Does an increase in condo fees affect the value of a condo?  

Specifically, it is going up $100 per month.  If I put that $100
towards a mortgage, I could buy a place $20K more expensive (or more
if you included tax deduction).  Is the place now worth $20K less than
it was?

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Request for Question Clarification by answerguru-ga on 08 Mar 2006 10:55 PST

Patrick, can you define "worth" for us? Are you referring to the
assessed value of the condo or the amount you can expect to get for it
on the market?

Whose perspective are you trying to answer this question from? A potential buyer?

answerguru-ga

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Clarification of Question by patrick_omalley-ga on 08 Mar 2006 12:05 PST

When I say "worth", I mean value on the market.

In other words, would the value of the condos in this building drop. 
I put in an offer for $345K, and I'm concerned that as of today, the
place would only be worth $325K (i.e. 345-20), so I'm not sure whether
I want to proceed.

Does raising the condo fee a significant ammount tend to have this
dramatic effect?  I know no one knows for sure, but I want some ideas.

Hi patrick...

I've been the president of the homeowners association for a group of
condos for several years, and I've seen many of them bought and sold.

The fee has never come up as an issue when the units have been bought
and sold. When I first took office, we had a fee of $85/month, and 
we're about to raise it to $100/month. This is primarily due to the
inflationary increases in required monthly costs, such as water, 
electricity, insurance, and waste management.

When units are sold, the primary consideration for lenders is the
assessed value of the units, which depend primarily on the relative
value of similar units in the area as well as an assessment of the
specific unit with regard to any improvements which have been made
in recent years. Appraisers also look at the state of the grounds
in common areas, so if the grounds are unkempt or in disrepair, a
low fee may only reflect that adequate upkeep is not being done.
If there is a higher fee, but the grounds are pristine, the overall
effect can be an increase in property value. So it's a matter of
things being in balance.

As long as the monthly fee isn't exorbitant, it won't even be a 
consideration for most buyers. Keep in mind that, even with a
relatively low monthly fee, assessments can be levied of, say,
$200 or more a year (limits are usually set in the bylaws), for
extraordinary maintenance that can't be covered by the monthly
fee, and these costs are not visible when the unit is up for sale.
A fee that is realistically too low may result in the need for
more frequent assessments.

A bigger concern for many lenders is the percentage of units which
are owned, vs being rented. If more than 25% of the units are being
used as rentals, with offsite owners, some lenders are disinclined
to finance them.


All of the above discusses the property value from the point of
view of sellers, buyers, and lenders. In my experience, appraisers,
who are the ones advising all three, have never even expressed any
interest in the HOA fee at all.


Please do not rate this answer until you are satisfied that  
the answer cannot be improved upon by way of a dialog  
established through the "Request for Clarification" process. 

sublime1-ga

Well, why is it going up by $100?  And what is it currently?  Has the
association been mismanaged, and they don't have adequate reserves? 
Is there a big repair they need to make?  Have they been successfully
sued and the money is to pay off the suit?

There are lots of factors to consider.  I'd consider these two factors
the most important:

1.  Is the reason it's going up a "good" reason or a "bad" reason?
2.  Is the monthly dues going from ridiculously low to average, or
from already very high to astronomically high?

So what is a good reason?  To be honest, I can't think of any purely
"good" reason, though some aren't as bad as others.  A higher payment
to make up for inadequate reserves implies that the association is
trying to get it's s**t together, so this isn't too bad of a reason. 
A higher payment to pay off a successful legal suit against the
association is definitely a bad reason, in my book.

If the previous dues was $90 and it's going up to $190 and the average
dues in your area is, oh, say $160, that's not too bad.  If the dues
are going up from $200 to $300 and the average dues in you area is
$130, then that's definitely a bad thing.

J.

Sorry, I got sidetracked and didn't really answer your question.  :-)

The amount of association dues does not directly effect the worth of
the condo.  As long as the dues are in a "reasonable" range for your
location, they don't appreciably change the condo's value. 
Conversely, if the association dues are seen as excessive by potential
buyers, it will make the condo less attractive and could negatively
effect the price.

I bought a condo about 3 years ago.  The average dues in my area were
between $140 and $220 a month.  One condo complex had dues of $345 a
month.  I didn't even look at it because I knew selling it later would
be a big problem.

J.

The comments above are good things to consider.  There is one other
question.  How much do you get for the association fees?  Do they just
maintain very basic common areas or do they cover pools, tennis
courts, a private road, etc?

Near where I live, a set of twin towers went up for condos, the first
hi rise condos in the area.  The association fees cover a lot
including a concierge.  They are about $1000/month.  The towers were
almost completely sold out before they finished building them.

Many people who bought the high rise condo units probably did it to
flip them and will never end up paying condo fees.