Marco: Question for you–if you had a choice between investing in a small house, or investing in a condo, which one would you choose?
Will Nesbitt: As a rental, I might do a condo, if it’s a well-managed association, because there are few hassles. But it’s more complicated than that. Feel free to call me if you want to download the full lecture.
Marco: Here’s the situation: My parents are retiring and need a place to live. They’d like to live in Northern Virginia. They have a sizable down payment but bad credit, so we have offered to buy them a little house. We’re somewhat limited in what we can get because of Mom’s health issues—they need a place that has at least 2 bedrooms, 2 baths, all on one level and wide hallways because she will eventually be in a wheelchair. I think they’d be happier in a house because they haven’t lived in an apartment ever. But we’re having a hard time finding the “right” house and they’re on a deadline to move out of the parsonage they’re in. They were looking at a condo in an outlying suburb, but Paul doesn’t want to buy a condo. He doesn’t feel like it will keep its value.
Will: That’s something that comes up from time to time when you talk about purchasing a condo. There are no hard and fast rules that apply to all condos everywhere, but I’ll share a few of the lessons of my experience.
Location. Yes, we’ve all heard “location, location, location” when it comes to real estate, and of course most of what you’ve heard is probably true. But here’s my take on it when it comes to valuing a condominium property: if the property is in a highly desirable location the property will hold its value. There are only so many places to live within walking distance of a Metro in Northern Virginia. Until the day people stop using the Metro those properties will retain a measure of demand. Condos on the perimeter, condos at the periphery, condos that entice the buyer with a low price, won’t keep pace with increases in other communities and worse yet, can lose value. So ask yourself is, is the appeal of this condo that has a fantastic location or is the appeal that the condo is cheap?
Lesson: If the price and not the location is the primary driver in the purchase, then this condo might not be a good investment.
Management. Condos are managed by an all-volunteer board of directors elected by the community. Some boards are thoughtful, logical, practical and deliberate. Some boards are incompetent, petty, well-intentioned or corrupt. Take a hard look at the condominium documents before you buy your condominium. If you see that the board has repeatedly directed large amounts of funds to the same contractor you might want to dig a little deeper. If you see that the board has repeatedly spent money on frivolous expenses, that might give you reason to pause. If the board has just authorized a large contract for debt to pay for bills the association cannot afford, that might give you reason to move on to the next opportunity.
Lesson: The condominium management can make or break the community.
Condo Fee. Let’s start with this premise: every property owner everywhere pays a condo fee. This is true once you realize that utilities and building maintenance are condo fees. An owner of a single-family home might pay zero condo fees for 10 months and then pay a $15,000 condo fee for a roof repair. But a well-managed condo association puts money in reserves to prepare for future problems when they arise. A condo owner doesn’t get bogged down in details of property management, but a home owner usually spends money more efficiently than a democratically elected board.
Lesson: Condo fees are not a problem. Poor management of maintenance and utilities is a problem no matter if you have 1 member or 1500 members in your association.
Bottom Line. “Location. Location. Management.” If your property is located in a less than desirable neighborhood, don’t expect the property to appreciate. (That doesn’t means the property is a bad-buy for you or for some people, it just means don’t count on appreciation from this investment.) You can minimize your exposure by picking properties that are in highly desirable locations, even if they are smaller or more costly per square-foot.
But when it comes to condos, property management is almost as important as location. A poorly management property can deteriorates or can have high condo fees, or worst of all, a poorly managed property can have both a poor condition and high fees. Nothing will kill your value faster than condo fees which are not justifiable. You can minimize your exposure to the risk of management incompetence by purchasing in condominiums with minimal amenites, no elevators, common areas that are open to the elements, etc.