Should I Buy a Condo or a House?
It’s a question that comes up a lot, particularly with first-time homebuyers – and for good reason.
Buying a condo is different than buying a single family home, and it’s different than buying a townhouse.
Here’s what you need to know – and questions you need to ask – to ensure you’re making the right choice.
First, What’s the Difference Between a Condo, a Townhouse, and a Single Family Home?
Condos. Condominiums are properties that are individually owned, connected to one another, and typically, everyone shares ownership of the common areas as tenants in common.
When you own a condo, you own the inside of the home. But you don’t own the outside of the property or the land beneath it.
Some condos look like apartments and some look like townhomes, so it’s easy to get confused. And then there are variations on the theme, such as the condominium complexes that function and feel very much like hotels, but each unit is individually owned. Because of all the amenities these properties provide, the Association fees tend to be among the highest, but owners benefit from ultra-convenience and peace of mind when they need to leave.
Townhomes. When you purchase a townhouse, you are purchasing not just the part of the building that is your townhome, but also the land underneath. Generally speaking, like condominiums, townhomes are also part of an HOA that takes care of common areas, as well as various other amenities and services, such as trash pick up and snow removal.
Because you own the land outside your townhome, you may be liable for the exterior of the building. It all depends on the HOA and the rules and regulations, which we’ll talk more about it in a minute.
Single Family Home. Sometimes called a Single Family Detached and often shortened to SFR (Single Family Residence), a Single Family Home is a stand alone structure with its own lot. HOA fees tend to be much lower, of course, but owners of Single Family Homes do all of their own maintenance and repairs.
Here are ten important questions to ask yourself so you know for sure what type of property is right for you.
Condo or House: Lifestyle Considerations
1. Peace and Privacy – or Action and Community?
I ask this question at the beginning for a reason. No matter how much financial sense one property might make over another, the most important consideration is how much you will enjoy living in your new home or condo.
Do you yearn for a peaceful property with a private yard and lots of space – or do you want to be in on all the action: close to work, say, or shopping and restaurants – and spending Saturdays lounging at the condominium’s pool? Condos tend to be located in more central (but noisier) locations.
Another consideration, of course: How much do you value your privacy? Your neighbors in a condo complex can feel as though they are very close. (All the time.)
2. How long are you planning to own the property?
Every real estate market is different but, generally speaking, single family homes tend to appreciate at a faster rate than condos do. Why? When you own a single family home, you generally own it all: the home, the land, the trees, the flowers, the driveway, the garage. Everything. When you own a condominium, you own only the interior of your unit – and the right to live there. In addition, there are typically more condos available in an area than there are single family homes, so it’s a simple matter of supply and demand.
That means you may be able to squeeze more equity from a single family home when you go to sell than you will with a condo. Of course, every case (and real estate marketplace) is different, and you should talk to your REALTOR about the specifics in your area.
In Summit County, you can compare the historic data for different types of properties via the graphs and charts here.
3. How often do you travel?
Would you enjoy having the peace of mind that comes with on site management and maintenance?
4. Are you interested in renting out your property – on a short- or long-term basis?
The amenities that come with your condo association, such as a hot tub or pool, may be more attractive to renters.
5. Do you enjoy working on your home?
Are you hoping to earn some sweat equity on your home? Single family homes can give you more opportunity for improving your property as you can make improvements to both the inside and outside of your unit, as well as to the landscaping.
6. How good are you at following rules?
Nearly all residential properties these days have some sort of governing Owner’s Association but the proximity to other neighbors means that a condo or townhome’s Owner’s Association might have more rules and be more stringent in making you adhere to them.
Outside the home, the association is in charge. The HOA can tell you whether you can keep a garden, whether you can have pets (and how many), whether you can add on to your property, whether you’re allowed a satellite dish, what time you can make noise, and whether you’re allowed to rent out the unit on a short or long-term basis, as well as what kind of rules your renters will have to abide by. Depending on the HOA, that might be just the beginning.
7. How much storage space do you need? How important is a garage?
It’s possible to find townhomes with garages, but most condos have surface parking or underground parking only. If you like to work on your own car or you need additional storage space for your toys, a condo might not be the best option for you.
Condo or House? Financing Considerations
8. How are you planning to finance your purchase?
Condos and townhomes may be subject to higher interest rates than detached, single family homes. In general, lenders say, you can expect your mortgage rate to be .125% to .25% higher when you buy a condo versus buying a home. Why? The value of your condo is going to be somewhat dependent on the other tenants as well as the financial health of the HOA, so that introduces risk, which calls for a slight increase in rate. Plus, because not all lenders will finance a condo, there’s less competition in the marketplace to drive rates down.
What’s more, if you make a small down payment on your home (less than 20 percent) expect your lender to do an extensive review of your Owner’s Association’s finances, to make sure there won’t be any financial surprises for the condo owners down the line.
Before you close on a condo or a townhome, it’s critical (even if you’re paying cash) to take a very close look at the condominium’s Conditions, Covenants, and Restrictions (CC&Rs) so that you know all the rules you’ll be expected to follow. You’ll also want to examine the budgets and financials to help you determine the financial health of the Owner’s Association. And you’ll want to read the minutes from the latest meetings to see how well the Owner’s Association addresses any issues or grievances.
9. How much is in your budget for Homeowner’s Association Fees?
The HOA fees for single family homes tend to be fairly minimal. For condos and townhomes, expect monthly or quarterly fees to be much higher. Of course, each complex is different in terms of what these fees pay for.
In Summit County, my Colorado resort community where short-term condo rentals are common, it’s typical to see HOA fees upwards of $400 a month. These fees might pay for snow removal, trash pickup, and cable TV, as well as on-site amenities such as hot tubs, pools, and sauna – or all of the above.
Keep in mind that your HOA fees, whether a townhome, a condo or a single family home, will be included in your debt-to-income ratio, which your lender will use to determine whether you qualify for a loan.
The higher the HOA fees, the more amenities the condo probably provides. And that makes sense for some items, but maybe not others. If your complex has eight hot tubs and two pools, but you know you won’t ever use them, it makes no sense for you to pay for them (unless you plan to rent your unit on occasion.) If they are part of your HOA dues, however, you will have to pay for them regardless of how much you use the amenities.
Also keep in mind that, unlike property tax and mortgage interest, HOA fees are not tax deductible. So if you were to take the money you would be paying in HOA fees each month and invest it in a larger home, there might be some financial advantage to you. Ask your financial advisor about just how much of a difference this could make in your situation.
Future fees and special assessments. Before you purchase a condo, you want to get a reasonable assurance of what HOA fees will be in the future. Individual condo owners sometimes don’t have a lot of say when HOA fees are raised.
You’ll also want to consider the likelihood of special assessments. These are fees that are shared by all owners in the complex to pay for things such as putting on a new roof or repaving the parking lot. These can be major expenses that every condo owner is responsible for, and they are in addition to the monthly fees.
Reserve funds. Make sure the condo has sufficient reserve funds for future maintenance needs. A reserve is the amount of money that goes to repairs that will be needed by all properties over time.
Find out how much is in the complex’s reserve fund and how it is funded. These days, it’s not unusual for a townhome or condo HOA to collect some kind of “working capital” from each homeowner at closing (equal to, say, 6 months of HOA fees). These funds may not be refunded or available to you until you sell the unit. Avoid surprises as your closing date approaches by knowing about these fees upfront.
FYI, many experts say, for condos built fewer than 10 years ago, the reserve or repair fund should have at least 10 percent of the HOA’s annual budget. If the condos are older than 10 years old, the reserves should be closer to 25 percent of the HOA’s annual budget.
Again, it’s super important to look at your association documents and financials before you close on your condo or townhome.Make sure there are reserves budgeted and in place for those long-term maintenance and repair issues.
It’s also a good idea to find out who manages the HOA, whether professionally or through a board of the owners. Get the contact information and give them a call. See how well (and how quickly) they respond to any questions you may have.
Of course it’s not just condo associations that need reserve funds. Every property owner needs a reserve. Regardless of whether the condo association budgets this amount or you do, as a homeowner, it’s important for every property owner to have money budgeted for ongoing repair and maintenance.
10. Can you get the loan you want on the property?
Condos and townhomes may present some obstacles for lenders that single family homes do not. For that reason alone, if you’re leaning toward a condo, it’s a good idea to talk with a lender or mortgage broker who is familiar with the area and who is at least somewhat familiar with the complex you are buying in.
As we’ve discussed, condos and townhomes have certain inherent risks that may result in a slightly higher interest rate. Lenders will look at a variety of characteristics of individual complexes and HOAs, as well. For example, lenders often look at the number of units in the complex that are rented and will typically look for owner occupancy rates of at least 65 percent. Why? Because a high number of rentals can mean a variety of things: non-primary residents may be more subject to defaulting on loans, and, if a foreclosure does occur, the HOA fees aren’t paid. This can drain reserves and put financial pressure on all of the owners.
Is the condo approved for FHA loans? If it is, buyers will be able to secure a loan with only a 3.5% down payment. This can be important to you even if you aren’t shopping for an FHA loan because, if a condo is not approved for FHA loans, the potential buyer pool will be restricted when you go to sell. You can check for FHA-approved condominium projects by location or name here: https://entp.hud.gov/idapp/html/condlook.cfm
Whether home, townhome, or condo, make sure you are working with a REALTOR who understands the issues that each option represents
An online home search can give you a general idea of the different properties available, but there’s no substitute for a knowledgeable REALTOR when it comes to researching and fully understanding your options. A real estate agent will know and will help you navigate the fine print of all the various contracts and documents inherent to a sale of real property.
About the author: The real estate information above was written and provided by Susie Cortright, a REALTOR and Broker Associate serving Summit County, Colorado, including the areas of Breckenridge, Frisco, Copper Mountain, Keystone, Dillon, and Silverthorne. Contact Susie.
If you aren’t located in Summit County, Colorado, Susie can still help you by referring you to an internet savvy, real estate professional who is accessible, easy to work with, reliable, and knowledgeable on these issues. Just drop her a note to let her know where you’re looking to buy or sell,and she’ll take care of the rest.