A common question I receive is on the differences, pros & cons of owning a condo versus a townhome. There are many different variations but here's the difference in its simplest form:
Townhouses are single family homes that share one or more walls with other independently owned units, while condos are individually owned units in an apartment style building surrounded by common areas which are jointly owned.
There are several differences between condominiums. The main difference is ownership, condos you only own the interior the your unit, while townhomes you normally own the full.
In other words, Condos - you own your actual unit but the halls,exterior, common areas, etc are all jointly owned by all of the units. Townhomes - you share a wall with a neighbor but it is mostly considered to be independently owned.
Both of these choices are cheaper than buying an actual single family house. There's many variations for each, some townhouses are actually condos, difference in the HOA's and what is covered.
We're going to take a look at the overview of what majority of the units mean for Seattle.
The main reason to consider buying one of these two units is because they are more affordable than buying a single family home. If you want to live close to downtown Seattle at a more affordable price, a condo or a townhome might be the best choice for you.
The average sale price for a single family home in Seattle is around $800,000. For condos, it's about half that price.
In Seattle, most condos are going to be located in the heart of the city which are highly populated areas. They will be close to public transportation hubs and be intensely pedestrian oriented areas with shops/bars/restaurants. Since you jointly own all of the common areas, you pay a monthly due through an HOA that covers maintenance and future projects.
The pros are affordability, location, and high demand for renting out your unit. It's not getting any cheaper to live in Seattle and millennials seem to be holding off on buying their first home and instead rent out nicer units. Being in high dense areas, they do make great rentals.
The main pitfalls are Homeowner Association dues and not having complete control over your property because it's jointly owned. One of the beautiful thing about real estate is the ability to force appreciation by remodeling the property. Since you only own a percentage of the whole building, you don't have complete control.
Here's three things to consider when looking to purchase a condo:
1. Homeowner Association Dues - The average HOA's for Seattle are $300-500 per month. Since you only own your unit and jointly own the common areas, this money goes directly to all of the shared areas and maintenance on the building. A low HOA is not always a good thing, it's more important about how the association is being managed. Each HOA will have a reserve account which is the excess money set aside for major future projects such as roof, windows, siding, flooring replacement, exterior painting, parking lot repave, etc. There will be quite a bit of paperwork to read through when you go into contract to purchase a condo.
2. HOA Balance and Special Assessments- HOA's are required to keep a certain amount of reserves for future projects. Some associations are run better than others. If the building needs new siding, it could be a million dollar project. The HOA's charge their fees based on keeping the reserve account at a certain level and for future projects and to keep the maintenance of the building up. If you have 50 units in a complex and it needs a $1,200,000 siding project in the next 10 years, that would mean a possible increase of $200 per month per unit to make up that amount. If the reserve account is already at a satisfactory level, the monthly fee will stay the same.
3. Rental Cap- Some HOA's have a limit on the number of units in the building that can be rented out. It's called the rental cap on a complex. If the rental cap is met, then no more rentals are allowed. That will decrease the number of potential buyers because it won't include investors or buyers that might want to rent out their unit down the road, which in turn, decreases the the demand and sale price. If you see a condo complex that is for sale at a low price, odds are that the rental cap has been met. There might also be a waiting list to rent out your unit which means you might never be able to rent it out.
You also have to go with a conventional mortgage to qualify for most condos which takes out a big group of buyers that cannot save 7-8% for the down payment. FHA/VA/Government Programs are not normally allowed to finance a condo unit.
Townhouses are normally in medium density areas. They may or may not be close to a downtown area or public transportation. Some are part of a full HOA similar to condos, while the rest, you actually own the building. You just have restrictions on what you can do with your property. A few of the positives for townhouses are that since you own your property, you have more control about what you can do. They are also cheaper than single family homes which makes them more affordable than buying an actual home.
Most townhouses have a form of an HOA called Covenants, Conditions, and Restrictions (CC&Rs for short). These are the rules of your neighborhood or complex. They describe the requirements and limitations about what you can do with your property. The goal is to protect and preserve the value of the homes. These are usually pretty general, "common sense" type rules & restrictions, such as they won't allow you to go paint your home bright orange without the consent of the other owners. Instead, they'll have approved exterior paint colors that match the existing palette of the complex.
Most CC&Rs for townhouses average $75-$150 per month. They normally only cover the landscaping for the units and possibly the shared walls. The actual CC&Rs will specify what is covered but most items are shared by the owners instead of using funds from the monthly dues. For example, if a new roof is needed, the amount will be split by the three units that fall under the roof.
The main things to consider for townhomes:
1. CCRs and monthly dues - With each complex having different rules, you're going to want to read through to see how costs are shared and how recent the building was built. Older buildings are going to require more maintenance and projects. With most monthly dues being less than condos, they also cover less of the building. You and the other owners are going to be sharing these costs out of pocket since the only thing covered is landscaping.
2. Layout - There's two main types of townhouses that are popular in Seattle right now
2 bed/ 2 bath roughly 1400 sqft
3 bed/3 bath roughly 1800 sqft
For both rental purposes and resale value, the 3 bed/ 3 bath are going to be much higher in demand. You have the opportunity to rent out a bedroom or provide a family 3 bedrooms down the road. I discuss a specific case study in our monthly seminar, this client leveraged a townhome to start building his rental portfolio, he did this by purchasing a 3 bedroom townhome with a suitable layout so he could comfortable rent out the bottom floor, share the middle floor, and live on the top floor himself.
3. Location - Townhouses are becoming more and more popular in Seattle. We've seen a huge supply hit the market and there's more on the way. Whether you plan to rent out one of your units down the road, you're going to want to make sure it's close to public transportation. This will increase demand for rentals while also increase resale price with most potential buyers wanting to have public transportation downtown. Not all townhomes are next to major transportation hubs so it's good to find out this out.
Hopefully this gives you a better idea of these two types of real estate.
Part 2 will cover actually Investing in Condos and Townhouses in Seattle