The Most Important Condo Column You Will Ever Read
(Part 1 of 2)
The lack of knowledge nationally about “detached” or “site condominiums” is profound. Almost all realtors, broker-owners, managers, MLSs, Associations, appraisers, lenders, and taxing authorities are unfamiliar with this widespread style of homeownership. The result has been massive confusion within the real estate community that has also led to serious misrepresentations being made to consumers as well.
Assume that you’re taking your buyer out to see two different properties. Both properties have 3 bedrooms, 2.5 baths, an office, family room, and a two car garage. Both are located within “Planned Unit Developments” with an HOA and CC&R’s. The recorded documentation says title is “fee simple.”
Here are the MLS photos of the two properties.
The MLS states the lot size as per the Appraisal District (property taxes) for Property 1 is 10,332 square feet and for Property 2, is 11,848 square feet.
One of these properties is a “detached” or “site” condominium. Can you tell which one?
I recently interviewed Bob Burton of the Winstead PC law firm. Burton’s specialty is detached condominiums, attached condominiums, and planned communities. He currently works with the Texas Legislature as well as many of the nation’s largest builders. His experience with detached/site condominiums dates back to 1994. He also wrote the Condominium Declaration for the subdivision where I live.
The difference between platted subdivisions vs. detached/site condomium developments
Property 1 above is a detached/site condominium. Property 2 is located in a platted subdivision. Both are in Planned Unit Developments with an HOA and CC&R’s. It’s easy to see why there is massive confusion about this style of ownership because they so closely resemble traditional platted subdivisions.
Part of the confusion results from the fact that a condominium development is a form OWNERSHIP, not a specific type of physical development or structure.
Vertical and horizontal condominiums vs. detached/site condominiums
The subdivision where I live has three types of condominiums. Our “Lofts” are the traditional style of apartment or “vertical” condominiums. Our townhomes (five to a building) are an example of “horizontal” condominiums. The Villas are free-standing detached condominums like Property 1 above. We have an HOA and there are separate sub-HOAs for the three types of condominiums.
Our subdivision is also a Planned Unit Development zoned as three lots. Lot 1 contains all the residential structures. There is one commercial lot that has yet to be developed and the city library is located on the third lot.
You can’t identify a detached/site condominium merely by looking at the property or what the tax assessor has posted as the “lot size”
Burton explains that detached/site condominiums are condominium units that are separated from one another.
Think of a traditional subdivision. You drive through the subdivision, you have platted lots, and you have homes that are detached from one another. A detached/site condominium looks and acts exactly the same as a traditional platted subdivision, yet the legal ownership is structured as a condominium as opposed to platted lots.
If you buy in a traditional platted subdivision, you are buying a lot. And if you pull up the plat of those lots, you will see lot one, lot two, lot three, lot four, and you will see 1602 Oak Street, 1603 Oak Street, 1604 Oak Street. So in a condominium, similar to a lot, you will have Unit One, Unit Two, Unit Three, Unit Four, but a different street address.
How to recognize if a property is a detached/site condominium
The easiest way to recognize whether a property is a detached/site condominium vs. a platted subdivision is to look at the plat map. Here’s a plat map from PropertyShark showing three different subdivisions.
Property 1 is located in the white part of the map above. You can see the three lots in the the subdivision. You can also see the street names, but there are no lot numbers. The yellow areas are for two typical platted subdivisions and include the lot numbers for each property. The pink lot is an undeveloped commercial property.
Here’s a closer look at one of the plats from the subdivision where property 1 is located. Notice that there is no lot number, but instead there is a Unit Number for each property. Also note the plat below shows square footage numbers that corresponds to footprint of the land on which the Unit is situated—e.g., Unit 71 has 5,770 square feet and Unit 72 has 6,063 square feet.
So if Units 71 and 72 are detached condominiums situated on a single lot, why did the Appraisal District give a value for the “lot size?” So did the realtor who correctly quoted the number provided by the Appraisal District, but replicated the mistake by entering it into the the “lot size” field on the MLS.
The simple answer is they failed to check the plat map and/or legal description. Alternatively, they didn’t know that a Unit number coupled with a square footage number describing the boundaries of the Unit indicates the property is a detached/site condominium. This is a major mistake, one that realtors, MLSs, appraisers, and lenders make daily all over the country.
Detached/site condominiums are very similar to traditional platted subdivisions
Burton explained how detached/site condominiums have a great deal in common with traditional platted subdvisions.
- Owners of detached/site condominiums have fee simple title just like owners in platted subdivisions.
- In subdivisions with HOAs, there are CC&Rs, By-Laws, and use restrictions limiting what owners can and cannot do to their property. The HOA typically maintains any private streets, entry gates, drainage easements, and open space.
- The homeowner maintains their own insurance, performs their own exterior and interior maintainance of the structure plus maintaining all the systems that support the property.
- Both styles of subdivisions may be Planned Unit Developments (PUD), i.e., a community of single family homes, condos, and or townhomes, where all homeowners belong to an HOA. The subdivision may also include restaurants, shopping, edcuational facilities, recreation, etc.
In terms of the differences:
- Traditional subdivisions where the homeowners own their lots are created by plat map submitted to a county or city for approval.
- According to Burton, what you won’t see in a traditional set of CC&Rs for a platted subdivision is the Condominium Declaration which is used to create the lots.
For example, the Declaration for the subdivision where I live is 673 pages long. A substantial proportion of it is devoted to the amendments that create the new units. In the case of my unit, the original plat showed the property as being three separate units. The developer decided to take the three units and reduce them to two units. The change was made as an Amendment to the original Declaration including a new plat map with the renumbered units.
- Instead of a legal description of the lot lines on the property, Burton also explains:
You will see unit boundaries and how the units are configured. In a detached condo, you’ll see an upper boundary, you’ll see a lower boundary, and you’ll (also) see a discussion about side-to-side boundaries. Think of a detached condominium as a three-dimensional airspace in effect, that encapsulates the home as well as the exclusive yard space around the home.
- To locate the correct legal description of the unit, search the Declaration for the “Condominium Plats and Plans.” These are typically attached as an exhibit to the Declaration. Locate the location of the specific unit on the plat map to determine the unit number. The unit number is your legal description, NOT the street address.
When you purchase a detached/site condominium, what exactly do you own?
Using the detached condominium subdivision where I live as an example, I have three different interests in the ownership of my unit with the following definitions set forth in our Condominium Declaration:
- “Limited Common Elements,” if any, means those portions of Common Element reserved for the exclusive use of one or more Owners to the exclusion of other Owners.
- “Common Elements,” means all portions of the Property, SAVE AND EXCEPT the Master Units, expressly including the Land.” Examples would be our park, the swimming pool, Club House, and all the other property where there are no Master Units (i.e., Lofts, Townhomes, and Villas).
- “Master Unit” means each physical portion of the Property designated by this Declaration for separate onwership, the boundaries of which are shown on the Plats and Plans.
Our Declaration goes on to state the nature of Master Unit ownership:
Not a Typical Condominum Unit
- A MASTER UNIT DOES NOT INCLUDE LAND.
- THE CONVEYANCE OF A MASTER UNIT IS NOT A METES AND BOUNDS CONVEYANCE OF LAND.
- THE CREATION OF A MASTER UNIT DOES NOT CONSTITUTE A SUBDIVISION OF LAND.
- EACH MASTER UNIT IS THE SURFACE OF A DESIGNATED PIECE OF LAND, EVERYTHING ABOVE THE SURFACE FOR 200 FEET, AND ANYTHING BELOW THE SURFACE THAT SERVES OR SUPPORTS THE ABOVE-SURFACE IMPROVEMENTS AND ANYTHING THAT EXCLUSIVELY SERVES THE MASTER UNIT.
Common misconceptions about platted lot ownership
Burton describes how platted subdivisions have similar limitations to those of detached/site condominiums:
There’s another misconception that if you own a platted lot, that there is no upper boundary to the heavens or to the center of the earth. In the United States, the upper limit for your lot is 600 feet in a high traffic area of aircraft, and 1000 feet in a low traffic area of aircraft. Below the ground, you have mineral interests, and you have a lot of other things that potentially impact your ownership. You don’t own to the center of the earth.
Detached/site condominiums are described in three dimensions. Burton explains how they have sought to make this style of ownership as close as possible to a subdivided platted lot here in Texas.
We define the unit as anything that exclusively serves that unit, irrespective of whether it’s located within the boundaries of that unit, tree roots, grassroots, swimming pool, foundation, (plus) telecommunication lines that run from a main line service in the street branch off, and exclusively serve that particular home. The detached condominium unit actually, in reality, looks like a square with a bunch of legs hanging off of it.
In other words, the owner of a detached/site condominium has “surface rights” to the land which closely resemble the same rights as platted lot owners. In terms of what the owner of a detached/site condominium can do assuming that you are comparing a deed restricted platted subdivision with detached/site condo subdivision:
There should not be any difference between the two other than unique characteristics of that particular project and that particular development.
Appraisals on detached/site condos should not differ from platted subdivision lots
Because detached/site condos have surface rights to the land, Burton argues:
There really should be no difference between the appraised value of a detached condo versus a subdivided lot. Within the boundaries of the detached condo that is exclusively yours, you own fee simple title to that component. There should be no difference in value between the detached condo and the platted lot subdivision.
Reasons detached/site condominium ownership is actually preferable to platted lot ownership
Burton enumerated a wide variety of reasons that detached/site condominium ownership is better for almost all parties involved as opposed to platted lot ownership.
- Consumer protection
Detached/site condominium ownership:
Is much more protective of the consumer, believe it or not, than a traditional platted subdivision. If you think condominiums as somehow inferior to traditional platted subdivisions, almost all states have a process where the developer is required to provide comprehensive information to the purchaser prior to their entering into the purchase and sale agreement for a condominium unit.
In Texas, this is called a Condominium Information Sheet. It is required by law and is a summary of all the components of the project, what rights the developer has retained in the project, how many units will be within the project, a first-year fiscal budget of the association estimated monthly assessment, community rules. There are also mandatory requirements for your association to secure insurance.
For traditional platted subdivisions, this doesn’t exist.
It’s important to note that the way different states treat the creation of detached/site condominiums and the protections provided varies from state-to-state. Burton described some of the differences:
- Like Texas, Georgia has the Condominium Information Statement concept. Alabama, Oklahoma, and Tennessee do not.
- Arizona: developers must go to the Arizona Department of Real Estate and obtain an Approved Property Report.
- California: Detached condominiums are considered to be planned developments (p.16) and must follow the guidelines for having that style of subdivision approved.
- New York: Developers must have their Disclosure Package approved by the state attorney general.
- Density and demographics
Detached/site condos started because of density. As opposed to “antiquated code-based subdivision requirements, minimum lot sizes, and rectilinear structures of land area” required in platted subdivisions, the developer may want to do a subdivision that is a little denser and enables him to take advantage of the beautiful trees or views. Moreover, many of the community building codes and ordinances are “not reflective of what the market is asking for, (which is) being smaller, denser, and more community oriented.”
- “Master Planned Communities Outperform: The Lifestyle Commands a Price Premium”
While not all detached/site condominiums are located in Master Planned Communities, those that are definitely outperform individual homes in traditional platted subdivisions as the chart from John Burns Consulting clearly illustrates below:
- FHA benefits for both developers and consumers
“Site condominiums” are exempted from FHA’s Condominium Project and Processing Guide. If they were not exempt, the project would be required to meet certain unit presale requirements prior to issuance of FHA mortgage insurance on a specific unit. (In some cases, FHA may require up to 50 percent of the units be pre-sold before any of them can close.)
Despite all the misconceptions, detached/site condominium ownership offers significant benefits, including consumer protection, density, and demographic advantages. Nevertheless, the lack of understanding among industry professionals means massive mistakes are being made in the field.
See Part 2 to learn where major risks exist and what you and your organization can do to mitigate them.