single family homes, but if we live here long enough, I don't think it will matter.  Good luck with your decision.

[BPA]

Condos and houses offer very different experiences. Do you want a separate space with a yard? Do you want a lower maintenance space with amenities?

We've done both and we love our condo. Our fees are high and cover almost all the maintenance, full time concierge, a nice gym, etc. The board is excellent and there is a healthy fund for planned replacements. I haven't mowed a lawn in years. We like our small easy to clean space.

Condos can be great if you find one with a strong board and good financial management. But I wouldn't buy a condo if what you really want is a house. And if you do look at condos, read the board meeting minutes and reserve fund documents for the past few years.

SIS

I believe that people have to make their own decisions about their own lives, but this description of living is completely anti-mustachian.  Do catheters and bedpans come with those amenities, because they should?

[iris lily]

In man parts of the country condos do not appreciate at the same rate as single family houses.

Personally, for me, I've heard so many horror stories (my mom's$20,000 assessment in her old building, my friend's bankrupt condo association) that I would not buy into one. Rather I should say that  I wouldn't buy an apartment style condo. I might consider a townhouse-type condo where the units have only shared walls, or a newish unit with stand-alone walls in a condo community. But I really am not attracted to any of that.

[Mr. Frugalwoods]

There is a possibility that we could potentially rent out the condo in the future for more income, especially if we pay it off quickly.  The idea of being a landlord is concerning for us though, so that is a whole other topic of discussion.

If there is a chance you want to rent out the condo in the future, the due diligence above becomes ALL the more important.  Some condo boards are OK with owners renting their unit.  But many have restrictions or outright bans.  These aren't always spelled out in a way that it obvious.  I've seen board docs that mention that the complex must maintain FHA lend-ability.  Important for resale values, but this is a de facto restriction on rentals.  That then puts you in the position of figuring out how many units are owner occupied and how many of the rented units are owned by the same person.  The condo board _should_ be able to tell you this but it's something that I'd want to confirm independently before buying.  It's also something that can change over time without you being able to influence it.

The other thing about renting a condo is that no matter what the rules are when you buy, the board can always change them later.  This means you may need to join the board and play politics (or pay bribes... it happens) in order to influence policy in a way that is financially advantageous to you.

Now there are plenty of condo buildings that are completely rental friendly.  But they also tend to be ones where people are less interested in buying to owner occupy.  Since you want to do that first, it's something to think about.

All that being said, I still think a condo can be the right decision if the numbers make sense.  If it's cheaper than renting, all costs included, then maybe you should go for it.