What is a Condominium?CASAPLORERTrusted & Transparent
What You Should Know
- A condominium is a large property complex of multiple units where each unit is owned by an individual.
- Condo owners are only entitled to air space within their unit, but they are not entitled to the exclusive ownership of the four walls and common areas of the building.
- Homeowners Association or or HOA is a group of condominium owners within a complex who makes and enforces rules for the residents of the complex.
- An apartment is a rental unit in a property complex that is fully owned by one entity. Apartments can be rented, but they cannot be owned like units in a condo complex.
- Townhouses are usually larger and less dense than condominiums. They are a hybrid between condominium units and fee simple properties like single-family houses .
Definition of Condominium
A condominium is a large property complex of multiple units where each unit is owned by an individual. Condominium buyers usually own air space within a unit and share ownership interest in all common areas of the condominium complex. A condominium complex usually has a homeowner association (HOA). An HOA is responsible for creating rules and regulations for all condominium units and the residents. The HOA also appoints a board of governors, which is commonly referred to as a “condo board”. Condominium owners are responsible for paying monthly or quarterly HOA fees, which are commonly referred to as “condo fees”.
Condominium ownership is more nuanced than ownership of a freehold property like a single-family house. Condo owners are entitled to air space within their unit of a condo complex, but they are not entitled to the ownership of the four walls that separate their unit from other units or common areas of the building. With these rules, the owner of a unit (or multiple units) cannot alter the structure of the building because altering the walls may compromise the integrity of the structure of the whole complex that in some cases may lead to a collapse of a part or of the whole complex.
Pros and Cons of Owning a Condo
Just like any type of property, condos have their pros and cons, and it is important to weigh all the benefits and challenges associated with owning a condominium. The list below addresses the most considerable pros and cons of condominium ownership, but they vary from complex to complex and from individual to individual.
|Pros and Cons of Buying a Condominium||Pros||Cons|
|Less Maintenance||More Fees|
|Urban Location||More Rules|
|Extra Amenities||Less Privacy|
|Enhanced Security||Investment Risk|
|Social Opportunities||Limited Outdoor Space|
- Affordability - Condominium complexes tend to be more compact due to their high-density nature, and the units tend to be smaller in square footage than single-family houses. All this saved space helps lower the bill for a condominium compared to other less compact options. The property taxes tend to be lower for condominiums than they are for other types of housing. This is a very attractive characteristic for first-time buyers and new young families.
- Less Maintenance - Some people do not want the responsibility of maintaining the property on their own. A condominium is a great option for these people because all shared areas are usually maintained by HOA. This means that the owner of a condominium needs to take care of in-unit space and not worry about a number of other responsibilities that come with owning a house.
- Urban Location - Due to their compactness, condominiums tend to be built in high-density areas. People who like active and vibrant city life may enjoy living in a condominium because it offers easy access to everything a city has to offer within a walking distance. Owners of a condominium that is located in a city, tend to save on car and gas since it is much easier for them to travel around and get to places than suburban homeowners.
- Extra Amenities - Depending on the condominium complex, condominium ownership usually comes with extra shared amenities such as a pool, gym, party room, dog park, parking space, and many others. All these amenities are maintained by the HOA, so the residents of a condominium can enjoy the spaces and not worry about the upkeep.
- Enhanced Security - High-density condominiums also tend to have security guards in their buildings for enhanced protection. Also, since many people are living in a condominium complex, most of the shared areas tend to be covered with security cameras, which helps keep the community safe.
- Opportunities to Socialize - Many HOAs conduct social events for the residents of their condominium complexes. It could include pool parties, barbecues, workout sessions, and many other activities given the right amenities. Apart from the efforts of HOAs, people tend to have more opportunities to strike a conversation with their neighbors in hallways, elevators, or in other shared amenities.
- Less Private Space - One factor that makes a condo more affordable than a single-family house is the lower square footage of condo units. Some people may prefer to have more space for themselves and their family especially if their family is large. In this case, a condominium is not a great option because even though it offers a lot of shared space, the in-unit space tends to be very limited.
- More Fees - Condominium ownership is easy in terms of maintenance because most of it is done by HOA. Unfortunately, this convenience comes at a cost of monthly or quarterly HOA fees. These fees may be quite substantial. On average, they tend to be around $200 - $300 per month and can go up to $1000 per month. As a rule of thumb to understand how large the fees are for a condominium compared to other condominium complexes is the more amenities the complex has and the more HOA does, the higher the fees are.
- More Rules - HOA tends to impose restrictive rules on the residents for the benefit of everyone, but many people do not like to have such restrictions imposed on them. These rules vary on a condominium complex, but they generally regulate living conditions, pets, guests, ability to smoke, and ability to rent. Many people like the benefit that comes with these regulations, but for some, it may be a dealbreaker when choosing a condominium.
- Less Privacy - Unlike single-family houses, condos share walls, floors, and ceilings. A condo unit may be surrounded by other units from all sides, which makes the life of a condo owner more exposed to other people. Shared spaces also take away a part of privacy since it is easy for a neighbor to stumble upon incoming guests or overhear a conversation especially in complexes where sound isolation is a concern.
- Investment Risk - A condominium may be perceived as a more risky investment than a standalone house because the value of a unit in a complex depends on the value of the whole complex. If one owner forecloses on their unit, it may negatively affect the value of all units in the complex.
- Limited Outdoor Space - Even though condominium complexes usually provide ample indoor and outdoor space, it is all shared. Condominium units usually can offer private balconies at most while single-family houses tend to have private backyards.
Types of Condos
There are many different types of condominiums. They do not even have to be residential dwellings to be considered condominiums. A lot of office spaces are considered condominium offices because the owners of those spaces do not own the walls of the unit, which restricts the alteration of the unit. When it comes to residential condominiums, there are 5 distinct types of condominiums.
- Condo Building
The most popular type of condominium complex is a Condo Building. It has separate units that are owned by individuals. The building is being operated by an HOA that is elected by the board of the owners.
- Condo House
A condo house is a standalone detached house where an owner is entitled to the interior of a building. The difference between a condo house and a house is that the ownership of the house implies the ownership of the building and the land while an owner of a condo home only owns the interior of their unit.
- Detached Condo
Detached condominiums offer the accommodation of detached houses with the convenience of a condominium community. Detached condos are usually clustered together and have their own HOA that takes care of the common areas in the neighborhood. This type of house ownership spares the owner from a lot of maintenance tasks that come with owning a property, but just like with any other condo, the owner does not own the building structure nor the land.
- Timeshare Condo
This type of condo arrangement is usually owned by a group of individuals who get to enjoy the premises for a predetermined time. It is typically used as a second home or a vacation home because it is unlikely that one co-owner is allowed to live there at all times. When an individual buys a timeshare in a condo, the individual buys the right to use the condo during the predetermined time. Timeshare condos usually have maintenance fees and property taxes, and they are not considered investment properties. It might be difficult to sell such property, but it is also cheaper to acquire than a whole condo.
- Rental Condo
Rental condos or privately owned apartments are condos that are owned by individual landlords and are being rented out to other people. The renters of those condos may have an additional set of rules and deposits imposed by the landlord on top of the rules set by the HOA.
Homeowners Association & HOA Fees
One significant characteristic of condominiums is that they share ownership of adjacent territories with multiple residents. Condominium complexes tend to have hallways, parking lots, lawns, and many other amenities that are not owned by anyone exclusively but shared by the owners of the units in the complex. A Homeowners Association (HOA) creates rules and regulations for the condominium and helps organize day-to-day operations related to the condominium.
Homeowners Association (HOA) is an organization within a condominium building that makes and enforces rules for the condominium units and their residents. An HOA is typically composed of the unit owners who get to vote on how the condominium is run. Individuals who purchase a property in a condominium building automatically become members of the HOA and are required to pay monthly or quarterly HOA fees.
Usually, an HOA chooses the board of directors or governors who are elected to oversee and enforce the rules and regulations of the building. An HOA outlines its rules in a document called a Declaration of Covenants, Conditions, and Restrictions (CC&Rs). CC&Rs usually outline the condition for property maintenance, structural restrictions, fees, and other penalties like forced compliance, or even litigation. When the day-to-day operations are established, the board oversees the operations and collects the fees owed by the members of the HOA. The HOA fees vary greatly from community to community, and they depend on what the members of a particular HOA would like to have included in the services provided by the HOA. On average, the fees tend to be around $200 - $300 per month and can go up to as much as $1000 per month. If a member of HOA refuses to pay the fees, the HOA may file a lawsuit that may lead to a lien on the delinquent property or even foreclose on the owner’s property to collect the amount owed.
Condo Vs Apartment
The main difference between a condo and an apartment is that a condo complex is owned by multiple individuals who own single units in the complex while an apartment complex is owned by a single entity that rents them out to individuals. Even when a condominium is being rented out, it is rented out by an individual who owns the unit and pays all expenses related to condominium ownership. An apartment is generally never owned by an individual because an individual cannot buy an apartment by definition. There are rare cases when an individual can own an apartment in very limited markets like in New York City.
The structural differences between an apartment and a condo are minimal since their intended use is catered to similar demographics. An apartment building, just like a condominium complex, is usually a multi-level building with a number of units in it. Both types of housing tend to include management of all common areas, the ability to use and alter space within a unit, and restrictions on wall alterations of the units. They also tend to include amenities like picnic areas, trash disposal, gym, and parking spaces.
For an individual who is wondering what is a better choice, the bottom line is that a condo owner builds equity on their property, pays all HOA fees and applicable taxes, and is responsible for the unit maintenance. An apartment renter, on the other hand, does not build equity, pays monthly rent only, and relies on the landlord to maintain the unit.
|Ownership||Air space in unit||None|
|Fees||Mortgage, HOA fees, taxes||Rent|
|Rules||Set by HOA||Set by Property Management|
Condo Vs Townhouse
Condominium complexes tend to be larger communities than communities of townhouses. Townhouses usually have less shared amenities than condominium complexes because of the smaller size of the community entitled to the amenities. On the other hand, townhouses are individual homes that are built on top and side by side of one another. On average, townhouses have larger square footage and more spacious floor plans than condominium units do, and they may offer attached private garages. A townhouse community can provide a hybrid experience of an independent single-family house lifestyle and a condominium community lifestyle.
Townhouse communities, just like condominium complexes, tend to have HOAs who impose the rules and oversee the day-to-day operations. Condominium associations usually impose stricter rules and regulations such as less freedom over landscaping and in-unit renovations. Townhouses, on the other hand, offer more flexibility in what an owner can do with their space regardless of its indoor or outdoor space.
Generally, living in a townhouse is more like living in a house with a lot of freedom and added responsibilities that a condominium owner does not have. A condo owner has possession over the inside of the unit while a townhouse owner may have ownership over the interior, exterior, and even land the property sits on if the townhouse is fee simple.
What to Consider:
- Cost - Townhouses tend to be more expensive than condominiums because of the larger square footage of the units. On the other hand, townhouses tend to have lower HOA fees since there are fewer amenities and maintenance provided to the owners of townhouse units than condominium units.
- Maintenance - Townhouse owners tend to have more maintenance responsibilities than condominium units owners. Typically, condos require the least amount of maintenance because most of it is done by their respective HOA. Townhouses are more independent, and the owners have to maintain not only the in-unit space but also the exterior such as roof and siding and outdoor living spaces.
- Amenities - Townhouses usually have fewer amenities than condominiums do because townhouses are smaller communities than condominiums. It might be feasible to build a pool in a condominium, but it might not be as feasible in a townhouse.
- Location - Townhouses tend to be less dense than condominium high rises, so it is easier to find condominiums in densely populated areas. Townhouses can be found around cities, but they tend to be located at the intersection of densely populated neighborhoods and suburbs.
- Rules - Townhouses usually have less restrictive rules imposed by their local HOA. Condominium HOAs usually impose stricter rules on a wider range of activities. These can include rules about exterior decorations, pet restrictions, rental restrictions, and many others.
Fee Simple and Freehold Estate
Some property types are often sold as a condominium as well as a fee simple, which is commonly referred to as freehold. A townhouse is a good example of an accommodation that often is sold as both types. There is a big difference between a condominium and a fee simple property, and a buyer should consider both types before choosing one.
Ownership of fee simple estate implies that the owner is in possession of land and everything that is on the land. This type of ownership is called Freehold in common law countries such as England, Canada, and Australia. Fee simple estates offer a lot of freedom over the land, but it also comes with the responsibility to fully maintain the piece of land owned. Fee simple property ownership is in many ways the opposite of condominium ownership.
- Ownership - Fee simple property ownership implies that the owner is in possession of the land and everything that is constructed on that land. Condominium ownership usually allows the owner to be in possession of only air inside the unit, while fee simple implies ownership of the air inside the unit, the walls, floors, ceilings, and other structures permanently adjacent to the land.
- Rules - An owner of a fee simple property is allowed to do anything they want with their land within legal limits and zoning laws. They can restructure, demolish and build on their land anything they want as long as the laws and zoning regulations permit it. On the other hand, an owner of a condominium does not have the freedom to do anything they want with the property they own. Usually, they do not have the right to alter the structure of the unit they live in, and they have to follow the rules outlined in CC&Rs.
- Responsibilities - Fee simple property owner is responsible for maintenance of the property and the land owned. There is usually no management team or HOA attached to the land, so no one except the owner has the interest in taking care of the property and the land. In some cases, depending on the bylaws, the owner may be fined for failing to maintain their land in proper condition, which may include lawn care, garbage removal, and other maintenance activities. The owner of a condominium unit has fewer maintenance responsibilities because most of them are taken care of by the HOA of the condominium complex. The condo owner only needs to maintain the in-unit space and leave everything else to the HOA.
- Fees - Since the owner of a fee simple property has to maintain everything on their own, they do not have to pay any management or HOA fees while a condominium owner does have to pay HOA fees. Usually, HOA fees range from $200 to $300 per month and can go up to $1000 per month.
- Is it worth buying a one bedroom condo?
There are pros and cons to buying a one bedroom condo. One bedroom condos are cheaper than regular sized condos in the same complex, but they come with smaller square footage. It may be a good idea to buy this condo for a new family of two, but a family of three people and more may need to consider something larger. Buyers should also consider HOA fee structure for different condo sizes. In some cases, a one bedroom condo may pay the same HOA fees as other sized condos. In this case, one bedroom condo may be less attractive investment than a larger sized condo.
- Are condos harder to sell than houses?
Generally, there is nothing special about condominiums as an investment tool compared to single family homes or townhouses. If a condominium is worth the price it’s listed for, it should not be a problem to sell it. Problems may arise when estimating the value of the condominium as an investment given that it is closely related to the respective HOA and the community it is in. As an example, if HOA fees tend to increase uncontrollably, unit owners foreclose on their properties or if the board is dysfunctional to the point that the property is not maintained, it might be a problem to sell a unit. Otherwise, if the relationship within the community is healthy, the maintenance operations are optimized and the property is appreciating, the unit may be sold just as easily as any other type of property.
- Are condos a good investment?
Prices on condominiums, just as prices on any other real estate, mostly depend on supply and demand. Demand for condominiums can depend on many different factors that may differ from the factors affecting other real estate prices. Generally, condominiums appreciate at a lower rate than single-family houses, but they appreciate nevertheless. The factors that affect the appreciation rate may include: location, walkability, population growth in the area the condo is located, amenities included and the demand for low-maintenance properties. Given that condominiums are usually cheaper than other types of real estate, they may look as an attractive investment for investors who cannot afford a more expensive property.
During the year of 2020, many condominiums did not increase in value as in previous years because demand for low-maintenance urban properties fell. This decrease in demand was mainly caused by the workers moving to suburban areas as they were given an opportunity to work from home.
- What happens when an HOA goes bankrupt?
Condominium Associations rarely file for bankruptcy because they are strictly regulated and their formation, operations and management practices are supervised by the US Government. An HOA still may go bankrupt especially if the management cannot raise enough funds from the members of the HOA. Fortunately enough, the bankruptcy itself does not affect the condo owners significantly. HOAs tend to file for reorganization under Chapter 11 of the United States Code. Reorganization lets an HOA to restructure its debt and postpone collection proceedings during bankruptcy. Most of the associations tend to continue their operations as a debtor in possession under Chapter 11 and under supervision of the bankruptcy court. Individuals who carry the title of condominium owners are not in danger of losing their property when an HOA goes bankrupt because HOA and an owner of a unit in a condominium are two different entities. One of the downsides of HOA going bankrupt is possible lack of funds to continue day-to-day operations at a full capacity. If the HOA does not have the funds to cover all maintenance costs, then some of the amenities may be temporarily unavailable.
- What are condo reserves used for?
Condo reserve fund pays for unforeseeable expenses that are not addressed in the operational budget. A small share of HOA fees go into the special account that must remain accessible in case of an emergency. To ensure that the fund has enough money, the board must conduct a case study to determine an optimal account balance that needs to be maintained. Sometimes the board may request financial experts to conduct the analysis if no one on the board has expertise in this kind of analysis.
- Can an HOA have no reserve fund?
Low or no HOA reserves may come at risk for the condominium owners. A condominium reserve fund exists to cover unforeseeable expenses that are not included in the operating budget. If the reserve has low funds, then it may mean that the HOA does not accurately estimate the amount needed to cover unforeseen expenses. This means that the HOA fees may significantly increase in the future to sustainably cover unforeseeable expenses. In rare cases, the board may vote to eliminate the fund altogether. In this case, the condominium complex is left without any money to cover unforeseeable expenses. If an unforeseeable expense occurs, the HOA may collect the amount needed on top of regular HOA fees to cover the costs of the expense. If the HOA cannot collect the funds on time, it may lead to extra interest expenses that will fall on the owners of the condominium units.