Have you ever noticed how the terms “town house” and “condo” are sometimes used interchangeably? This is most likely because both types of housing structures may be governed by homeowners associations. That, however, is where the similarity between the two ends. Conflating condos with town houses is akin to comparing apples and oranges.
When most consumers hear the word “condo” they picture a unit in a larger structure. For the most part, this is accurate. The problem, though, is that “condominium” is actually a form of ownership, not a type of structure. There are three major types of homeownership:
- Fee simple.
Condominium owners own the interiors of their units and share ownership of the common areas. “Town house,” on the other hand, describes a type of structure – one that is typically two or more stories and attached to one or more other town houses, each with its own front door.
In some parts of the country, town houses may be owned as condominiums or the homeowner may own it fee simple – in which she owns the building and/or land in its entirety.
As you can see, the questions to ask if you are thinking of purchasing a town house will be quite different than those you’ll consider when purchasing a condominium unit. Let’s take a look at three of the most significant factors you should consider.
1. Homeowners Association
While not all town houses are governed by homeowners associations, many are. This fact opens up a can of worms when considering whether to purchase. HOA fees can be quite expensive, so you’ll need to take them into account when determining how much you can afford to spend on housing every month.
During the purchase process you’ll be given a pile of HOA-related paperwork, and you’ll need to read every word of every page – or have your attorney do so. You’ll want to know if the HOA is solvent, how often it levies assessments and if there is pending litigation, among other issues.
Finally, you’ll need to consider if you want to live in an area managed by an association. Some people prefer the structure that an HOA affords while others find that structure too confining.
2. Getting Financed
Purchasing a fee simple town house is identical to purchasing a detached, single-family dwelling as far as lenders are concerned. If the town house is owned as a condominium, lending becomes a bit trickier.
Owner-occupied homes tend to be maintained better than those used strictly as rentals. Lenders understand this and make it a part of the lending decision. Find out the ratio of owner-occupied to tenant-occupied units before making an offer. If it exceeds 30 percent, you may not be able to get a mortgage for it.
Determine the percentage of homeowners that are delinquent in paying their HOA dues. This is critical information because banks typically won’t lend to anyone wishing to purchase a town house where the HOA delinquency rate is more than 15 percent.
3. Exit Strategy
If you’re using the purchase of a town house as a springboard to the future purchase of a detached home, you’ll want to plan an exit strategy. Yes, it seems silly to consider moving before the ink is dry on the purchase agreement, but it’s necessary to achieve your future goals.
Building equity in a home takes time and, depending on market conditions and the type of home you own, it may take longer with a town house. All things being equal (location, proximity to good schools, etc.) a single-family home will appreciate in value quicker than a town house. In reality, the opportunity to build equity in the first few years of ownership of any type of home is minimal unless you pay an enormous down payment.
Ask your real estate agent to give you statistics on town house sales in your area over the past year. Check the average days on the market. The longer a home remains on the market, the less money it eventually brings. Should you decide to purchase, ask your agent to keep you updated on the town house market in the future. Most agents are happy to do this.
Keep in mind that even when your equity begins building, your property taxes may rise. Property reassessments can take a bite out of how much equity you’re able to build.
Living in a town house is ideal for those who want the benefit of homeownership at a cheaper price and without some of the headaches that come with a detached home. Choose your town house wisely and with an eye toward future market value.