Condo Buying Process

Condo Buying Process:  RENTAL INCOME

I'd like to take a moment to discuss some important points to consider when buying a condo for rental income. While it may seem obvious, some complexes have a better track record for producing rental income and maintaining high occupancy rates.

There are also some complexes that do not permit short-term rentals or have minimum stay requirements that are not conducive for generating high GRI. We maintain a list of such complexes, including those that perform poorly in vacation rental income production and those that are strong performers.

If your primary objective is generating rental income, we can discuss your preferences and set up property alerts for you accordingly. When you tell us that you have particular interest in a specific unit, we will gather multiple rental income projections from 8-10 local companies. We will evaluate these projections as to their basis in reality (too low or too high) and forward the ones we believe are most acheiveable.  

We will also create an ROI or Projected Return On Investment spreadsheet that shows  the breakdown in expenses such as HOA fees, property taxes, mortgage payment, insurance, expected average maintenance expenditures, and the commission charged by the management company that we are relying on for the ROI scenario.  

This ROI will show what the projected amount of rental income is left after paying all expenses; If this amount is positive, then the property is likely to cash flow - meaning it should not cost you any more money on a monthly basis to own this property than your initial down payment. In some cases, the property can actually produce a very significant amount of money on a monthly basis as passive income.

Some units will not cash flow but they will reduce the cost of ownership to a very small amount of money per month to own your beach condo. 

If you're not planning to rent out your unit and instead intend to use it as a vacation home, you may not be concerned with this list. However, some second home condo clients prefer to purchase in complexes that don't allow vacation rentals to minimize noise, foot traffic, and general wear and tear on the complex.

 

 

Condo Buying Process: ASSESSMENTS & INSURANCE

Essentially, assessments are voted on by HOA boards and owners to finance certain projects or budgetary necessities. While there are many reasons why an assessment may be necessary, the most common ones include exterior work such as roof replacement, refurbishing, painting, window or sliding door replacement, balcony railing refurbishing or replacement, and elevator maintenance, all of which are quite expensive.

Due diligence is necessary to uncover these known future projects so that they can be factored into the negotiation process. There are many ways to determine if an assessment is on the horizon, such as reviewing annual meeting minutes, discussing with clients who already own in the building, and understanding the likelihood of a particular future project passing in a given year.

Additionally, each complex renews its insurance every year, and the premium is always a moving target, especially after a major event like a hurricane or hailstorm. It's important to determine whether the new premium is known and, if so, whether the increase will be paid in a one-time assessment or multiple payments, or whether the HOA dues will be raised to pay for it.

Assessments need to be taken into account not only for ROI cashflow purposes but also as a capital expenditure that second home buyers must consider.

 

 

Condo Buying Process: BUILDING CONDITION

Building condition is directly related to assessments. Some condition problems are easy to spot, but there are some that are also easy to miss, or simply hidden from view. What you can pay attention to are things like the building’s exterior:

• are there chips in the paint
• rust showing through the stucco (this is generally rebar that is oxidizing and will require expensive repairs to correct)
• Doors and or door locks rusting 
• Windows and sliding doors rusting or fogging or hard to open
• Water stains on the ceiling of the unit
• Balcony railings loose or rusting in places
• Elevators that appear to be old and in disrepair or making noises
• General appearance & upkeep of the property as whole

We always try to find out when expensive repairs or replacements of critical operational components last occurred, or if they have not occurred and may be imminent, leading to costly assessments.

 

 

 

Condo Buying Process: VENDOR LIENS

Although it is not a common problem, some complexes, especially those affected by natural disasters like hurricanes, may have liens placed by contractors who have not been paid in full for their work. This can occur when the HOA is engaged in legal disputes with the insurance company over payment for the repairs or when there is a dispute about the quality of the work performed or the scope of work.

In any case, contractors will file a lien for the amount they are owed until the dispute is resolved, which can take a long time. When a complex has a lien against it, lenders will not provide loans to purchase units in the complex because of the unknown risk and financial liability.

A title company can identify these issues, but it's important to be aware of this potential problem before investing time and effort in searching for a unit in a specific complex. While a cash purchase is still possible, the buyer may need to sign a waiver that releases the title company from liability.

 

 

 

Condo Buying Process: HOA COMPOSITION AND FINANCIAL HEALTH

HOA boards are made up of complex owners, elected annually at the annual meeting. The turnover rate of the board members is a crucial factor in determining whether there may be instability or inconsistency in the board's decision-making during their term. It is important to determine if the board conducts adequate research, obtains multiple bids, and has clearly defined project scopes to avoid disputes. Reviewing the BOD meeting and Annual Meeting minutes can reveal how the board members work together as well as how the owners feel towards the board.

The financial health of the association involves examining the budget of the previous and current years, as well as the projected budget for the upcoming year. Additionally, the balance of reserve accounts, overdue HOA dues, and money owed to vendors and contractors must be considered. The amount of money allocated for salaried employees should also be examined.

The financial information should indicate ample liquidity to handle most smaller projects without requiring an assessment. It should also provide reassurance that the board is not spending money unwisely or too frequently. However, if the current board is too frugal and not spending money on upkeep and routine maintenance, this can lead to future problems. Neglected upkeep and poor maintenance practices will be evident in the condition of the building and grounds.

 

 

 

Condo Buying Process: OFFER NEGOTIATION, COMPS, & PRICE

 

Negotiation tactics depend on various market conditions such as:

• Interest rates (even if you are buying with cash)
• Overall condo market inventory levels
• Inventory in the target complex
• Inventory of the same/similar floorplan in the complex
• Inventory of the similar floorplan and view-type and location in nearby complexes
• Days on market of the current inventory
• Recent sold inventory in the complex (30-90 days)

In a fast-moving seller's market, the tactics might include going over the list price and making an attractive offer with sweeteners such as paying for the owner's closing costs and paying with cash for a short 10-day close. However, in a strong seller's market, it can be challenging to get a good deal, especially in a desirable complex. In a buyer's market, there is an excess of inventory and longer days on the market, which encourages competition among the sellers and makes them much more negotiable.

To determine the offer price in a buyer's market, we will find units with a lower price than the one you are interested in, either in the same complex or nearby complexes. The purpose of these units is to provide a basis for why we are offering a lower price than the list price. We will submit the offer to the listing agent along with the listings that are your "back-ups" in case we cannot come to a deal with their property.

We tell the agent that if they counter with an unreasonable price, we will revisit the other units to see if we want to purchase one of those instead. This way, the agent and seller know the amount of money we wish to spend, and it can influence the seller's decision-making process.

We continue to negotiate until we reach a number that is satisfactory to you and makes prudent financial sense. Once we come to a mutually agreed number, everyone signs, and it becomes a binding contract with clearly spelled out dates and timelines that must be met. If there are circumstances that require changes to the contract, an addendum must be drawn up that clearly articulates the changes, and everyone must sign it to make it a part of the ratified contract.

 

 

Condo Buying Process: PA & CONTRACT EXPLANATION

There are some differences between the purchase agreements in AL and FL, but generally they are very similar and cover most of the same issues.

The items that follow are the ones that are straight forward and do not need explanation:

1.)  Buyer and Seller legal names

2.) Legal description & address of the property 

3.) Offer price

 

The items that follow need explanation:

 

Purchase Terms

This is where we define if you will be paying with cash, or with a loan. If with a loan, then we specify what the type of loan is conventional, FHA, USDA, VA etc. For almost all condo transactions the only loan type that banks and mortgage brokers will offer is conventional or portfolio (which is also considered conventional). The max interest rate that the buyer is willing to accept on the loan once it is finalized which allows for termination of the contract should you not be able to arrange a loan at or under that interest rate.

Appraisal

The # of days by which an appraisal report MUST be given to the sellers or the contingency is deemed removed. This is important as the market will also dictate how long it may take for the appraisal to take place due to the volume of work the appraisers are doing at the time. Appraisers are to have no contact with the lender that orders the appraisal and they are assigned to the lender in a round robin fashion, so the lender cannot pick and choose who will do the appraisal. For this reason, it is important to know how long is reasonable in the current market and to use a number of days that has some padding in it for unexpected delays. As with any provision of a contract, the # of days can be extended with an addedum signed by all parties. However, it is best if the #of days is sufficient in the original contract. Changing the contract and adding addendums gives the other side a possible way out of the deal if they have a backup offer that they would prefer to take. This goes with any addendum, some things are routinely handled by addendums, but some things are very important and will give the other side a way out.

All loans will require an appraisal of the property and for the property to appraise for at least the amount of the loan. If it does not appraise for the amount of the loan, then we have 3 options

• Pay the difference in down payment so the loan amount matches the appraised value
• Re-negotiate the purchase price to be the appraised value (best option but unlikely in a strong seller’s market as someone will come in and pay cash)
• Terminate the transaction and get your earnest money back and we start looking again.

Included with the property

This is the part of the agreement that states what you expect to convey with the property. In almost all condo transactions the vast majority of furnishings and décor and kitchen items and appliances convey with the sale. Usually there are some personal décor items or pieces of furniture that the seller will want to take with them. All of that needs to be spelled out in the contract or in an addendum that clearly defines what will stay or what will be taken by the seller, whichever is a smaller list.

Inspections and Due Diligence

This is where we define whether or not you want an inspection contingency (almost always – unless it’s a strong seller’s market and you want to sweeten the offer to beat out other offers). It also articulates the # of business days (excludes weekends and holidays) that the inspection contingency will last before a report and repairs request must be presented to the seller. This is important because if there is a strong market and the home inspectors are busy, you must provide enough time to have the inspection completed, get the report back, decide what to have addressed (If anything) and then write up a repair request and submit it to the seller BEFORE the inspection period ends. This way if the seller refuses to either make the repairs or come to agreement on a concession at closing to pay for repairs, then you have a opportunity to terminate at this point. If however the inspection period elapses and the repairs request has not been submitted, the inspection contingency is automatically deemed as removed and there is no way to compel the seller to make the repairs, and you cannot terminate for an inspection reason. However, this does not mean that the owner will not still want to make the deal work and honor the request.

Insurance and Flood

This is where we define whether or not you wish to have a contingency on being able to find adequate insurance for a premium that you are comfortable with paying. If it sounds vague, that’s because it is… This is one of the contingencies that can be used to provide an out if needed because you can say that any insurance amount is not acceptable. For that reason however, in a strong seller’s market it is not advisable to have a long period of time on this contingency as it will be seen as a weak offer when compared with others. Condo policy’s are known as HO6 policies and they cover from the sheetrock in to the interior of the unit including contents and furnishings etc. They can also have business interruption coverage (rent loss) and assessment coverage that can help with mitigating some assessment cost. Speak with your insurance agent specifically about those 2 addons as they are definitely something that you want.

Internet

This defines whether or not you want to have a contingency on whether or not you are able to obtain satisfactory internet service. Almost all condos have the internet service as part of the HOA dues. So this is generally left blank and if not the seller’s agent will see it as weak offer.

Termites

This defines the # of business days that we must provide the report of a termite inspection before the contingency is dropped, meaning that you could terminate because you did not like the results of the report. Generally, unless the condo is a wooden structure, termite inspections are not important and not done unless the lender requires it.

Systems and Components

This defines whether or not the seller shall warrant the appliances and HVAC and Water Heater, electrical, plumbing etc are in working order at closing. We ALWAYS check this box unless it is an AS-IS transaction which is very rare in condos, except perhaps after a hurricane or a distress sale. This is important because if one of these systems is not working at the final walk through, you have recourse to terminate if it’s not corrected.

Home Warranty

This provision is used to make the agreement contingent on a home warranty being purchased by yourself or the seller. If it is the seller who is responsible for buying the warranty, it can be seen as a weaker offer.

Lead Based Paint

Is just something the FEDs and State assume that buildings built before 1978 MIGHT have lead based paint and that the buyer needs to be made aware of it.

Title Insurance

This states that the seller must provide assurance that the title is clear through the use of a title company to research the liens and ownership etc and provide insurance against any future claims of ownership by any party.

Property Taxes

States who will be responsible should the taxing authority levee an assessment or transfer fee etc.

Lease Agreements

This provision states that any lease agreement or rental management agreement that the current owner has with an individual or company must be turned over to you within a certain period of time and you must be ok with those agreements or you can terminate the transaction. Most condo transactions do not use this provision to hold the new buyer to honor a prior agreement.

Owners Association Assessments

This provision defines who will pay for assessments that become due either before or after closing. It states that the seller shall pay any assessment that has been approved by the board BEFORE the acceptance date of the agreement (unless there is language that states the buyer will pay an assessment in the additional provisions of this agreement, sometimes used to make an offer sweeter or in exchange for a price decrease). The other 2 provisions deal with 2 different situations for assessments:

1.)  Defines who will pay for any assessment that becomes due after the acceptance date but before the closing date. We always ask for the seller to pay this.

2.) Defines who will pay for any assessment that is approved PRIOR to closing but does not become due until after closing. We always ask for the seller to pay this unless it’s a hot market or a multiple offer situation (sometimes we submit an offer before another comes in however) or we think that an offer might come in.

Survey/Elevation Certificate

This is generally left as not to be provided for condos except in special circumstances where the insurance provider requires it.

Final Walkthrough

Defines that you have the right to walk throught the unit before closing to make sure that everything is the way that it is written in the contract and condition is the way that it was during the showing process. That everything that was supposed to convey is still in the unit. This walkthrough cannot be used to terminate the sale unless some material defect is discovered or systems are not operational etc, things that are covered in the rest of the agreement. Basically, it can’t be used as a last minute out.

Closing and Possession Dates

This provision defines when closing shall take place and when possession shall occur. If there will be a few days after closing to allow the seller to get out, it must be stated in this section. It is generally not advisable to allow for post-closing occupancy as it can introduce unnecessary risk to the you the buyer. It is also not advisable for the seller to allow Pre-Closing occupancy, but it does happen especially for out of town buyers that wish to stay the night before closing. We generally try and work out a “rental” of the unit for that time period to avoid the Pre-Closing occupancy in the contract.

Extension of Closing Date

This defines certain situations that trigger an automatic extension of 5 business days for closing to take place WITHOUT the need for an addendum to be written and signed by both parties. This can be for title defects that the title company can correct in that timeframe. It can be if your lender needs up to an additional 5 days, and they issue a letter that is given to the seller stating that you are unconditionally approved for the loan and that they just need more time to give a clear to close. And the last reason is for an act of God that delays the closing for a period of no more than 5 days.

Any other extension will need to have an addendum signed by all parties to extend the closing date. IE if the seller OR the buyer will not sign the extension addedum, and the reason is not covered by the automatic triggers OR it takes longer than 5 days, either side can terminate when those 5 days pass or the original closing date passes if it’s a non-triggerable reason.

Risk of Loss

States that you do not have to close if its destroyed in a fire or flood or hurricane etc.

Time to Respond

This defines the date and time by which the seller has to respond to the offer. If they respond after this deadline, you can still move forward, but you also can terminate if they had accepted your offer after the deadline. This can be important in situations where we have a strong offer and we want to force a decision before any other offer can come in.

Withdrawal of Offer

This states that both parties have the option to rescind their offer or counter offer as long as it is prior to the other side sending acceptance of that offer.

Earnest Money Deposit

This provision states how much money will be placed in escrow to show good faith in terms of following through on the purchase and it states how many days before the money must be placed into escrow and the verification given to the seller.

Condominium Disclosures

This provision is very important for a condo transaction because it states exactly which documents must be provided to the buyer by the HOA and how long the seller has to provide those documents. It also states how long you as the buyer have to review those documents and can terminate the agreement based upon something you found objectionable in the documents.

Additional Provisions

This is a section that we can use to amend the agreement and change it to either exclude something or include something or change the terms or closing date with on or before language etc. It is also where we can ask the seller to contribute to the buyers closing cost or points etc.

Ratification

If there are counter offers back and forth, each side will amend the document to their desired price and/or terms and send to the other side for their acceptance. Once this purchase agreement has been signed by all parties it becomes a ratified contract.

 

 

Condo Buying Process: CONDO DOCS & REVIEW PERIOD

 

The seller and seller's agent have the # of business days as specified in the purchase agreement. They must provide the following documents:

 

1. Recorded Declaration of Condominium and any amendments thereto, Bylaws, Covenants/Restrictions, Rules/Regulations. 
2. Minutes from last 2 Annual Owners Meetings and last 2 Board of Director’s Meetings. 
3. A statement setting forth the amount of the monthly common expense assessment and any unpaid common expense or special assessment currently due and payable from the selling unit owner. 
4. A statement of any other fees payable by unit owners. 
5. The most recent regularly prepared balance sheet and income and expense statement, if any, of the association. 
6. The current operating budget of the association. 
7. A statement of any unsatisfied judgments against the association and any pending suit in which the association is a party. 
8. A statement describing any insurance coverage provided for the benefit of unit owners. 
9. A statement of the remaining term of any leasehold estate affecting the condominium and the provisions governing any extension or renewal thereof. 
10. A statement of any restrictions in the declaration affecting the amount that may be received by a unit owner upon sale, condemnation, casualty loss to the unit or condominium or on termination of the condominium. 
11. Contact information for the association.

You should review the by-laws, covenants, and rules and regulations to be sure that you are ok with their contents. Be sure that there are no rules or restrictions that will prevent you and your family from using the condo in the manner that you intend to use it. For example, If you have pets and are wanting to bring them to the condo with you when you stay, make sure that those pets are not disallowed by either type/size or number. 

You should review the Annual Meeting minutes with an eye towards looking for any outstanding issues that are being talked about particularly, if they involve work to the property that may be expensive to complete. Also you should be looking for any talk of future assessments or insurance increases. Of course, insurance increases are extremely common in all of the complexes along the coast. What differs is the amount of increase and how the HOA is thinking about allowing owners to pay; They may opt for a 1 time special assessment for the current year's insurance premium increase or they may allow owners to make several payments over a few months; they may also elect to increase the HOA dues vs an assessment.

The financial health of the association involves examining the budget of the previous and current years, as well as the projected budget for the upcoming year. Additionally, the balance of reserve accounts, overdue HOA dues, and money owed to vendors and contractors must be considered. The amount of money allocated for salaried employees should also be examined.

The financial information should indicate ample liquidity to handle most smaller projects without requiring an assessment. It should also provide reassurance that the board is not spending money unwisely or too frequently. However, if the current board is too frugal and not spending money on upkeep and routine maintenance, this can lead to future problems. Neglected upkeep and poor maintenance practices will be evident in the condition of the building and grounds.

You are also looking for any liens or judgements against the association. Also any lawsuits that the association is a party to OR may become a party to inthe near future.

 

 

Condo Buying Process: INSPECTION PERIOD & REPAIRS REQUEST

Assuming that the purchase agreement specifies an inspection contingency (AS-IS situations may dictate that an inspection contingency is not necessary, however, it is generally advisable even in an AS-IS situation to have an inspection contingency so that you can evaluate the risk involved with buying an AS-IS property and terminate if necessary.), a home inspection should be scheduled ASAP so that plenty of time is available during the contingency period to have the inspection take place, receive the report back, review and evaluate the findings, prepare the list of repairs that we will request the owner to make prior to closing, and finally have the request signed and sent to the listing agent.

We will send you a list of home inspectors that we use regularly, and after you pick one, we will arrange the inspection with that vendor to take place at the first opportunity of the inspector AND the availability of the unit. Often, espcially with units that are currently in a rental program, there may be a guest in the unit and it may be necessary to schedule the inspection during the turn-around period between reservations. For this reason it is particularly important to immediately determine the inspection availability, find a company that can accommodate that time frame and schedule the inspection. If the inspection contingency period will be dangerously close to expiring before the inspection can take place and the rest of the process could not reasonably take place, it will be necessary to prepare an addendum to extend the inspection time-period to accommodate the circumstances.

Once the inspection takes place and the report is generated and received from the inspector, we will review the report and forward to you concurrently. Once you have had a chance to review the report and digest its findings, we will call you and discuss what items, if any should be placed on a repairs request addeddum to be presented to the seller.

All markets are not the same, if the current market is a strong seller's market, meaning that there may be many other offers and even backup offers in place, it may be in-advisable to ask to have every item corrected... This is a decision that you must make in a hot market, what is the likelihood that the seller will refuse the repairs, in which case you would have the opportunity to terminate or elect to modify the repairs request to remove the objectionable items.

Once we have a list of the items that you wish to have repaired, we will create an addendum that will remove the inspection contingency in exchange for those repairs to be made by the owner OR in lieu of repairs we may ask the seller to contribute a specific dollar amount at closing to credit the you buyer, so that you can take care of these repairs after closing. This is often done in cash transactions when repairs are desirable but the closing date time frame makes it impossible to have the repairs completed prior to closing. It is also done when you the buyer, would prefer contractors of your choice to to preform the repairs vs the seller themselves or a handy man that they find. Of course, we can stipulate in the addendum that each repair be performed by an appropriately licensed and insured vendor, and also that each repair invoice document the company and the work performed.

If the seller refuses to make all of the repairs requested, we have 3 options:

1.) We can terminate the transaction and begin looking for another property.

2.) We can try and come to a mutually acceptable agreement on repairs and continue on with the transaction.

3.) We can accept what they are willing to repair and continue on with the transaction.

If the closing date is very short, we will negotiate to either, escrow funds to be paid to vendors that we or the seller's agent contract to do the work ( so that there is a known agreed upon cost ) OR we can collect quotes and estimates for the work necessary and ask the seller to contribute that amount of money to you the buyer at the closing table OR lower the purchase price by that amount.