Friday, April 18, 2008

Condo fees

Occasionally, I receive an email from someone with a comment about a recent blog post or a question on a topic I've not discussed. For example, I received this email today from a fellow about condo fees. I thought I'd post his question, my response, and then ask whether this blog's readers had corrections for my response, further elucidation, or other information that would help.

The email I received [edited]:

How should I, as a buyer, be thinking about condo fees in the context of condo buying v. house buying? That is, what do these condo fees generally incorporate that I would otherwise be paying for if I owned a house? Power? Water? Insurance? Trash?

A house would have maintenance expenses that I wouldn't have in a condo - I might have to pay someone to mow the lawn, but then again I'd have the lawn to use, unlike in a condo.

Bottom line is I am just trying to figure out the best way to do an apples to apples, condo to house, price comparison.

My response [edited]:

It's definitely a factor to consider. First, they're not tax deductible and, worse, they can increase. I've heard of one building - new construction - where the condo fees doubled in a year from $400 to $800/month.

Generally, the fee covers common expenses like building maintenance, insurance, staff salaries, trash collection, management company fees, etc. It could include cable TV, too. My experience has been they're set based on the size of your unit.

I would expect you'll have to pay your own power bill, unsure about water. You'd also have to buy insurance to cover your personal belongings, much like renter's insurance. The condo board should also be placing a portion of the fees towards a reserve to cover unexpected or planned, future expenses; having inadequate reserves could result in your receiving an assessment to cover the gap.

I look at condo fees as cash I'd rather put towards something else, especially when I see units that have $1000/month condo fees. If you're doing a financial analysis, include the condo fee in your analysis and model a range of percentage increases to see where they become unsustainable. You might find that applying that extra cash to a mortgage, where a portion of it would be tax deductible, makes it easier for you to buy a home instead of a condo.

Your thoughts?


Kira said...

Your advice makes good sense IF the buyer also accounts for the maintenance expenses of the house.

How much does it cost to have the heating and AC serviced every year?
And just as the condo association putting away reserves for a new roof, the homeowner has to save for a new roof. Or exterior paint, or re-topping the driveway, etc. It would probably help to talk to someone who owns a home of similar age.

There's also a hassle factor that's hard to quantify -- would you rather interview roofing contractors, or write a check to the association and have the property manager talk to the roofing contractor?

The condo docs that the seller provides should detail everything covered by the condo fees. It varies a lot from building to building.

Paul said...

I did a lot of thinking about this a couple of years ago, and it's a really important point that a lot of people tend to breeze over. The biggest concern I have in association fees is that it adds another level of administrative costs into the equation, and is inherently inefficient.

In a single family house, if I were to put $500 per month into a money market account, or if I had enough of a buffer that I could withstand the ups and downs, into the market, I would have more than enough to cover most of the ongoing expenses. Frankly, at $6000 per year, I should have far more than enough for upkeep and improvements over the long term, and I may be able to repocket some of it.

I would also have the ability to completely determine how and when that money is spent, without having a paid administrative group determining it.

On the other hand, if I lived in a building where there were 5 people each costing $50,000 per person, between salary, benefits, infrastructure, etc... that would add up a lot. Say there are 100 units, those costs come out to $2500 per unit per year, or over $200 per month. It just seems like an inefficient use of money. That leaves less than $300 of the $500 for actual improvements, water bills, etc...

In my eyes, one absolutely has to think of the administrative costs as an additional tax (which can go up dramatically without notice) on the cost of condo ownership.

It's not inherently bad, and takes care of a lot of the day to day nuisance and risk of home ownership, but I've seen a lot of people not really consider the full cost of ownership when they buy into condos, and pay for it in the end. Instead they prefer to think of it as an alternative to bills they would otherwise pay anyway. That's not exactly the case at the end of the day...

Anonymous said...

You do have to consider that many neighborhoods have HOA dues. While generally not as much as what you would pay in condo fees, still something to factor in.
Depending on the condo you buy into, you may be getting a lot of benefits from your condo fees, i.e. use of the pool & gym, security guards

Anonymous said...

SOmething I am not hearing much talk about, but I am seeing the effects of, is what happens to condo fee's when you have a lot of foreclosures in a building? When a sizable group of condo owners fall behind, the condo association then has to raise fee's for everyone else. That is what is happening in these newer buildings.

Anonymous said...

My impression is that high vacancies in a new condo project are a big risk factor for future fee increases. The initial rates are based on the expectation that most/all of the units will be sold. I expect that a lot of foreclosures would be similarly bad.

Also, to respond to Kira's comment, condo owners will have to take care of their heating/ac maintenance too if it's in the unit and not building-wide. So if it's a heat pump in each unit, it's yours. So just be clear what the condo fee covers in each case.

FourthandEye said...

Still seems to me that the lender should be on the hook for the condo fees if there is a foreclosure. If they agree to back a buyer they should be accountable for expenses if that person defaults. But I'm not surprised that they found a legal way around it. So I believe you.

Anonymous said...

These are all good points. The condo fees at The Whitman increased by nearly 12% this past year. It seems the builder/seller tried to move units buy keeping fees artificially low.

Now that the condo board is in place, the fees in place were not sustaining the building and the fee had to be increased by 12% in just one year.

Some say this is "normal" for a new building. But many believe it's dishonest marketing on behalf of the builder/seller.

Anonymous said...

Actually, my cousin's condo fee in pentagon city includes utilities (which is good for her because she likes to keep the place unbearably hot in the winter). It seems that this is unusal, am I right?

cloud9ine said...

I own a 2-bedroom condo in St. Louis and pay $134 a month in Condo fees.

It takes care of Water, the lobby is kept clean, and just got fresh plush carpeting, Lawn is mowed regularly, Building maintenance is good, The lobby is well-lit, and because there is an extra door, it's more secure, and heating and cooling bills are that much lower (my monthly electric bill averages $40).

It is an extra cost, but I added the condo fee, and my property tax, plus my mortgage payment, subtracted the tax benefit, and made sure that came up less than the rent I would be paying otherwise.