I Don’t Hate Condos.

You may have noticed that aside from a few mentions in the quarterly and yearly updates, I rarely ever talk about condos and townhomes when I am discussing the San Carlos real estate market. There was a time when I included them in the Monday Real Estate Week in Review, but not anymore.

There are a few reasons for that, and it's not that I hate condos.

The primary reason is that condos and townhomes make up just a fraction of the residential real estate that changes hands in any given year in San Carlos. If you looked at the sales data for even last year, this is what you would see:

• 75 Condos and townhomes sold last year in San Carlos. That represented 24% of the total number of residences that changed hands last year. That's not an insignificant number.
• The revenue generated from those sales represented only 12% of the total revenue for residential sales in San Carlos. That is an insignificant number. And it underscores the fact that single-family homes are simply a better real estate investment than condos are.

So when I dive into the data to identify trends in the San Carlos market, I focus my attention on the beast that drives 88% of the market, not the one that drives 12%. The latter simply doesn't move the needle.

But that doesn't mean I hate condos. I think they have a valuable place in our real estate food chain. But they also have some serious drawbacks.

Let's look at both.

Why I Like Condos

The first step in building wealth through real estate is simply being able to get onto the escalator in the first place, and that first step is almost always the doozy for first-time home buyers. Since condos are generally less expensive than single-family homes, they represent the first step in building equity and eventually trading up to a home.

Condos are also a good choice for downsizers who want to stay in the ownership game instead of becoming renters. Condos are also generally smaller than single-family homes, and in most cases, the homeowner no longer needs to fuss over the yard or the exterior of the house.

The final aspects that I appreciate about condo living are the community experience and the amenities. Living by oneself in a single-family home can be a very lonely experience, especially for someone in their advanced years. Just having more people in close proximity is good for safety reasons and overall mental health (unless they are lousy neighbors). And some complexes – not all of them – are nicely appointed with swimming pools, exercise rooms, and even tennis courts. These are luxuries that most single-family homes don't have, unless Atherton is your zip code.

Why I Don't Like Condos

When you look at real estate as an investment, and consider the overall cost of ownership, condos don't score nearly as well as single-family homes. Consider the following:

• Slower Appreciation: Condos appreciate at a slower rate than single-family homes. The data makes that very clear.
• HOA: The average monthly Home Owner's Association (HOA)fees have skyrocketed over the past decade, and they are now the second-highest cost of owning the property, only behind the mortgage. The HOA fee for a 3BR unit in the Brittan Heights complex is now over $1,000 per month. But at least you get three pools and a couple of tennis courts. At 1001 Laurel Street, your $718 montly tithing doesn't get you either.
• Assessments: Think of special assessments as crowdfunding for when the s**t hits the fan. Just because you pay a monthly fee for amenities and insurance, there's the very real possibility that you could be on the hook for an unexpected major repair to the complex. This is a given if there's not enough funds in the reserves. I could write an entire article on horror stories about special assessments that condo owners have had to stomach.

A Success Story

Fifteen years ago, I helped a young couple with the purchase of their first home. They were pre-approved for around $800K and had just figured that all that was available for their budget was a high-end condo. I found a cute, three-bedroom single-family home in White Oaks that was about $50K over their budget, and I nudged them to stretch outside their comfort zone to get this home.

With some trepidation, they bootstrapped their finances, and I got them into that home. If you fast forward to today, let's look at the contrast in just the appreciation of the two different paths.

• Townhouse: $800K would have landed them one of the upscale townhouses on Crestview. That very same unit today would sell for about $1.7M, or a $900,000 appreciation.
• Home: The home they purchased in White Oaks for $950K would easily sell today for $2.4M, which is an appreciation of $1,450,000. And that doesn't take into account 15 years of HOA fees that they would have been paying for the upscale townhouse.

Needless to say, they are extremely happy that I pushed them to look at the bigger picture.

Key Takeaways

I don't hate condos. They have a special role in attaining home ownership and generational wealth through real estate.

• Condos and townhouses represent only a small fraction of the total revenue that is generated each year for residential real estate sales in San Carlos.
• Condos and townhomes can be a good first step to building generational wealth with real estate, and they are sometimes the only option a first-time buyer has to attain home ownership.
• HOA fees are rapidly becoming the second-largest expense that condo owners have to bear – more than their car payment, and more than health insurance.
• Condos also carry the risk of special assessments, which are in addition to the onerous HOA dues.
• Condos and townhomes don't appreciate as quickly as single-family homes.

Let me know your thoughts in the comments!