Q: My spouse and I have been considering a home purchase, but every time we begin looking, the plummeting prices give us cold feet. Is buying a condo a smarter move? The prices seem less risky.
A: Listen to your cold feet—they're telling you something. Though buying a home still makes a lot of sense, don't do it just because you think you're supposed to. For many people, I believe that renting is actually the way to go. For help sizing up your own best option, see "4 Signs You Should Rent Instead of Buy a Home.
But if you're set on owning, know that a condo's lower price doesn't necessarily mean lower risk. Because too many condos were built during the housing boom—and because many people bought condos as investments, not residences—they've been among the hardest hit properties since the real estate bubble burst. From 2007 through 2010, the national median price of condos fell 24 percent, according to the National Association of Realtors, compared with a 22 percent decline for single-family homes. That doesn't mean condos are always a bad deal, but it does mean you should do your research. Ask your agent for data on how local condo values have fared compared with single-family homes in recent years.
You should also know that in 2009, the Federal Housing Administration announced that it would insure loans on condos only in developments where at least 50 percent of the units are owner occupied and, for new developments, where at least 30 percent of units are already sold. If you plan to use an FHA-insured loan, you can check if a condo development is FHA approved at hud.gov
After all that legwork, if you're sure you want to buy a condo, do so only if...
• You can afford the maintenance fee. Many first-time owners don't realize that a condo purchase means paying a monthly fee to the condo association.
• At least 90 percent of the condos in the development are owner occupied.
• The annual increase in the monthly maintenance fee for the past few years has not exceeded the general rate of inflation, or about 3 percent.
• Ninety-seven percent of the development's residents are current with their monthly payments. Remember, it's the other owners who must make up the shortfall when some owners fall behind.
• At least 10 percent of the association's annual budget goes into a reserve fund.
• The condo's roof and major mechanical systems are closer to five years old than they are to 15. If a development requires big upgrades, you could face a costly "special assessment" charge after moving in.
Finally, talk to a few of the residents. They can be your most valuable resource for learning about the development's pros and cons.
More Financial Guidance from Suze Orman