If you’re planning on selling a townhome, there are things to know and do which are a little different than with other types of home ownership. Correct planning and execution may increase your return on investment. Two areas to research ahead of time are these:
- Correctly understand the type of ownership (many consumers and real estate professionals don’t) – it matters.
- Check into the HOA finances and learn whether it will influence your home’s value positively or negatively.
Both of these should influence your pricing strategy.
1 Selling a townhome and understanding ownership types
The most important and unique thing about a townhouse sale is understanding the type of ownership for the unit, as there’s a lot of confusion about this, even among real estate professionals. We’ll explain that below.
A townhouse or townhome is an architectural style (think shape of the home), and usually it means no other units above or below it. There can be some exceptions, but that’s not common in our experience.
A townhome is a type of housing in a Common Interest Development or CID, and could be held in these ownership types:
- Condominium or condo
- Planned Unit Development (PUD)
- Co-op or Cooperative (there are only a few of these here in Silicon Valley)
Condominium ownership
Most townhomes in Santa Clara County seem to be held in condo ownership. With that type, unit owners directly own the interior of the unit (as in the airspace between the walls) and they also own a fraction of the common areas. If there are 100 units, they might own 1% (or it could be based on square footage or bedroom size). If there are garages, balconies, or patios, those may belong to the homeowner’s association, but the resident has the exclusive right to use those areas. They don’t own the balcony, garage, etc. in the majority of cases.
There’s good and bad to every ownership category. The good thing about the HOA owning a deck is that if there’s dry rot and an expensive repair, the HOA will pay to fix it (but also you pay a portion of your own plus anyone else’s rotted deck).
PUD Ownership
PUD ownership is the most sought after type of townhouse. With this type, home owners own the outer walls, the roof, the backyard or patio, and the land under the home. Mortgage lenders treat a PUD like a single family house, so it’s easier to sell.
In my experience, HOAs are less restrictive or less intrusive than they are with condo ownership – home owners seem to have more latitude.
Between the easier selling and often more freedom, PUDs tend to sell for more than condos, even when they look exactly the same. Many agents don’t understand what a PUD is, or don’t know how to identify them, so they may be misclassified in the MLS and that may impact the ultimate sale ability of the home or the price that it may fetch when on the market. When selling a townhome, it’s crucial to understand the type of ownership so that you can catch a mistake that may impact the sale price.
The downside to PUDs is that if there’s wood siding or exterior damage, the HOA is less likely to cover those repairs. It’s not set in stone, though, so it’s imperative to read the HOA documents and know what they do and don’t cover.
For both condominium and PUD communities, there can be gray areas. Are windows the HOA’s responsibility, or the owners’? That would be in the HOA docs also. If you’re selling your townhome and some of the double pane windows have seal failure, it’s important to know if the HOA or if you as the owner are responsible for repairs.
Co-op Ownership
Co-ops or cooperatives are uncommon here, but I’m aware of some in Santa Clara. This ownership is a little similar to owning shares in a stock. With this housing type, there’s a corporation that owns the building, and the owners of each unit own a share or shares in it, and they have the exclusive right to use their particular home. We haven’t sold these as they are rare here, but you can learn more about this type of housing at this link.
2 Understanding HOA finances and their impact on a townhome’s value
Many people living in common interest developments don’t pay a lot of attention to the finances of the HOA except when it comes to dues being raised or special assessments being threatened. If a you are thinking of a selling a townhome – even in the distant future – it’s important to know what’s what because those finances can be a feature when selling a townhome, or they could be a detriment.
In short, HOAs have two types of accounts for the members’ funds. The operating account covers the immediate bills and things needed to be paid for in the near future or current calendar year. The reserve account is for long term expenses, things more than a year out, such as periodically replastering the pool, re-roofing, or repaving the parking lot.
Because the reserve accounts cover things in the more distant future, HOA boards often don’t fund them fully. In fact, it is a small minority of HOAs in our area that have 100% funding or close to it in that account.
The problem with low percentages funded with the reserve account is that there’s a risk of needing to have a special assessment or a dues increase or both.
If the HOA’s reserve account drops below 10% (we’ve seen it), it can be harder or more expensive to get a mortgage. When buyers cannot get a loan on homes in a particular community, or if they have to pay more or get a worse rate, that impact will show up in home values.
A few months ago we were showing a townhouse and we overheard the listing agent educate people on this and tell them that the reserve account was 100% funded. She was wise and the seller was very well represented in that case!
Buyers get access to the budgets and reserve account info with the HOA packages that are part of the pre-sale disclosure package (at least this is normative for Silicon Valley – it may not happen everywhere.) Careful buyers may see it and either feel better or worse about buying into the community from what they’ve learned.
When selling a townhome, most home owners know that they need to declutter, stage, price carefully, and so on. But just as important is understanding the type of home ownership and the condition of the community’s finances so that the pricing will be correct.
