When I first studied for my real estate license, I always found the distinction between a condo and and town home to be confusing and a little hard to explain. In Colorado Springs, most condominiums for sale tend to be multi story, with units above other units, and so visually it was a little easier to determine the LIKELY description. Town homes tended to be ‘ground to sky’ single unit, and many people still distinguish the 2 by this physical attribute. This isn’t 100% correct however. The real distinction is in the legalese, and in today’s market, the financing.
1st, the legal descriptions of condominiums describe ownership in the unit itself, and a portion of the common areas. This can technically be done with any type of architecture (even detached units), and is ultimately the distinguishing mark of all condominiums. Town homes grant ownership to the unit, and the homeowners association actually owns the common areas. For most owners, the difference is not discernible, because they pay dues to the HOA to maintain common areas regardless.
The US Department of Housing and Urban Development (HUD) however, sees a big difference. They see the common ownership problem to be a big one when it comes to the current mortgage crisis. As more units have fallen into foreclosure, homeowners in the remaining units have been hit with big dues increases (since the defaulted units aren’t paying their share). This in turn leads to more defaults, liens, etc that make a mess. Their solution? Make it harder for people to use FHA financing to buy condominiums. The new rules don’t apply to town homes, and it is not impossible. However, the new rules have essentially caused many lenders to simply stop doing condominium financing. This in turn reduces the liquidity to existing condo owners, causing a new set of problems.
There are various criteria FHA is using to approve condo projects, including foreclosure rates, owner occupancy rates, proximity to traffic, financial statements, etc, that are all subject to change. You can view condominium projects that are on the ‘approved list’ here, however that doesn’t mean every lender you work with will do the loan, and it also doesn’t mean the complex will still be approved at the time your loan is processed. Fees can also be charged to the buyer to re-certify a project.
So does it really matter if a unit is a condo or townhouse? Yes it does! If you (or your future buyer) need FHA financing, a townhouse is a much safer bet right now. Could that change? Maybe, but in the world as we currently know it, it is already a disadvantage to buy a condo. Thankfully, in Colorado Springs, town homes for sale are much more plentiful, making the decision a little easier. Because town home architecture has normally been preferred, the legal descriptions have also been more frequently done that way, reducing the impact of the FHA financing changes.