Friday, June 7, 2013

What's the Difference Between a Condominium and a Townhome?

Since townhomes (also called rowhomes or townhouses) often look similar to condominiums, most people think they're the same. They're enormously different and can
be enormously confusing.

Okay, the Cliffs Notes version:

1. They are radically different property type.
2. Townhomes (also called "rowhomes" or Townhouses) are closer to single-family detached homes than they are to condominiums.
3. Townhomes may or may be part of an HOA. Condos always are. And a condominium HOA can hose individual owners far more than a townhome HOA can.
4. Townhomes are easier to finance and get better interest rates than condos.

Part of the reason for the confusion is that "townhome" or "rowhome" or "townhouse" also refers to an architectural style, where a single building has multiple units whose walls are attached. Worse, the property type of the units in such a building may be either townhomes or condominiums! You can't tell the difference by just looking. You need to check the property type on the tax record.

Why? Because a townhome is more similar to a single family detached home than it is a condo, appearances notwithstanding. The owner owns the walls, roof, and the ground under it. An owner will have fee simple ownership to the property.

With a condo, by contrast, the unit owner owns only the airspace inside the unit. Everything else is owned collectively by all owners in the community, which is represented by the Condominium Owners Association (COA), and individual unit owners pretty much have to do what the COA says. If you buy a condo, you'll get a deed for your tiny fraction of common ownership land.

Townhomes don't always have Home Owner Associations (HOA) managing maintenance and aesthetic affairs. If you own a townhome and a tree falls on your roof, you're on your own, just as you would be if you owned a single-family detached home. With a condo, the COA would fix things.

In fact, townhomes often don't have HOAs. Most commonly, these are two- to four-unit buildings, but sometimes larger. The advertising copy almost always says, "No HOA fees!" That always annoyed me. No fee may mean no monthly payment, but it also probably means no, or weak, governing documents describing who does what. What if your neighbors painted their home teal? What if they replace their lawn and landscaping with beach sand? What if the collective roof leaks and they won't pay their fair share to fix it? There woldn't be much you could do without good governing documents, a fancy name for C C & Rs.

Townhomes are much easier to finance than condos. All things being equal, it's easy to get an FHA loan on a townhome, but problematic for condos. The whole condo building has to have been FHA-approved. Even with a conventional loan, condos receive higher interest rates than townhomes.

I can't tell you how many real estate brokers I've run into who didn't know the difference. In fact, shortly before leaving Portland, OR, I got into a kerfuffle with one. He'd used condo sales for his rowhome listing. I tried explaining the difference and even showed him the comps, but he'd have none of it. It cost his client at least $30,000, because the place sold before the ink was dry on the listing, and no wonder. He was dumb as a frickin' post anyway, but I felt sorry for the client.

To further complicate all this, condos do not always have attached walls. I've seen a few neighborhoods where they look like single-family detached homes. However--you guessed it--the COA still owns all the common area. Appearances are deceiving.

There's more, but that's the gist of it.