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5 Challenges of Buying a Condo

How to navigate

Banks

The good news about buying a condominium is that it is easy to rent out. Unlike a co-op you do not have to live there before you rent it out. You can rent it the very day you close and own it. The downside is that if you are getting a mortgage and you’re buying into a building with more than 50% of the apartments rented out, it could be tough to get a mortgage.

Investors look for condominium buildings with low monthly carrying costs to maximize their profits. In Harlem where many condominiums have tax abatements there are quite a few owners who are investors. There is nothing wrong with that in theory as many renters take very good care of their homes and are excellent neighbors.

The problem comes from the banks. A bank will approve a lender for a loan but they also need to approve a building. There are certain guidelines typical for most banks and that includes having the investors own less than fifty percent of the apartments in any given building.

If you purchase into a building and later the investor ratio exceeds fifty percent there will be fewer banks who will give mortgages on the building. The reduced lending options also reduces buyer demand which has a direct impact on the sale price.

In NYC it is not uncommon for half of all condominium deals to be all cash but if you can only sell to a cash buyer you have effectively wiped out half of your potential buyers. When looking to purchase either a primary home or an investment, find out what percentage of the building is owned by investors. If the ratio is high, you can ask how the building is handling the issue.

There are some Harlem condominiums which limit the term of your rentals. Others charge a yearly fee, cutting into investor profits. For rentals in other parts of Manhattan such as on the Upper West Side, the taxes and common charges are higher, which naturally discourages too many investors keeping the primary owner/investor ratio in line with underwriting guidelines.

Maintenance requirements

When you purchase a condominium, you’re purchasing real property. Real property comes with real responsibility, which can be challenging when a long-term renter becomes a homeowner. This means you are responsible for maintaining everything inside the home including appliances, floors, walls and even the heating and cooling system.

Typically, the windows are considered a building responsibility but there is one Upper West side condominium which requires owners to bear the cost of replacing the windows when they renovate. This beautiful landmarked condominium on Central Park West has many casement style windows which can cost up to fifty thousand dollars each.

When you purchase a condominium anywhere in the city, the owner is required to have all of the appliances working. You will test each of them just before you close on the apartment. While they must be in working order, if they are old you will have to replace them sooner rather than later. As for heating and cooling, many buildings have PTAC units or heat pumps.

In either case if these units — which pull in the hot or cold air into your apartment — break down, you will have to pay to have them fixed.

The board package

While condominiums offer much more flexibility than a co-op you are still purchasing into a vertical living situation which requires rules. It is not uncommon for buyers to assume they do not have to fill out the dreaded board package when purchasing a condominium.

A condominium will require a purchase application with much of the same information required by a co-op, although they may not ask letters of recommendation. A condo board is typically taking this opportunity to gather all the paperwork and signatures required by their insurance and for building compliance.

Condos only have the right of first refusal, which means if they decide to decline your purchase application, they are required to purchase the apartment from the owner for the exact same price you agreed to pay.

Most condominiums not only don’t have that money on hand, but they are not interested in owning additional apartments. However, you will not get out of putting together the purchase application as you do need the board of directors’ approval to proceed to closing.

Rent restrictions

Many homeowners around the country enjoy the benefit of short-term rentals, but in New York City most buildings require you rent for a minimum of 12 months. In addition, there will be a number of fees associated with the rental application along with building move-in fees a prospective tenant will bear.

This is why most renters look for a lease with a minimum of two years. While you can certainly earn more money from short term rentals, there is less wear and tear on your property with fewer people moving in and out. If you wish to use your condominium only part of the year, there are some condominiums which do allow six-month rentals but they are more the exception than the rule.

Capital improvement requirements

You will be paying a monthly common charge and taxes. However, if the building doesn’t have sufficient funds and a major capital improvement project is required, you could wind up with an assessment on top of your usual monthly payment.

Examples of capital improvement projects include: local law 11, replacing a boiler or a roof. If you are an investor these added monthly costs will impact how profitable your investment is in the long term. While you cannot predict the future you should not expect your common charges to remain constant. They will go up over time because of inflation and they almost never go down.

If you are buying a primary home and you want to keep your monthly costs down, look for a building with lower monthly costs which also offers a full suite of amenities. This way you will not also be paying for a gym outside of your building.

For example, there are a few larger condominiums in Murray Hill that boast swimming pools, full gyms, roof decks and even an outdoor running track. Yoga studios and libraries for quiet study areas outside of the home can now be found in many newer condominiums especially on the Upper West Side.

Questions? Reach out to me and I’ll be happy to help.