Rent a home

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Before you commit to a home purchase, ask yourself again if renting, at least temporarily, doesn’t make more sense given market conditions? Only buy when buying makes more sense than renting.

Can I Really Do This?

Keep in mind that all real estate markets are regional. That means that while the market may be up in California, it could be down in Michigan. Down in Massachusetts, up in Arkansas. If you’ve only got one house to buy, national statistics don’t make too much difference. It’s only the market in your area that counts. And it’s only you who can decide if now is the right time to buy. If you’ve got to make a housing choice, then give yourself every chance of it being an educated decision. Don’t simply say, “Prices are too high to buy.” They may be even higher next year and the year after. Don’t simply say, “This house is cheap because it’s selling for less than it did a year ago.” It may be worth far less a year from now and the year after, worth even less. Look at the facts. To reiterate, check out all of the following:

Choosing Betweena Single-Family Home, Condo, or Co-op

For many people, there is no choice to make. They simply want a single-family house and nothing else will do. Others demand a condo or co-op and will not consider an alternative. Most people, however, at least consider their options. If homes are expensive, will a condo/co-op be cheaper? Will prices appreciate (or drop) faster in a condo/co-op than a single-family house? Are there any real differences?

Price Appreciation in Condos

versus Single-Family Homes Going back about 50 years, the rule of thumb was that when prices went up, condos were the last to appreciate. When prices fell, they were the first to go down. That’s changed. Today, in many parts of the country, condominium price appreciation is faster than for single-family homes. Indeed, in many areas condos sell quicker and for more money per square foot than their single-family counterparts.

TRAP GETTING THE RIGHT COMPARISON

Always compare apples with apples. When comparing prices between condos and single-family homes, do it on a square foot basis. If a 2000-square-foot house is selling for $300,000 and a 1500-square-foot condo is selling for $250,000, which costs more for what you get? The answer is the condo! The condo is selling for $167 a square foot, the home for $150 a square foot. It’s something to consider. The reason condos are appreciating faster now than in the past is mainly because there are fewer of them available. Thirty years ago, builders swarmed to condominium construction and conversion. (A conversion is where an apartment building is converted to condominiums.) For the builders, the costs were less for multiple family dwellings, yet the prices they could get were handsome. So they built condos. Then came the lawsuits. As it turned out, builders had grabbed hold of the tail of a tiger. When the roof on one or two units leaked, the HOA(Home Owners Association) often demanded that the entire roof over all the units be replaced before leaks could appear elsewhere. When the ground settled, the HOA sometimes demanded that the whole building(s) be lifted and a new foundation poured. Similar problems were found with plumbing, electrical, mold all matter of things. Since the builders often had to guarantee the construction for as long as 10 years (in some cases by state law), they were faced with enormous liability. Some builders went out of business. Others took the heavy financial hit. But very few built more condos. In California, as an example, in 1999 there were roughly 20,000 new condo units built. By 2002 that number had dropped to roughly 2000. As a result, in many areas there is a shortage of condominiums. And, consequently, the price of those available is driven higher.

TRAP WHEN OLDER MAY BE BETTER

When buying a condo, it’s best to look for units that are at least 10 years old and that don’t have any pending lawsuits. Chances are that any construction problems will have already been taken care of. And you probably won’t have as big a risk of being assessed if the existing lawsuits go against the homeowners.

What Is a Condo? A condominium, as most buyers know, involves shared ownership. You end up with a deed to the property (called a “fee simple”) and separately own the inside of the unit while sharing with the other owners the grounds, walkways, and recreational facilities in short, everything outside. Another way to look at it is as if you were renting an apartment and then decided to buy your rental unit. (Indeed, some condos are converted apartment houses.) It’s sometimes useful to know that there are actually two separate kinds of condominium ownership. The first is the one with which most people are familiar you could be on the fifth floor of a building and you own only that airspace that your unit occupies. The second is called a townhouse (technically known as a PUD, or planned unit development). Here units are not arranged on top of one another. Rather, you own the ground underneath your unit and the airspace above.

Don’t make the mistake of thinking a townhouse is legally different from a condo. In terms of ownership, it’s not. Rather, the difference is in the layout. In a conven- tional condo, you only own an airspace. In a townhouse, you own the ground underneath and the air above.

What Is a Co-op? A co-op is a cooperatively owned property. This is different from condominium ownership. In a co-op, as an individual you don’t actually own any separate airspace or ground. Rather, you own a share of stock in a company, which owns the entire property. While you have the exclusive right to use a particular unit, you don’t actually own it in the sense of being able to sell it directly. To sell your unit, you must sell your share in the company.

It’s important to understand the ownership difference between a condo and a co-op. With a condo you get title to the property; you actually own airspace (or in the case of a townhouse, the ground beneath and air above as well). You get a fee simple or absolute title. With a co-op you do not get title to any real estate. Indeed, you do not own the real estate; the corporation does. With a co-op you get stock in the corporation that owns the real estate, and that stock entitles you to a proprietary lease on a specified apartment from the corporation. You’re a stockholder and a tenant, not a property owner. While up until very recently, condo owners were the last to take advantage of real estate boom periods; not so with many co-op owners. Most of the big gains occurred when an apartment building located in an urban area (such as Manhattan) was converted to co-op status. The first to buy (often the former tenants) saw huge increases when they resold, in large part because of the shortage of available rentals. They bought an apartment in a city where just finding any place to live could be a problem. Another factor has been timing. Most of the co-ops were established a good many years ago before the big price hikes in real estate that occurred in the late 1970s, the late 1980s, and once again in the late 1990s and early 2000s. If you bought prior to any of these market bumps, you would stand to see a big increase in value, regardless of the type of real estate. For those who bought co-ops in urban areas where there were already housing shortages (as noted above), the increases were even more dramatic. On the other hand, there are some problems with co-op ownership not found with condos. First of all, there are the finances. By its very nature a co-op tends to be less financially stable than a condo.

Remember, when you buy into a condo, you own your unit. If you can’t make the payments on your mortgage, you lose, not the other owners. (They only lose the fees that you would otherwise pay toward the upkeep of the common areas.) With a co-op, however, an underlying mortgage is typically held by the corporation on the overall structure. That means that if you can’t make your monthly payments to cover your portion of the mortgage debt, the other owners must make up what you can’t pay in order to meet the monthly mortgage payment. The same holds true for property taxes and insurance. If too many owners can’t pay, then the remainder might not be able to make up the difference and the entire project could conceivably go into foreclosure. In short, with a co-op it is very much like an extended family with brothers, sisters, aunts, and uncles all living in close approximation and all contributing to the living expenses. When one (or more) loses a job or gets sick and can’t contribute their share, the others must make it up. If they can’t make it up, they could lose their home. The inherent financial instability is the reason that good co-ops are very careful about whom they will allow to buy stock. They want to be sure that any new owners are financially strong.

P When buying into a co-op, expect to have a meeting before the board in which you will have to show why you would be financially capable of being a good owner. Although discrimination based on gender, race, ethnic background, medical problems, or other similar concerns is prohibited, nonetheless, some boards have discriminated. Thus buying and later reselling your unit is potentially made harder. Further, in some parts of the country, such as west of the Mississippi, getting financing to buy a co-op can be difficult. Lenders are concerned about the financial structure noted above, and they are simply not as familiar with the financing as with condos.