The housing crisis, while putting a tremendous strain on Shared Ownership Communities like Condominiums, Co-Ops and Homeowner Associations has also opened attractive investment opportunities. However, investing in an SOC is not identical to buying other property, and you may want to consider the potential problems they pose before you make that seemingly unbeatable deal.
SOCs must collect assess-ments or maintenance fees from every owner so that they can maintain common property—even from investor-owners who aren’t using their units. If you don’t cover your maintenance, the association will put a lien on your property and foreclose. It won’t matter if you’ve fallen on hard times, lost your renter or your other properties have been foreclosed. If you don’t pay, the association will eventually own your place.
So before you buy into a shared ownership development you may want to make sure that you check not only the current maintenance costs, but also how much money the association keeps in reserve for emergencies. And whether there are any outstanding large repair projects that might require a special assessment, which could pose problems. Budget for fluctuations in maintenance, especially in new properties. Special assessments are a cost that any investor needs to plan for before buying.
Whether or not you’ve read the documents, every person who buys a unit in a Shared Ownership Community has constructively agreed to be bound by the rules they contain.
Frequently rules govern rentals. While you may plan to cover maintenance and taxes through rental income, rules and regulations may limit your ability to rent the unit or control the number of days that you can rent the unit each year, limiting income from the home or condo making it problematic for many potential buyers.
In some communities, the association will have the right to screen renters, and this may pose problems renting your property. Remember, SOC rules are designed to benefit the owners who live in the development, not investors trying to make a profit. So you need to plan accordingly, and accept that there are some investment situations where you’ll have to carry the property without steady rental income.
Unlike a single family home in a development without an association, when disaster strikes an SOC all owners collectively foot the bill to rebuild the common areas. Check whether the community association carries sufficient casualty insurance to cover emergencies, flood insurance, earthquake coverage and in some weather active regions along coastal areas even Hurricane coverage.
Realize that even with sufficient insurance, owners will be responsible for a hefty insurance deductible before the work starts to make repairs.
Even if a developer promises you the world, don’t assume that’s what you’ll ultimately get. In the majority of states, you can only legally rely on promises made in writing, and then only in the official prospectus and sales contract. Buying a home or condo in a development that hasn’t yet been built is a gamble, so do your research, read your contract and consider whether you might be better suited investing in a more established community.
Ryan Poliakoff is the co-author of New Neighborhoods: The Consumer’s Guide to Condo, Co-op and HOA Living. For more information visit www.NewNeighborhoodsPublishing.com