I went to get ice cream the other night and had to decide which flavor to get. Should I buy the cake batter or vanilla cinnamon flavor? What about peanut butter chocolate? Then I had to decide which “mixings” to get, which opened up a whole new can of worms. Luckily I was decisive and figured out what flavor worked for me. However, figuring out what type of home flavor works for you is quite another matter entirely.
Deciding to take the plunge and purchase a home is a difficult choice, especially in this economic climate. However, with the right information and help, purchasing a home can be done in an efficient manner. One of the first decisions to make is what type of home to purchase. Two main types exist for homeowners — single family residences, also known as houses, and condominiums or condos.
The largest difference between a house and a condo is land. When you purchase a home, you are buying the land, everything under the land, the structure on the land, which is the house, known as the improvement and the rights to the air above it, known as air rights. One benefit to owning a house over a condominium is not having to share any amenities such as a pool, laundry room, etc. The downside with a single family residence is maintenance.
Many first-time home buyers who purchase houses do not use realistic numbers when running a maintenance budget. This can lead to problems down the road, as a homeowner is responsible for the structure. If the toilet overflows, the homeowner needs to fix the problem or call a plumber. If the roof leaks, it is the homeowner’s responsibility. No longer is the homeowner able to contact the manager of the building to have the repair completed because the homeowner becomes the manager of the property and all the responsibility that comes with it. New owners will also find that single family residences cost a premium over condominiums, but they also tend to hold value better in declining markets when compared to condos.
Just as a house has benefits, so does a condominium. A condominium is a structure or series of structures on a plot of land, where each owner has individual ownership of their property, but shared interest in the land and common areas such as exterior walls, pool, laundry area and other shared amenities. Since the structure, or outside walls, are owned together with other condo owners, the building maintenance, property insurance and other costs are shared amongst all the owners in the form of monthly assessments, also known as condo fees or dues or home owner association fees (HOA fees).
The benefit to having dues is to enable recurring building maintenance such as pool maintenance, elevator repair, weekly landscaping, etc. to be done without having to contact each owner every time recurring maintenance is completed. These recurring costs are taken out of the account which holds the monies collected from the owners’ monthly dues.
Many buildings keep a surplus of money for large improvements such as exterior painting or a new roof every 20 years. A well run condominium will plan and assess the owners accordingly. Of course, not all condominiums are run the same and some are in desperate need of repairs, which can lead to large increases in monthly fees when work is completed. Of course, owners vote for these repairs and subsequent increases. Many homeowners in Southern California find that condos are far more affordable versus single family homes, but homeowners must understand how lenders, especially banks, view condominiums and their associated dues when requesting financing.
Many times a house with the same square footage as a condominium located in the same neighborhood will cost more money. However, it is important to understand how the financing works for both types of properties. A lender, specifically a bank, will calculate the condominium fees or dues when running the numbers for a loan. Condo fees affect the loan amount a person can afford. For example, at 5.25 percent, a $400 monthly condo fee would equal $72,000 in loan dollars. If you were prequalified to get a loan on a condo of $550,000, you would most likely qualify for a loan of $622,000 for a house, continuing with the same example. Of course all lenders are different and debt-to-income requirements along with loan and credit requirements may and often do change when increasing loan dollars. The best thing to do is speak with a loan officer about a specific scenario.
Deciding which type of property to purchase will most likely depend on how much you can afford and where you want to live. Even in a down market, a home can give you tax benefits that few other non-real estate investments can. Furthermore, a home is a place to call your own, so regardless of what flavor you choose, if you can afford it, a home may be the best financial and emotional investment of your life.
Mike Heayn is a real estate investor and can be e-mailed at maheayn@yahoo.com.
