Many 20-somethings graduate college and move to the city. Not quite ready for homeownership, many of them may consider buying a condo.
Recently, I observed a billboard for a condo building in downtown Chicago that piqued my curiousity because it clearly was seeking to attract young professionals. I went home and looked on their website, which was sleek and obviously catering to the 20 to early 30s crowd. There were beautiful pictures of the high rise from the outside, pictures of the inside of different condos highlighting the beautiful city view, floor plans, and even interviews with a half dozen of the residents (all of them young professionals except for the token near retirement empty nester).
What really caught my interest was their page that declared, “You Can’t Afford Not To Buy!”
If I were a real estate novice, I would have to agree with their persuasive argument that I couldn’t afford not to buy. They base their scenario on renting an apartment for $1,350 a month with a 3% increase each year for 5 years. They base their buying scenario on securing a 5 year ARM at 3.236% and paying 3.5% down. Condo fees run $220 to $240 a month, and taxes are 1.5%. Based on this scenario, they persuasively argue that a buyer will save $389 a month by owning rather than renting. (They also include mortgage interest and tax deductions that the person will get on their income tax, assuming a 30% tax bracket.)
If these were all of the variables to consider, the marketing department is right, people can’t afford not to buy! Unfortunately, they have left out several other variables, namely condo fees you may not be aware of.
– PMI. Because the home owners only paid 3.5% down, they must pay private mortgage insurance (PMI) at an estimated cost of $150 a month. Conveniently, this was left out of the calculations.
– Closing costs. These vary, of course, but $5,000 to $6,000 is a reasonable figure.
– Increases in condo fees. When I called the marketing department to get more information on this property, I was assured that condo fees had not gone up in a year. Still, it is a good guess that they will go up sometime during the 5 year example the marketing department gives.
– Parking. True, many people don’t have a vehicle when they live in the city, but if you do and you want to buy a condo in this location, it will cost an extra $35,000!
– Mortgage interest. This scenario assumes the purchaser obtains an ARM. Unless you plan to sell the residence in 5 years or less, an ARM is generally a bad idea. Interest rates are currently at historic lows. It is likely that in five years mortgage rates will be higher than they are now, causing the buyer to pay more in interest.
Just taking into account the PMI and closing costs, the touted cost benefits of buying over renting nearly disappear. In addition, if the buyer wants to eventually sell the property, there are also realtor fees and closing costs on the other end. I am not trying to dissuade young people from buying condos as their first step into home ownership, but they should be advised that there are plenty of fees and costs associated with their purchase that the marketing department is less than willing to disclose.
20's Finances says
While I would imagine it depends on the area or location, I would have assumed that parking was included. Good to be aware of. Thanks.
Glen Craig says
I could easily see a building in Manhattan not including parking in their condo fees.
Money Beagle says
You should also understand that in many associations, you can get charged assessments for larger improvements or unexpected costs. I lived in a condo and a portion of our monthly fees was placed into an account for the eventual replacement of the building roofing. All good until the roofing wore out five years earlier than expected, so every unit had to pay an extra few hundred dollars so that the repairs could be undertaken.
It’s crazy to think of a condo as “homeownership light.” Absolutely none of the costs you cited in the article are unique to condos except for the association fee.
The only thing easier in a condo than a stand-alone house is maintenance.
Money Beagle–Ouch. That could cause problems with the budget, especially if problems like that crop up every few years.
Pamela–I agree. Yet, the marketing department was clearly trying to show buying a condo in this building would have all the ease of renting while building equity at the same time.
Jenna, Adaptu Community Manager says
How is parking an extra $35,000? When you buy a house you don’t pay that much extra for a parking spot (or a garage…)
Home ownership is not that cheap! In some HOAs, assessments are routine. Being informed about the costs of home ownership is important when you make that decision.
Yeah, I’ve seen such signs in Chicago too. Could be any vibrant big city for that matter.
Anyway, I totally agree with you. The condo vs. apartment situation is not at all just about mortgage payment vs. rent costs. Apartments are easy to move into and leave, relative to condos. Many condos can lock a person into a specific location for quite a while, as you need to sell before moving out. That is, unless you want to try to rent it (harder/more hassle than it would appear to be) or pay for a vacant place.
Aside from locking someone into a place, what about the possibility of losing money on the place? Sure, one could always make money as well, but that’s more thinking of 5 years ago.
The costs can add up. Assessments can go up, special assessments can be made, interior repairs can be incurred, etc. And yes, transaction costs can be high – with commissions, transfer stamps, etc.
Condos can be a great fit for many people. Just have to realize that it’s a huge purchase and vastly different responsiblity and obligations than renting an apartment.
Abigail's Mommy says
Don’t forget inside maintenance. If you fringe goes you have to replace it.
John @ TheChristianDollar.com says
We live in a condo, and understand how many fees there are! Seriously, if you are thinking about getting into a condo, think twice before you do so. Although home ownership is a noble goal, I highly recommend my readers to rent until they are in a financial position to own something – especially condos!
pierre marc says
Well, buying a condo doesn’t mean owning. The condo fee is based on the spending the association makes ,sometimes it can jack up the fee by 200 % from the initial and the unit owner cannot fight the fee if unable to pay it the association has the right to foreclose the unit. So my advice is simple DO NOT BUY CONDO.
I live in a condo and the fees spent in condo fees; I don’t see it being put towards the condo. It seems like everytime I request for repairs “outside of my unit”, I am told it is my responsibility. There really need to be am enforcement in place to protect condominium owners from extremely high fees and etc.
Too many people have been taken advantage in the dealings with real estate.