In a Hot Condo Market, Cool Heads Prevail Realty Happenings
Reprinted from The Washington Post
By Sandra Fleishman
Washington Post Staff Writer
Saturday, October 7, 2000; Page G09
With developers and real estate agents agreeing that everybody’s trying to jump into the hot condo market, potential buyers need to do more homework than usual to make sure they don’t get burned.
While buying a condo always involves checking a lot of documents provided by the seller or the developer, and talking to the property manager and other condo owners, the situation’s trickier in new construction. If the developer has done a lot of buildings, you can ask for references elsewhere. But if the property you’re considering is a developer’s first new construction or first conversion of a rental property into condos, there’s no history to check and no longtime owners to quiz.
In those cases, real estate agents suggest great caution, and lawyers suggest hiring an inspector to look at engineering reports, as well as an even closer reading of the proffered disclosure documents.
“I would be careful in dealing with a builder who doesn’t have a track record,” said Sue Strehlow, a District-based associate broker for Long & Foster who specializes in condos. “You just have to make sure to check all of the documents very carefully.”
“You want to know the history of the developer whenever you can,” said Fred Kendrick of Pardoe Real Estate ERA, who co-writes a monthly housing report on the District. “I would be very wary of somebody doing a first-time conversion” of a single-family house or town house or doing first-time new construction.
In cases involving a new developer, District real estate lawyer Steven Skalet recommends talking to any previous buyers to find out “what their experience has been” with the developer and to learn how the cost estimates in sales documents compared with the actual costs.
The key documents to examine, say experts, are the “public offering statement” for a new unit and the “resale package” or resale certificate for a resale unit.
The seller must provide the appropriate papers. They contain similar information about a variety of details, including condo fees and the costs of running the building. But the public offering statement reflects only projections and estimates rather than actual costs.
Buyers of new units in the District and Maryland have 15 days to review the public offering statement and rescind the contract. In Virginia, it’s 10 days.
Buyers of resale units in the District have three business days to rescind after receiving the resale package. Buyers in Virginia get three consecutive days. In Maryland, it’s seven days.
A buyer can ask for more time during contract negotiations, said Skalet, “and it’s a good thing to do, especially if you end up getting the documents on a Friday.”
To get through all the paperwork, buyers might want to consult a lawyer, accountant or someone else with similar experience. “Every jurisdiction has its own condo act, with . . . mostly common provisions, but the laws are different,” said Northern Virginia real estate lawyer Beau Brincefield. “Most people go to a real estate attorney for help. It’s unlikely most buyers would understand the documents.”
Brincefield added, “It’s becoming very popular for developers to put in every conceivable disclaimer about every possible thing that can go wrong, including nail pops, because they know people don’t read these things.”
Among the items to check are:
* Condominium instruments. These include the declaration, bylaws, plats and plans, and rules and regulations. If the condo association is incorporated, also review the articles of incorporation. These explain how the condo building operates.
The declaration helps you figure out the monthly condo fee.
The bylaws cover things such as whether you have to meet any architectural requirements if you want to make external changes to the unit.
The rules cover things such as how and when trash is collected and how the swimming pool or exercise facility operates.
Check “use restrictions” that may limit your ability to rent out the unit. Some associations forbid leasing to protect financing and refinancing options. Others limit rentals to a percentage of the number of units in the development.
Pets might also be prohibited.
* Statement of the monthly condo fee. To determine the fee for an individual unit, Skalet’s partner, Benny Kass, advises in his real estate column in The Washington Post, check the end of the condominium declaration. It should include a list of the percentage interest in the development that is held by the owner of each unit.
Multiply your percentage interest times the total budget and that’s the annual fee. Divide that by 12 to get the monthly fee.
Check whether utility charges and amenities&emdash;such as the pool&emdash;are included.
* Income and expense statement. This tells you what’s actually been spent each month compared with the budget adopted by the condo association’s board of directors.
* Current budget. This is what the board proposes to spend for the current year.
Resale buyers should check the amount of money in reserves for “rainy day” expenses or for fixing big-ticket items such as the roof.
Because the resale package doesn’t always pinpoint expenses that are looming, Skalet recommends chatting with the property manager, condo association officers and individual unit owners about big projects that may be on the horizon.
“Buyers should worry about any deferred maintenance&emdash;especially of big projects&emdash;that would result in a special assessment coming up or a loan being taken out,” Skalet said.
The resale certificate must disclose any special assessments pending against the unit. Who pays these assessments can be negotiated with the seller.
Skalet also recommends checking the condo building insurance policy, especially in buildings converted years ago, where units have been extensively upgraded recently. If the policy doesn’t cover “betterments,” rather than “original materials,” Skalet warns that those upgraded granite countertops, cherry cabinets and flashy new appliances won’t be fully replaced in the event of a loss. If the condo building’s policy is inadequate, the buyer needs to buy more coverage on his own.
* Proposed budget. This sets the condo fees for the next year. A buyer can try to persuade the seller to guarantee fees for a certain length of time, but that stipulation has to be in the purchase contract.
Also worth knowing is that developers of new condos in the District must post a warranty bond or bank letter of credit with the city. The letter of credit must be equal to 10 percent of the construction or conversion cost and must be available to cover certain warranty claims. Getting a claim paid, however, often can entail litigation or the threat of litigation, according to local real estate lawyers.