Buying a newly converted condominium.

So you found a brand new or newly renovated condo and you are excited to be the first person to ever scratch the brand new hardwood floors. Congrats! Aside from trying not to get any fingerprints on the newly painted surfaces there are a few items you will want to know about regarding new conversions/construction condos.

1.) Setup of an “association” and condo bank account is necessary. Sometimes the developer/seller will handle or aid in this but sometimes the buyers are left to their own devices. The first buyer in the project (or if everyone closes the same time it can be done as the first community action) will likely need to setup a bank account in the name of the association. In order to do this – the bank will require a copy of all the recorded condo documents such as recorded condo trust, and master deed as well as a Tax ID number for the condo association. In order to obtain a tax ID number or “EIN” you will want to fill out a SS-4 form from the IRS website Form SS-4 and then fax the form to the IRS as instructed on the on the site. You will get an email soon thereafter providing you the “EIN” number which you will use to setup the bank account. The form will ask you for basic information that can be found on the recorded condo documents mentioned above. Once you have the bank account setup the general course of events for most associations (spelled out in the condo docs) is that every new buyer will deposit two months of condo fees into the bank account for “reserves or future common expenses”. Additionally each unit owner will be depositing their monthly condo fees into this account and the account will then be used to pay for common expenses such as the master insurance bill, landscaping, snow removal, common electric and any unforeseen common repairs that might be required down the road.

2.) City real estate tax payments are quite confusing for new conversion condos unfortunately. There is no easy way to handle this process aside from “waiving escrows with your bank” which is usually only allowed with 20% down payment and even then there might be an additional fee or higher rate associated with doing so. If your bank allows “waiving escrows” means you will handle the taxes on your own and that is easier in this case as you’ll see next. New condo conversions cause confusion because when you close the city or town will still consider your condo a 2 or 3 family building and therefore the tax bill will be a) based on the former assessed value and b) your entire association will be billed as one and therefore you must divvy up the bill, figure out which percentage each unit is responsible for and then make the payment all together in unison. That isn’t so difficult until you involve the banks. Each unit owner (who financed with a mortgage) conceivably has a tax escrow account with their bank and the bank is collecting their tax money on a monthly basis. The banks do not typically know what to do when they get a tax bill for a 2 or 3 family and either will not pay it or they will pay the entire bill out of your escrow account for all of the units. To further complicate things the bill usually still goes to the developer and the developer will have to send it to you with instructions to either pay just your share (or if all the units are sold) the developer sends it to the group to handle it amongst themselves. As the unit owner you will have to send the tax bill with instructions to your mortgage company manually, explaining that it’s a new condo and it has not yet been re-assessed and that they need to make a payment to the town or city only for your portion of the bill OR the bank might even need to reimburse the developer or another unit owner who’s bank erroneously paid the entire bill. The light at the end of the tunnel is that once the city or town finally assesses the units individually you will get your individual bill and the bank will then have no trouble handling making the quarterly tax payments.

3.) There are pro’s and con’s with the above situation. The primary concern for you is that it’s a huge pain to deal with all of this as new homeowners. Additionally, you as the owner of the unit are going to be over-paying for your tax escrow for a bit because during the mortgage approval process the banks do not know what the final tax assessment will be (each town or city does it differently) so the bank can only assume worst case which is that the town will assess your unit at the full sales price you paid at the residential tax rate for that town or city. That information can be found by simply googling “residential tax rate in {year} for city of {enter city}. Multiply the sales price by the price per thousand and divide by 12 and you have your monthly tax amount which the mortgage company is collecting as part of your mortgage payment. On the bright side until the city or town re-assesses (which could take several months or longer) you are paying only a percentage of the formerly assessed multi-family which will be a large discount for you. When the assessments happen the city or town might assess your unit at 80% or 90% of the sales price and suddenly the overall tax bill for the entire association could be 2 or 3 times higher than the former structure. So you are actually hoping they will take their time in assessing your unit (even though it is frustrating getting the bill paid). As I mentioned before however – you are paying into your escrow account based on the newly assessed tax rate and so at some point you are going to have too much money in your tax escrow account. The bank will do an “annual review” on your tax escrow account every year (usually in spring) and realize they collected way too much and send you a check in the mail as a refund (bonus). One last point – if you purchased in a city that provides a “residential exemption” – essentially a reduction on taxes for being an owner-occupant in the town you will usually have to wait until the new year to apply for and receive the discount. For example, if you close on a condo in February 2019 as an owner occupant in the city of Boston you may be eligible for a residential tax exemption in the amount of $2,719.09 but you will likely have to wait until January 2020 to apply for and receive the discount. The mortgage company will not take this into account with your initial tax escrow payment setup but will adjust this down the road during their annual review.

Chris Butts

VP Sales Manager

NMLS# 613440

Chris Butts is a Loan Originator and Sales Manager at Leader Bank. He has been in the mortgage industry for over 15 years and is committed to providing his customers with the highest quality service. His extensive experience and knowledge allow him to effectively and consistently help his customers during the loan process, whether it’s a first time home buyer, a refinance or purchasing a dream home.

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