Not Your Auntie's Condo

Forget the condo in Boca or the anonymous, singles-only, low-rise golf-course abodes on the edge of town that you may have associated with condos if you’re not from San Francisco or New York.

In 2017, 2200 single-houses sold in San Francisco while 2600 condos sold at an average of $1.8 million for a house and $1.3 million for an average condominium. Condominiums reflect both an entry point into our market as well as a destination — from a Diamond Heights studio to a downtown penthouse with amenities galore — both are important bookends to a diverse and strong market segment in the City.

Here are some of the pros and cons of a buying a condominium:

Pros

• Lower average price point but higher $/sqft
• Collective responsibility and management of building and common areas
• Possibly exempt from Rent Control laws and Eviction Control laws for San Francisco
• Desirable inventory in desirable locations (planning and zoning favors more people enjoying a location through raising population density)
• Developer and designer focus on this product category
• Amenities from door people, gyms, spas to bare-boned
• Various legal protections for buyers of newly built condominiums for the first 10 years of a building’s life
• Lifestyle — depending on where, may be perfect for owners who travel, own multiple homes, or ones who don’t want to be bothered with mundane things like mowing the lawn or cleaning the windows

Cons

• Less independence because of Homeowner Association prerogatives, conflicting personalities, arcane rules and governing HOA documents and bylaws
• Close quarters with neighbors (sound transmission/privacy/freedom)
• Shared common areas (lack of yard/parking/storage)
• Risk that other neighbor actions will impact you financially (foreclosure risk)
• Risk of a chilling effect on ability to sell if HOA-wide legal issues arise
• HOA dues and assessments aren’t cheap and you may pay for things you don’t use
• Less flexibility to rent to short term (like Airbnb) or to take possession back of your plans change

How Do Condos Compare with Houses in San Francisco?

What exactly do you get when you buy a condominium?

When you purchase a condominium, you’re usually buying title to a subdivided, three-dimensional space within a “common interest development” per the legal jargon that defines these things. A condo ‘unit’ can be bought and sold, financed and willed like a single-family house can be. As a condition of your purchase, you’re also agreeing to being bound by certain documents, rules, conditions and a homeowner association’s authority.

Buying a condominium also means you’re not only buying the unit itself but you’re also buying into a homeowner association that ‘owns’ the common areas of a building like hallways, windows (potentially), roofs, yards, gym equipment and more.

Your ownership stake of the common area is usually tied to the square footage of your unit, which is in turn tied to the amount of the common dues that you’re expected to pay and is usually expressed as a percentage. The legal description of the unit will also include any exclusive use of a common area, i.e., a patio, parking space or storage area.

Because the HOA has an obligation to maintain ‘common areas’ as well as to promote resident welfare they are granted certain amounts of power to achieve those goals. For large associations, the HOA will have a Board and that board will hire a property management company. Some HOAs will have formal meetings, others won’t. All HOAs are supposed to maintain financial records and provide annual statements among other requirements under applicable California law.

The HOA also will have easement rights (unfettered access) to enter your unit if there’s an emergency like a water leak or if there is an urgent repair for example.

The Details: How HOAs are Governed, Types of Amenities, Monthly Dues and More

All the rights defining which parts of the condo development/subdivision belong to who, rules regarding things like pets, short-term rentals and allowed uses onsite are contained in a series of legally binding documents called the “CC&Rs” — Covenants, Conditions and Restrictions and supplemental Bylaws and House Rules where applicable. CC&Rs are required for all condominiums and planned developments and are prepared by lawyers as they do have to conform with the Stirling-Davis Act and cannot contain any discriminatory housing provisions; also, new developments cannot bar dogs from being onsite either. 

The CC&Rs describe the rights and obligations of the homeowners’ association and of each owner. CC&Rs vary widely in content and length and usually cover the following topics:

  • the demarcation between private and common areas;
  • setting budgets, reserves, regular and special assessments and dues;
  • usage restrictions like animal regulations, remodeling; maintenance responsibilities of the association and the individual owners;
  • leasing rights (is Airbnb allowed? Does the HOA get to veto a lease or just get information about it?);
  • how operating costs are shared among the owners, and the mechanism for collecting owner payments;
  • dispute resolution procedures between members and between members and the HOA; 
  • HOA Board or Member enforcement powers; and mortgagor rights;
  • Voting rights and election procedures for HOA Board Members.

How Much Are the Monthly Dues? The variation we see in condo inventory also shows up in monthly HOA fees, which usually cover building insurance, trash, water and common area electricity. The more amenities there are the higher the fee with attended buildings having the highest fees for the most part. There are buildings like the Arterra in South Beach that save copious amounts of money because of its LEED certification whereby its residents have an attended lobby, gym, common roof deck, elevators and common janitorial services for about $400/month whereas other buildings on the north side of town, for example have monthly dues well over $1,000/month with no amenities to speak of.

Top HOA Fee Cost Centers

In other words, what drives up monthly assessments:

  • People who provide those services (parking valet attendants, concierge services, door people)
  • Earthquake insurance (most HOAs do not have coverage, the ones who do see fees go up significantly)
  • Pools/gyms/common area lounges (equipment, labor and extra insurance costs)
  • Amenities (the fringe benefits like breakfasts, housekeeping, planned events)
  • Business centers (office space, copiers, computers, supplies)
  • Common Heat or Water
  • Packaged Internet, cable or phone (Webpass for example)
  • Renovations (common area maintenance, improvement, roofs)
  • Reserve-building (big HOAs are required to do ‘reserve studies’ which will examine common area elements, materials and systems and their expected life expectancies and replacement costs to arrive to a monthly set-aside assessment to save up for these items)

Expected Monthly Costs

Our experience with buying and selling so many condominiums in the City tells us what to expect

  • Pay-as-you-go to $100/mo – 1-2 unit buildings: garbage, water, common area electricity, common area insurance
  • $200-$400 2-4 unit buildings
  • $500-$700 medium to larger buildings with elevators
  • $800-$1000 large buildings with lobby attendants, services, common areas like lounges, party rooms, parking
  • $1500+ full-service concierge buildings with marquee services and amenities, closer to a hotel experience  

Can I buy another unit in the building? What if there are only two units? In the case of just a pair of units: lenders usually hate this scenario but can do it. You have to expect you to put down at least 40% of the purchase price for the other unit and have a good amount of HOA reserves built up. And before you ask why you’d want to buy both (or all) of the units in a building consider that many folks will buy both units in a building and use it as a single-family house/compound/residence.

What type in insurance do you need for a condo?

Each owner should purchase an HO-6 Condominium Homeowners Policy — a ‘walls-ins’ policy — to insure their own installed fixtures, personal property, loss of use with additional living expenses and/or loss of income and rental income. Coverage should track any lost assessment dues and cover the building’s overall policy deductible and, most importantly, insure for personal liability. For a decent summary, take a read about what HO-6/’walls-in’ insurance is and how it relates to a “Master” policy of insurance for the entire HOA when buying in a condominium building here.  

How does an HOA run?

HOAs can be as informal as just saying, “hi,” to your neighbor and ‘winging-it’ when it comes to paying the bills and having meetings. You’ll handle things as they arise and if there is no ‘reserve’ account (i.e., the HOA’s savings account) you’ll all have to pony up money when the roof needs replacing or if there’s a plumbing emergency. By contrast, other HOAs are very formal. We’re talking Robert’s Rules of Order formal meetings, professional management companies, budgets and budget studies that stretch on for pages and pages; reserve accounts into the millions.

WHAT ABOUT NEW CONSTRUCTION CONDOS? 

With all the new construction hitting San Francisco lately buying newly built condominiums has become more commonplace. There are some major differences with buying new-construction units versus buying older inventory. Here are a few:  

 

Remind Them of Us. If there’s a sales office selling the units be sure to mention you’re working with Kevin and Jonathan when you first go as it’ll be important both for proper compensation and to ensure that you have independent representation.

Customization and Credits. You may be able to customize finishes but will be subject to a developer’s timeline (and delays). While the seller developer may not negotiate on price they may give you a design credit to upgrade finishes or appliances.

Custom Contracts. Unlike most purchases in San Francisco that use our standardized contract form, buying new construction will have their own custom contacts that are governed by the Department of Real Estate.  

Brand New, With Fit and Finish Warranty. The original (first) owner of the condominium gets a 1-year, comprehensive fit and finish warranty from the developer covering nearly every system and aspect of the condominium’s construction and materials from defect or damage (absent normal wear and tear)

Bummer, You Have to Pay Transfer Tax…. Unlike most transactions involving resale of property, when a buyer chooses to buy new construction they will have to pay the transfer tax to the Assessor’s Office. This is a cost the seller usually pays. And, you guessed it, when the buyer becomes a seller one day they will have to pay transfer tax then too. Yes, it’s a bummer that taxes are paid twice but remember new construction comes along with a 10-year defects period and a comprehensive year-long warranty — these are things that never come with resale transactions. Read more about how taxes are calculated here.

… And Get an Even Longer Warranty. After the first year of occupancy the developers will then have the right to repair any issues that come up involving most systems in a development under California law. Another way to look at it: developers are obliged to cure any remedies that arise and manifest themselves during the development’s first 10 years. If the HOA and developer cannot reach a compromise or agreement on repairs of defects litigation can ensue.

Newly Built Condominiums Get a 10-Year Warranty Period  

California’s Right to Repair Act — SB 800 — In a Nutshell 

A Right to Repair, It’s Not Your Right However, It’s Theirs — SB 800: California’s Right to Repair Act

Construction-defect issues occur in a fair number of large residential buildings in the city. Does it mean all a building’s work is shoddy? Or that the builders were cutting corners? Or is it lawyers being greedy? (Law firms will send postcards to condos in years 7, 8 and 9 asking if there have been issues). Big building projects have so many moving parts — plans, permits, change orders — with such a big cast of characters — subcontractors, tradespeople, sales people — and general chaos over several years it takes to build something — it’s no wonder how isolated mistakes or bad luck can and do happen despite best everyone’s efforts.

In any case, when you get a lot of people doing something together someone is going to miss something somewhere. Usually this manifests itself in construction defects. The most common construction defects involve water leaks (or intrusion is the more formal term), inadequate climate control or venting or improper materials selection or installation. And of course, remediating those defects usually involved a lawsuit, which necessitated issues of proving fault, establishing damages and figuring out who had to repair what and when before anything got repaired.

This was true until California’s Legislature passed Senate Bill 800 —the Right to Repair Act— in 2003. The act applies to newly-built condos and single-family homes built since then. SB 800 was an attempt to create a comprehensive regulatory scheme to handle construction defects and applies during the first 10 years of a building’s life and works in conjunction with the 1-year fit and finish warranty that comes along with new construction (the fit and finish warranty is limited to the first owner).

Instead of having to sue to get construction defects repaired initially, this system is meant to encourage a collaborative process between owners (through their HOAs) that focuses less on proving liability as it instead focuses on allocating repair responsibility through mediation. This system is meant to give developers and their subcontractors a right to repair issues first before having to result to a lawsuit. SB 800 works well when the parties are engaged and the repair costs reasonable; it’s less effective when repairs and issues are more extensive and expensive. The system may be unevenly applied as some contractors may not be around years after a project is built, insurance carriers may squabble over coverage issues, and not every developer will opt to abide by the system. But the fact that a wide-variety of systems are covered and should be repaired within a building’s early life is something to consider.    

What type of condominium is right for you?

New or Old or In Between? Let us help you decide

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Kevin K. Ho, Esq. + Jonathan B. McNarry
San Francisco Real Estate Experts
+1-415.297-7462 (Kevin)
+1-415.215.4393 (Jonathan)
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