Wouldn’t you like something shiny and new? Well, in South Boston and other neighborhoods, there’s great deal of new condominium construction ongoing. That presents some great opportunities for new buyers – the ability to pick your own paint, floors, details, etc. – as well as warranties that you wouldn’t get outside new construction.
Of course, new projects aren’t perfect. They come with a great deal of unknowns. Making an offer before seeing the final product can be scary, and the property’s lack of history deprives you of some information. That much is obvious, though. Below are some less-obvious considerations when buying a newly constructed condominium.
In a brand new development, you won’t likely qualify for a traditional 30-year fixed mortgage. That’s because a new property is full of unknowns (owner occupancy rate, condo fee, comparative values, etc.). Consequently, the new condo unit won’t likely meet the underwriting standards for fixed-rate mortgages.
You’re not without options, however. You may apply for a variable-rate loan and plan to refinance later. In some cases, you may have more lending options if you approach the same bank that’s financing the project.
In the first year of ownership, new condominiums require some extra homework for property taxes. That’s because municipal tax assessors and collectors are slow to update the property’s information.
When you first move in, the condominium building may be listed with the city as a multifamily building, as though one person owned the whole thing. That will require the newly formed condo association to receive the tax bill and manually split it up among the owners by percentage interest. At a new condo’s closing, you will likely be required to sign an agreement to contribute.
More importantly, in cities that have a residential exemption (such as Boston), you will need to apply for it. The application window opens briefly once every year, and you won’t receive any discounts until you’ve successfully applied for it. That means that you’ll inevitably be paying a non-resident tax rate for at least some time. Just don’t miss the city’s application period. It’ll be an expensive oversight.
A new condo building will require a new condo association. That new condo association will require some capital reserve money. To raise the money, most new buyers will be required to make a capital contribution – usually equal to two months’ condo fees – at the closing.
Is that fair? Well, actually, it is. When you buy into an existing condo association, you indirectly buy a share of the existing condo reserve. If you’ve adequately reviewed the condo association in an existing development, then you’ve factored the reserves into your purchase price. In the new development, you’re starting with zero reserves.
I watch the homebuying shows, too. They give you three options, and you select one. In real-life homebuying, though, is it that easy? Well, of course not. It’s a complicated process with many decisions to make along the way.
When shopping, don’t let the excitement of homebuying distract you from simple ways to make the best-informed deal. There will always be risks in buying real estate; that’s unavoidable. However, by doing your homework, you can make an educated decision and avoid these common mistakes.
1. Not being specific. When you make your offer, don’t assume that you know what’s being included. If there are any must-have fixtures in the property, specify them in the offer. You don’t want to be disappointed when you move in to find the key light fixture missing. You also don’t want to start a bitter fight with the seller over furniture, appliances, or any built-ins.
2. Not reviewing the condo docs. When buying a condo, you’re buying into a joint enterprise with your neighbors. When investing in a company, you (hopefully) wouldn’t buy stake without doing any investigation. A condo is no different. When making the offer, require the seller to provide you with the condo information for your review. Take a good look at the condo budget and rules. Make note of any red flags – repeated litigation, collection difficulties, disorganized records, or abnormally high condo fees.
3. Not checking public information. While it may take some time at the computer, you can investigate the property and the sellers through some simple public records searches – city/town records, registry of deeds, etc. When making an offer, it may be helpful to know whether the seller is especially motivated or whether the property has a “history.”
4. Not investigating the surroundings. After thoroughly researching the home, why not look into the neighboring properties? Don’t assume that the grassy lot across the street will remain that way. Look into city records, news articles, zoning rules, property sales for your neighbors. Although you can’t prevent all development nearby forever, it would be nice to know that a high-rise is planned next door.
5. Not taking advantage of public homebuyer options. Most cities and towns offer something for homebuyers or developers. Many of these programs have specific eligibility rules – income limits, geographic zones, property types, and other criteria important to the municipality. For example, see Salem’s various opportunities. These offers may not apply to you, but it’s worth checking.
After working with you and becoming part of the community, I am proud to announce the launch of UrbanVillage Legal – a new kind of law office that’s about you and your neighborhood.
We’re here, as we’ve always been, to protect what’s important to you – your home, your condominium, your neighborhood – your urban village.
What’s in a name? “Urban village” commits us to your neighborhood and our mission. We’re focused on the most local of concerns that shape your daily life and long-term prosperity. Everything that we do starts with your home, protecting your most significant emotional and financial investment.
As any urban villager understands, however, your home isn’t independent of its surroundings. It’s integrally linked to the larger condominium association, neighborhood, and community.
For that reason, we have developed a unique concentration in matters that relate to you – the multifamily resident and investor.
How are we different? In order to meet your needs and accomplish our local mission, we have designed everything – our approachable environment, streamlined processes, transparent pricing, and on-demand communication – around your expectations.
First, we’re approachable and excited to work with you. Many of our clients have never worked with attorneys before. We want you to enjoy your interactions with us at every turn, and we avoid the pretense and aloof attitudes too common in legal services.
We’ve also developed streamlined, efficient processes for our work. If you’re seeking our counsel in a transaction or dispute, we know that you want us to cut the red tape – not create more of it. For real estate transactions, we know how to collaborate efficiently with your broker to make the sale hassle-free.
For all of our busy clients, we offer 24/7 access to your case online and on-demand. In one place, you’ll be able to track deadlines, see appointments, and review all case documents. The online portal not only keeps your case organized – it allows you a transparent look into our work and our billing.
What’s changing? With the launch of UrbanVillage Legal, we offer expanded services with a continued commitment to our shared local neighborhoods. Now, more of our services are available for flat rates – taking the guesswork out of your legal costs.
We’ll continue to offer advice and interesting stories at bostoncondolawyer.com, while publishing a weekly newsletter.
We’re as committed as every to our clients and are excited to announce the opening of UrbanVillage Legal, with expanded service offerings and improved client interface.
When you purchase a condo, you’re also buying a stake in the larger condo building or complex. More than anything else, your neighbors and the association will determine your happiness and return on investment.
While home shopping, you’ve probably evaluated the closet space and checked out the bathrooms. More importantly, though, have you audited the association? No? Well, here’s how to get started:
- Get the records. In the Offer to Purchase (or at least the Purchase and Sale Agreement), require the seller to provide the condo association’s documents, rules, and financial statements by a certain date and at their expense. In this step, you’re not only interested in the documents’ contents; you’re also interested in how easily you obtain the records. If a condo association delivers incomplete records or delivers them late, it may be a sign of poor management.
- Evaluate the financial statements. Take a good, hard look at the bank statements and budget. Verify that it’s reasonable and complete. Then, take a look at the association’s savings reserve. As a general rule, an association should have savings equal to at least 10-15% of its annual budget.
- Evaluate the documents and bylaws. In this step, you are looking for two issues. First, make sure that there are no restrictions that would make your life difficult there – bans on dogs, bans on smoking, etc. Second, consider what rules are not enforced. If you see a rule that is openly violated by other unit owners, it may be a sign of weak management.
- Verify any special assessments. When a condo association undertakes a large project, it usually pays for it through special assessments. In those circumstances, each unit owner is charged their share of the project in a mandatory bill. This can often be a very large expense. Get signed verifications from the association and the seller that no special assessments are currently being considered. If there are special assessments to contend with, factor that into the purchase price.
- Verify any litigation. Like special assessments, you should get verification from the seller and the association that they’re not engaged in or facing any litigation. Otherwise, you’ll be indirectly dragged into the fight. Also, ask your attorney to review court dockets and deed records to ensure that no significant legal battles are overlooked.
I’ve summarized the consequences before, but what would actually happen if you failed to pay your condo fee? The process is somewhat complicated, though the conclusion is simple. The condo association will get its money, with you incurring a lot of extra expense.
That’s because, under Massachusetts law, the condo association has all of the bargaining power and the legal rights. You’ll be on the hook for the overdue fees, penalties, interest, and legal collection costs. So, if you’ve fallen behind in payments, here’s what you’ll face –
The Steps to Collection.
Once you’ve fallen behind, the late fees and interest start accruing. The exact amount varies greatly condo-by-condo so check your condo documents for details.
Once 60 days has passed, the legal collection activity can start. This begins with a formal notice, usually sent by an attorney. Your mortgage lender will also get a notice. At this point, you’ve likely already incurred legal collection costs.
Typically, the next notice comes 30 days later. This is the final warning before your case heads to court.
After another 30 days, the condo association can file a complaint in court. By this point, you’ve incurred significant legal fees. It’s not unusual for the additional fees (penalties, interest, & legal) to far exceed the original overdue amount by the time you’re in court.
The Superlien and Your Mortgage Lender.
Even if you have no equity in your condo unit, the condo association’s claim is secure. That’s because of the state’s “superlien” law. This gives high priority to the association’s claim for all dues for the six months preceding the action, including all of the collection costs and penalties.
Simply put, the lien created by the overdue fees outranks most other liens, including your mortgage. That’s why the association sends letters to your mortgage lender. Their security interest is in jeopardy, and they are therefore owed warning.
In a growing number of cases, the mortgage lender will actually pay the amount owed on your behalf. That puts them in control of the debt and stops the legal fees from accruing in the lawsuit. Of course, the mortgage lender will turn to you for repayment – or worse.
The “Pay First” Rule.
Condo associations are far from perfect. Many are mismanaged. Some engage in unfair behavior. This never limits their ability to collect, however. This is because of the “pay first” rule.
Just like a tax, you are expected to pay the amount demand it and then challenge it afterward. It may seem unfair, but that’s the rule. Failure to pay – even an ultimately overturned fee or assessment – will likely leave you with a large collection cost. This means that intentional withholding out of protest is always a bad idea.
The Ultimate Consequences.
Failure to pay will leave you with a much greater debt than you may first expect. That debt, like most other real estate debts, could be ultimately recovered through foreclosure. Condo associations themselves, after going through a court case, can foreclose. Your mortgage lender can, too. Even if you’ve never missed a condo payment in your life, your mortgage lender can foreclose to protect itself from the superlien.
What you can do.
While the condo association has the better position, there are some actions you can take to minimize the damage.
Deal with overdue payments right away. If you’re falling behind, take action or get help asap. The serious costs begin after 60 days has passed. That gives you two months to make a deal, seek help, or consult an attorney. Ignoring the problem will make the matter much worse.
Enter a repayment plan. Even if you contest the debt, negotiate a repayment plan with the association. By doing so, you’ll stop the additional collection charges. Then, you can take action for your grievances and disputes.
Make some tough choices. If you’re not going to afford the condo fees for the foreseeable future, there are some difficult decisions to make. Just as a sale or short sale helps somebody facing a bank foreclosure, an exit plan may save your equity and your credit.
Do condo associations need to file taxes?
Yes! They’re largely tax exempt, but condominium associations still must file a tax return every year, typically using a specialized form, the 1120-H. I’ve seen many associations ignore this relatively painless requirement.
All income from dues and assessments – which is generally the only source of association income – is tax exempt. Of course, every expense related to property administration and upkeep is deductible. There’s also an additional effective deduction of $100.
For just about every case, this leaves condo associations with no tax liability whatsoever, even if there’s a surplus.
To qualify for this preferential tax treatment, condominium and homeowner associations must meet the following criteria:
- At least 60% of its income comes from dues and assessments
- At least 90% of its spending is related to the care or administration of the property
- No individual owner gets paid by the association, except for reimbursements
That sounds like just about every condo association I’ve ever encountered.
If for some reason, the association has non-dues income that exceeds its property management costs (investment income perhaps), the association faces a flat tax rate of 30%.
So, what happens if a condo association fails to file taxes? Well, I’m not entirely certain, though penalties are possible. At minimum, the association may lose its preferential tax treatment for unreported years – generating a 30% tax liability on any surpluses.
Ultimately, I recommend that all condo boards complete the one-page tax return and submit it. If your association is lucky enough to have an annual surplus greater than $100, you really need to file the 1120-H.
A while ago, I addressed a condo association’s ability to ban dogs from the building. The answer followed the general conditions for condo rules. Whether the association is blocking pets or banning smoking, the enforceability of a rule depends on two things. First, does the rule govern behavior inside the unit or activity out in the common areas? If the proposed rule reaches inside the unit, the second question must be answered: was the rule published in writing before the unit was sold? If so, the rule can likely be enforced.
I concluded that bans on dogs are only viable if they’re pre-existing and in writing. Service dogs, though, may have even more luck.
Even if the association has a solidly enforceable rule against dogs, a service dog stands a good chance of staying. The legal analysis is the same for a disabled worker requesting a modified workspace from his employer. The association must offer a reasonable accommodation for a qualified individual.
The dog as a reasonable accommodation. In housing and employment law, the bending of rules is required to allow disabled individuals access to home and work. An accommodation is reasonable if it doesn’t overburden the association. In the case of dogs, excessive burden has only been found legally in the case of designated dangerous breeds. That’s because pit bulls and other dogs can significantly raise the building’s insurance premiums. Otherwise, the association would have a difficult task explaining how dogs are uniquely and excessively burdensome to that condo.
Qualified individuals. Condo residents are qualified individuals, and therefore eligible for the accommodation by law, if a medical professional “prescribes” treatment – including a pet. (Yes, there are even service cats.) This could be for a wide variety of reasons – service dogs are truly remarkable and adaptable. They have been famously used for readily apparent disabilities such as blindness. Today, they have also been shown remarkably helpful for sufferers of Post-Traumatic Stress Disorder (PTSD). With the recommendation of a professional, an individual qualifies under the law. Condo associations should never question the medical diagnosis (unless they like defending discrimination lawsuits).
Bottom line: service dogs (and cats) almost always qualify for an exception from a ban on pets.
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Whether you’re falling behind financially or upset about the condominium’s management, missing condo payments will cost you. That’s because Massachusetts condo associations have very strong collection powers under the law. So, whatever you do, don’t ignore collection notices.
If you don’t pay up, here’s what can happen:
1. Collection fees, interest, and attorney costs get added to the bill. In many cases I’ve seen, the collection costs very quickly and dramatically exceed the underlying overdue fees. That’s because condo associations, knowing that this cost gets added to your bill, have very little incentive to keep costs low. They don’t always shop for reasonably priced legal services, and why would they?
2. Your mortgage lender may pay it for you and tack it to the bill. Mortgage lenders, concerned that the condo debt might jeopardize its security interest in your unit, can – and often do – pay the bill for you. This gets added to your mortgage balance. So, what’s the problem with that? Well, if the bank pays it, you lose all ability to negotiate. Worse, the bank could use this as a reason to foreclose on your unit.
3. Rent gets intercepted. If you have a tenant, the condo association can get a court order to intercept your tenant’s rent payments.
4. Foreclosure. Just like a bank owed money, Massachusetts condo associations can foreclose on your unit – selling it at auction to recover money. This isn’t commonly done for small debts, but a hard-pressed, broke condo association may have no other choice.
What can you do to avoid this mess?
1. Deal with the problem quickly. If you miss a monthly condo fee, address the situation within 60 days. Expensive collection costs can start once the debt is 60 days old. If you’re falling behind, try to negotiate a repayment or catch-up plan with the association right away. Otherwise, that $300 debt can become $3,000 pretty quickly.
2. Pay first, then challenge. Problems with the condo association, its budget, or the fees are never a reason to withhold condo fees. Even if the association is in the wrong, you must pay first and challenge later. So, if you want to contest a fee or a fine, pay up first, and then challenge it. It may not seem fair, but it’s the best course of action for the longer run.
While billions have been spent on next week’s election, I bet virtually no thought has been spent on the most local of elections – your condo association’s. That’s too bad. The decisions made by that board of trustees would impact you more directly than anything Congress does.
The Problem: Apathy
People don’t care, don’t show up, and don’t want to run for trustee. Worse, only the craziest people in the building do. Herein lies a pretty obvious recipe for disaster.
The condo board of trustees sets the budget, collects the condo fees, and pays the bills. Moreover, they decide when to replace the roof, who shovels the sidewalk, and whether dogs are allowed. The importance of this should be enough to get you to care, but it often isn’t. So, how can a condo association generate interest and ensure that competent trustees are elected?
1. Publish an agenda. Before the annual election meeting, I recommend sending an agenda that highlights what’s exactly at stake. If there’s a controversy of the rules, repairs, or budget, encourage people to come to the meeting to discuss it.
2. Make proxy voting easy. Remind people of their right to appoint somebody else to vote for them. If an owner can’t make the meeting herself, she shouldn’t throw away her vote. Certainly, there is somebody in the building to whom she can lend her support.
3. Serve wine or cupcakes. I’m not kidding. This helps.
If you don’t get enough participation in the election, you may not even have a quorum to conduct business. That means that nobody gets elected. So, what could be done then?
1. Postpone the meeting. You run the risk, though, of another poorly attended meeting.
2. Allow the existing trustees to fill the board vacancies. Most condo bylaws allow this. This only works out well if the existing trustees are competent.
3. Go to Court. If there’s a complete breakdown in the election process, you may end up in court. That’s because courts have the power to appoint trustees for you if you prove incapable of doing it yourself.
The Bottom Line
Vote. Run for trustee. The condo association will be better managed with people like you taking an active role.
photo found at www.adam-mcfarland.com
Hearing the wind outside the office window and the sensational weather reports on the radio, I can’t help but think of destruction today. So, what does that mean for condominium living? Well, like many other matters, damage and rebuilding can be a much more complicated process than in single-family homes. Why? It involves a significant level of group agreement, consensus, and cooperation.
The Single Family-Comparison
Property damage decision-making process is relatively simple for single-family homeowners. When the insurance company values the damage, the homeowner makes the decision whether to rebuild. Of course, there are insurance policy issues to consider, but the homeowner makes the decision.
Property Damage in Condominiums
Assuming that the condo trustees have maintained appropriate insurance, a condo building with multiple owners will also be repairable with insurance money. There is, however, a wrinkle. Individual property owners may have a right to just cash out.
Under Massachusetts law, property damage in excess of 10% of the condo building’s value triggers a need for consensus and an individual’s right to cash out.
After sustaining 10%+ damage, condo owners have 120 days to reach consensus on how to proceed with repairs. If 75% of owners can’t come to an agreement, any single owner can force the building to be sold. Once sold, each owner receives his percentage of the proceeds, based on ownership.
If 75% of the owners do agree, the condo association can proceed with repairs. An objecting owner, though, can compel the condo association to buy back the unit at fair market, appraised value. The superior court, however, needs to approve and supervise this process.
The Bottom Line
After a serious disaster, unit owners are forced to work together, quite literally, for the future of the building. If they can’t, it may just be time to cash out and move on.
Be safe in the storm, and I hope this post remains entirely irrelevant to you.