There are a number of reasons to buy a condo or townhome instead of a single family home.
- Enjoy the perks of ownership without responsibilities like lawn care and snow removal.
- Condo and townhome developments are often located in desirable urban locations.
- Owners often get more living space for their money.
Of course, there’s much more to buying a condo or townhome than personal preferences. Here's what residents and practicing physicians need to consider when buying an attached property.
Townhomes and condos are both attached residences. Really just nicer, larger apartments at face value. But they are not the same.
Townhome residents typically own the exterior of the home and the land it sits on. Townhomes are part of communities governed by a homeowners association (HOA). To maintain overall property values, HOAs enforce rules on:
- Exterior decorations.
- Other aesthetics.
HOAs also charge monthly dues that cover:
- Garbage service.
- Snow removal.
- Maintenance of common areas.
Condos are often cheaper than townhomes because they do not include land ownership. The condo community collectively owns all land, property exteriors and common areas. Like townhomes, HOAs governs condo developments.
Condos and townhomes are more difficult to obtain approval for than traditional single family homes. The process typically includes:
- More paperwork.
- More requirements.
- Higher interest rates.
Why? For lenders, condos and townhomes carry more risk. (Much more.)
Because condos and townhomes are attached to other units, they are more impacted by damage to adjacent properties. Damage to commons areas, such as a fire or leaking roofs, impact the value of your individual unit. Your unit's value may also decline if another unit within the development forecloses.
So, how do banks financing condo ownership protect their investment in your unit?
First, it will ensure that the entire development or community is warrantable. This means the HOA or property manager meets certain criteria that minimizes risk to the lender. In order to so, lenders will assess the HOA's:
- Insurance coverage.
- Past and present lawsuits.
- Amount of budget reserves for maintenance and repair.
Developments that fall into disrepair can affect the value of your individual unit.
Lenders will also assess the number of rentals in the community. If there is a constant state of empty units, this will affect property values.
Getting a FHA mortgage on a condo or townhome requires an even more stringent assessment of the HOA. In fact, less than 10 percent of all condo developments in the U.S. meet FHA financing requirements.
If you plan to use a physician mortgage loan, check with potential lenders first before starting your search. Although doctor loans apply to most condos and townhomes, this is not the case in certain cities and regions.
Typically, interest rates and upfront fees for condos and townhomes are higher than traditional properties. This is true regardless of what type of loan you use. Once again, this is due to the higher risk of default on condos and townhomes. The difference should be minimal; but the higher your price range, the more noticeable it will be.
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We've already discussed the added risk condos and townhomes pose to lenders. But they're not the only ones who are at risk.
Many are skeptical about the ROI of condos and townhouses for the owners. In fact, it's typically more affordable to buy an attached home than a detached one. According to the National Association of Realtors (NAR), the median sale price of condos and co-op homes was $210,700 in 2015 --- compared to $223,900 for single-family homes.
The Washington Post cited data from the NAR based on sales prices of existing properties. From 2010-2016, the average appreciation of single-family homes was 4.7 percent. Condos averaged 3.4 percent higher during the same period. NAR also indicated that a low amount of new condo construction indicates lagging demand.
In addition to limited appreciation, it's difficult for owners to boost property value through updates. While condo and townhome owners have some control over their properties, they must adhere to HOA rules. This means they cannot:
- Add a garage.
- Landscape how they want.
Detached homes offer more freedom. Still, this report suggests condo values may be increasing higher than traditional homes in some markets. The report cited data from Trulia's automated valuation model. It shows that condo values in the 100 largest markets increased 38.4 percent from February 2012 -2017. The same data showed the value of detached homes appreciated 27.9 percent during that time period.
Condos and townhomes are more feasible for some than others. A bachelor new to practice is a better fit than a seasoned physician with a family.
Either way, it's important to understand:
- The differences between condos and townhomes.
- What makes the mortgage process different.
- Their value and appreciation potential.
Learning this now will help you perform your due diligence when it's time to go house hunting.
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Joel Palmer is a writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.