Tips and Traps when Buying a Condo, Co-op, or Townhouse

Despite my earlier mixed feelings, I have returned to Robert Irwin for another read-through.  He's the author of one of the only books I can find that specifically address buying a condo.  Condos are certainly dwarfed in the national real estate market by traditional single-family detached homes (SFDs), but in certain markets, particularly older urban ones like mine, they're a significant force, and often the best or only choice for first-time home-buyers.  I was tired of being an afterthought in real estate books, and wanted something with more focus.

On the whole, I enjoyed reading this book more than Irwin's earlier book on negotiation.  That probably says more about me than it does about the relative quality of the books - I don't particularly enjoy negotiation, and I DO enjoy condos.  The earlier book occasionally irritated me when Irwin described high-pressure tactics and said things like, "I consider this approach to be unethical and would never suggest using it, but you should be aware of it."  There's almost none of that in this book - it's more more descriptive than prescriptive, focusing on informing you rather than advising how to act.

It fulfilled its main purpose of providing a high level of detail on purchasing properties like condos.  I have to say that I didn't glean too much additional knowledge from the book, but that's because I've spent more than six months patiently grabbing bits and pieces of info from a wide variety of sources.  I really wish I had read this up front, it would have saved me a lot of time.  I had a lot of basic questions early on that were surprisingly hard to answer: "When I buy a condo, what, exactly, do I own?"  Irwin gives an extremely clear answer: you own an "airspace", defined as the region between the walls of your unit.  You own this space "fee simple title," which is the same kind of ownership that an SFD buyer gets, and means that you have nearly unlimited freedom within that airspace.  Additionally, you own a proportional share of the land, common property, and everything else run by the association.  That last point is what used to confuse me - I knew that land was valuable, and was curious how exactly owning land works when multiple units are stacked on top of it.

He also digs deeper into the implications of this ownership structure.  Because all condo owners own their airspace "fee simple title," it can be very hard to enforce a noise ordinance against someone who plays their stereo loudly.  Unlike a co-op, where the association owns the property and can kick out someone who violates the rules, a condo association is more circumscribed - they can talk to the owner, fine them, place a lien on their condo, but can't just kick them out.

Irwin also writes a fair amount about condo conversions.  I read about these all the time - they're hugely popular in San Francisco with a very long waiting list - but he addresses all the implications.  Conversions generally offer a trade-off between a better location in exchange for an older building that may not last as long.

The book also forced me to confront an idea that I was familiar with but hadn't let myself think about very much: things wear out.  I was comfortable with the idea of a condo association repairing a roof, or repainting, but what if the building itself became decrepit?  This is especially worrisome if I think about buying, say, a 40-year-old condo unit.  If the average lifespan of a building is 50 years, then what happens to me when the time comes for massive changes?  According to Irwin, the condo association should take ALL maintenance and replacement costs into account, including the buildings themselves.  That doesn't necessarily mean that every board will do this responsibly, but at least in theory, the buildings should continue replenishing themselves over generations.

There are quite a few areas where I was learning actual new stuff for me.  A lot of these concern what happens AFTER I would buy a unit.  I've had a vague idea that there's a "board" that does important stuff, but Irwin goes into the details about the Architectural Committee, the enforcement committee, the board itself, and so on.  He confidently declares that YOU will want to run for the Board, even if right now you think you never would.  (I don't, so that makes me nervous.)  He talks about people burning out on the Board.  He describes the frequent lawsuits that Boards are involved in: against the developer, against residents, against guests.  All of which makes me a little concerned.  On the whole, though, the book maintains my goal of moving into one of these.  Now that I understand how they work a bit better, I feel more confident about what I'd be getting into.

At the same time, it impresses on me again the importance of buying into the RIGHT condo.  The difference between a well-run condo association and a poorly-run one is enormous.  Irwin gives some good advice on how to determine which is which: ask to read the minutes of recent board meetings, details on any current lawsuits, and phone numbers for board members.  If the board refuses, they're likely hiding something, and you should continue to look.

The other big concern is the unknown of a new development.  A few of the places I'm considering are new construction.  These hopefully have really high quality materials and the whole "new home smell" thing, but as Irwin points out, there's a huge unknown factor involved.  If the developer runs into financial troubles, they may never finish, and the value of existing units will tank.  Even if everything is satisfactorily completed, you're getting into an unknown situation: you don't know what the Board will be like, how responsible they will be with money, and so on.  With an existing development there is a track record that you can examine.  It takes guts to spend a lot of money to live under uncertain leadership.

Oh, and I was glad to see that Irwin tackled a question I had wondered about recently: whether the HOA fees include insurance.  While there may be exceptions, in general the HOA will purchase property (and often liability) insurance, so the owner just needs to buy a cheaper policy that covers only the replacement value of their goods.

One thing that is kind of funny about this book is that it was published in 2007, at the very height of the speculative real estate bubble.  Irwin allows that moment in history to infect some of his outlook - he writes about how "Condos usually appreciate more slowly than SFDs, but in the last few years, they've been appreciating much more quickly!"  Well, duh... that was part of the problem.  In the financing chapter he writes about negative-amortization and option-ARM loans.  Those things are long gone now.

While this book isn't perfect, it's certainly the best book that I've read yet on the specific issues facing a potential condo buyer.  I'd highly recommend checking out this book early on to orient yourself and make sure whether you want to go down this road or not.

Tips & Traps when Negotiating Real Estate

Oh, look at what we have here: Another book summary!  Please don't expect this pace to continue - there really are just a handful of real estate books that I plan on reading, I just happened to grab a bunch of them on a recent trip to the library. 

I'm paying particular attention to the topic of negotiation as I lay the groundwork for an eventual purchase, mainly because it's as aspect that starkly divides home shopping from almost any other American act of commerce.  I consider myself to be a savvy shopper, and pride myself on getting the best price for almost everything.  However, you can't negotiate with Amazon.com, or with Best Buy, or with Whole Foods.  For most commerce, getting the best price means searching among a large number of sellers until you find that price, and then acting quickly enough to take advantage of it.  In real estate, the search is still a big part of it, but even after you have found what you want, the negotiation phase can modify the price by tens of thousands of dollars.  This is the sort of thing I'll only experience a few times in my life, and I want to make sure I do it right.

I was pleased to see that there is a book out there that specifically covers the subject of negotiation within the context of home shopping, and it was pretty well reviewed at Amazon.  "Tips & Traps when Negotiating Real Estate" is written by Robert Irwin; this is the first thing by him that I've read, but apparently he writes a lot of real estate-related material, and also runs a web site with an annoying and intrusive registration requirement.

The book itself is extremely well written, though.  Unlike "Your New House," this book is written by an expert in the field, and it shows - he regularly recounts anecdotes from his decades in the business, and speaks with a strong air of authority.  The structure is very sound as well.  On the broad scale, it is soup-to-nuts, covering every aspect of negotiating that you may run across.  On the small scale, each chapter is focused on a particular topic, and usually includes a specific example or two to illustrate the importance of a particular type of negotiation.  As he talks through the importance of a given topic, the main text is punched up with occasional "Tips" - things you can look out for to gain advantage - and "Traps" - potential mistakes that could cost you a deal or money.

If there is one overriding theme to the book, it would be, "In real estate, EVERYTHING is negotiable."  Nothing is off-limits, even though it is in other people's interests to make it seem so.  Brokers' commissions, sales prices, the swing set in the back yard... everything can become a part of the deal.

At the same time, the most crucial tools you can have as a negotiator are knowledge and leverage.  Knowledge is crucial so you can recognize when something is a good deal, identify a reasonable price, know how hot or cold the market is so you know how much you can push the other side, and know the right questions to ask.  Leverage is crucial to get the best terms possible.  Whichever party has the most leverage can drive the other party.  In a hot market, sellers automatically have leverage, since if they don't like an offer or buyer they have plenty of others to choose from.  However, Irwin also describes ways that you can increase leverage in any market.  These all make sense, although I wouldn't necessarily have thought of them on my own.  For example, simply investing time can increase your leverage.  If you and the other party put four hours into making a deal, and then you mention that something is likely to be a deal-breaker, the other person will be much more likely to want to accommodate you and close the deal than they would be if you had brought up the deal-breaker when you first met.  Personally, I'm very Type A and I like to act quickly on everything, so I ordinarily wouldn't even consider engaging in a long conversation with an uncertain outcome like that, but Irwin's reasoning seems very sound.

The book is also valuable in the way it continues to re-emphasize things that I've read or heard from other sources: Buyers should always get a private inspection.  Make sure that your agent represents you and not the seller.  Give yourself enough time so you don't rush into a bad situation.

While everything is negotiable, you need to recognize that not everyone has the power to negotiate.  It's a bit of a waste to spend an hour chatting up the husband if the wife is responsible for all decisions.  New homes can be negotiated, but the front agent at the desk may not have the authority to change terms; you might need to get directly in touch with the builder.  Similarly, loan products are usually sold as prepackaged products by salesmen, but if you already have a loan or get in touch with a loan officer, you might (in the right market) be able to change terms.

I have to say, Irwin does seem like a formidable opponent, and I'm not sure if I would necessarily follow every one of his recommendations.  While he never recommends doing anything unethical or dishonest, he is a big advocate of taking a very hard line to get the best possible deal.  A late chapter describes why in some cases you might want to negotiate without using a real estate agent.  As he points out, even if the agent is representing you, the agent is also concerned about their reputation in the industry.  They don't want to be known as the mean person, or the person who brings in the lowest price (and hence lowest commission) for sellers.  You, on the other hand, will never see any of these agents again, and have no reason to hold back on arguing for the best deal you can get.  When he puts it that way, I can certainly see the advantage, though it's a role I wouldn't want to play often.

A lot of the negotiation-specific things he describes are worth keeping in mind.  For example, "Never negotiate at offer that cannot be closed."  He cites a hypothetical: A buyer comes to you and asks, "Would you accept $390,000 for this house?"  You reply, "We're asking $450,000, but I could go as low as $425,000".  You've just given away $25,000 - and, worst of all, you haven't gotten anything for it.  The person hasn't made you an offer - negotiations haven't truly begun - but you're already arguing from a weaker position.  The correct response is, "Are you offering $390,000?"  Ask them to put the offer in writing - in a form that can be closed - and only then begin negotiation.

I do feel pretty good about my overall chances in this field, thanks in large part to the knowledge and leverage pillars.  By investing as much time as I plan into researching the market and educating myself, I hope to get a great feel for what's a good deal.  Leverage may go up or down based on how the market is doing later this year, but even if the market warms up, I think I'll be in pretty good shape.  I plan to focus my search in the fall-winter period when sales are generally slow, and because I have such a wide time frame to work with, I'll be able to take my time to look for a good deal without feeling pressure to choose any one property.  As Irwin points out, at the end of the day you need to recognize when a deal just isn't possible and walk away.  (And be prepared if it turns out that the other party is willing to negotiate further after all - presto, instant leverage!)

All in all, this was a great book, Irwin's praise of Nixon notwithstanding.  I'll probably revisit it once more before I head out into the field for real.  After all, this will be one of the most expensive purchases I make in my entire life, and I want to get every advantage that I can.

Your New House

As part of my preparation, I've been reading a fair amount of real estate information.  A good chunk of this takes the form of news articles and online sources, but I also have several books that I've read or that I plan to read.  I'll try and summarize such books here, to describe both the good and the bad of each.

"Your New House" was written by the husband-and-wife team of Alan and Denise Fields.  It covers a relatively narrow category of real estate: purchasing a new house, with extra emphasis on overseeing construction.  In other words, rather than looking at a set of existing houses to find one that you like, working with professionals to build a house to your specifications.

The book has a lot of personality and is pretty enjoyable to read.  They stuff the book with anecdotes, a couple from their own experience and many more from readers who contacted them after reading earlier editions of the book.  This isn't a dry, detached, clinical look.  It self-advertises as being part caution, part information, and part rant. 

They don't put any effort into being "objective," and just call 'em like they see 'em.  They are relentlessly harsh towards builders and subcontractors.  If you take one thing away from this book, it will be the importance of choosing a good builder and watching them like a hawk.  They also sneer at real estate agents, only begrudgingly allowing that, in certain circumstances, it may be wise to find an exclusive buyer's agent.  On the other hand, they are generally glowing about architects, and speak fairly well about lawyers. 

Which does bring up an interesting point that they regularly raise: home-building is NOT a profession.  To become an architect or a lawyer, one must go to school for many years, study, and prove themselves.  Most real estate agents have no college degree, and anyone who picks up a hammer and (depending on the state) gets a license can become a builder.  I'm sure that there are bad architects and good builders out there, but when you consider how much money we spend on homes, it does seem pretty surprising that we don't have true systems for certifying professional builders.

While the breezy writing of the book is entertaining, it also makes it feel a bit loose and even untrustworthy.  In one example, the authors off-handedly mention that in an earlier edition of the book, they recommended that people frame their houses with 2x6 beams instead of 2x4s.  The reason for this was to permit more insulation, saving on energy bills.  Since the book came out, they had learned that the cost of the extra lumber and extra insulation was far too high, and the savings on lost heat far too low, for this to make sense.  On an average house, it would take about 75 years to recoup the extra money on materials.  So, never mind: 2x4s are fine!

Now, I'm delighted that they owned up to this mistake and talked through it, but it does shine light on a problem with this book: it's heavily anecdotal.  The authors aren't experts in the field.  Throughout the book, they're reporting what other people have told them.  Some of that is good advice; some of it is not.  You can't take this book as gospel.  Instead, you should treat it the same way you would treat a funny and opinionated guest at a dinner party.

That said, I am really glad that I read the book.  On the downside, it doesn't directly speak to my situation - the word "condo" isn't mentioned once in the entire book (fair enough, since it's "Your New House" and not "Your New Home"), and I won't have the opportunity to make many of the decisions they discuss (picking an architect, selecting a building site, etc.).  Nonetheless, all of those decisions will be made, and I now know how important it is to learn about them after the fact.  As a condo buyer I don't have as much choice, but that doesn't mean that the foundation is any less important, or that I should be less concerned about the builder's quality.

Probably the most valuable part of the book for me was the section towards the end that discusses the various choices available for components of the home: different styles of roof, materials for roofing, bathroom fixture manufacturers, siding, and so on.  Again, these aren't choices I'll be able to make, but after reading this book I now have a much better understanding of what the various options mean.  I now have a better understanding of the trade-offs between stucco, wood, brick, vinyl, and so on.  This extra knowledge will help me better evaluate various condo options and decide what I want.

Part of the book did make me seriously re-consider whether I wanted to stop being a renter at all.  The sections on builder scams and especially home-warranty fraud were especially distressing.  Once again, you would think that if you're spending so much money on something, you'd get some level of assurance of quality, but it's quite clear that a lot of people get into deep trouble.

That said, it's far better to read and think about these problems now than when I'm about to sign a check.  "Your New House" isn't gospel, but it is worth reading and thinking about.