Thursday, April 06, 2006

Who's Your Condo Neighbor?

With condo sales reaching record levels for new construction and second market sales in Chicago, condo buyers should be aware of some potential investment pitfalls that may arise from the condo investors who are purchasing condo units as investments. There is a development in Edgewater where condo sales are being purchased for over 30% of market value for the square footage and people are continuing to buy pre-construction.

Aside from the speculator-induced risk, there are many reasons for buying a condominium instead of a detached single-family house. Primary benefits and reasons for buying a condominium include (1) usually less expensive than purchasing an equivalent square footage house; (2) exterior maintenance is the responsibility of the condo homeowner's association (the condo owner monthly fees pay this expense); (3) security of being able to leave your condo for an extended period without worry (called "lock and leave"); (4) tax benefits similar to single-family houses; (5) security (and pride) of ownership rather than being a renter; and (6) potential resale profit as the condo appreciates in market value.

In the past, as soon as a local condo market started appreciating in market value, developers would often quickly flood the condo market with lots of brand-new condominiums and apartment building condo conversions, thus depressing condo sales prices and market value appreciation due to an oversupply.

Supply and demand is what causes houses and condos to appreciate in market value and there is usually a much lower number of prospective condo buyers than potential purchasers of single-family houses. Most prospective home buyers prefer houses and will look at condos only if they realize that is all they can afford, or they are unable to maintain a house, thus limiting potential market value appreciation.

There are, however, many potential drawbacks to buying a condominium. They are (1) a homeowner association (HOA) board of directors, which makes decisions you might not like, including expenditures for "improvements" you think are not necessary; (2) unexpected increases in monthly fees and/or special assessments for surprise costs such as a leaky roof or an elevator needing major repairs; (3) policies and rules you don't like (such as no pets or no rentals); (4) poor quality maintenance and/or management that hurts condo enjoyment and resale values; (5) noise from adjoining units (the number one complaint of condo owners); (6) lack of freedom to do as you wish, such as having noisy parties or turning up your TV as loud as you want; and (7) neighbors you don't like or who don't like you.

When you are looking to purchase a condo don't forget to ask the listing agent or homeowner what percentage of ownership (or sales in a new construction development) are investors seeking a quick gain. It could save you in the long run.

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