How to avoid buying a problem condo
There are special -- and potentially serious -- risks in buying a condo these days.
During the housing boom, condos were prime targets for investors who expected to flip their apartment or town home for a quick profit.
When prices started falling, investors were stuck with units that were worth less than they owed on their mortgages. Some are scrambling to keep up the payments by renting them out. Others are giving up and allowing lenders to repossess the units.
Either way, an entire building can suffer.
Investors who aren't turning a profit often stop paying the monthly association fees needed to clean foyers and hallways and to fix air-conditioning and heating systems. Collecting that money after a foreclosure is even tougher.
The results are higher fees, a shabbier building and declining home values for everyone else who lives there.
With lenders tightening their rules, empty units and delinquencies also can mean you won't be able to get a loan.
These 5 smart moves will make sure you don't get roped into a bad building:
Smart move 1. Put your real estate agent to work.
First, be sure to find an agent who has a lot of experience in the condo market. That will make things easier for both of you when you ask the agent for details on each building you're considering:
- How many units have been sold in the last two years and their sales price. If prices are significantly lower now than they were just a few months ago and are continuing to fall, make sure you know why. You may want to wait until they stabilize or find a building in which they've already stopped dropping.
- How many units are up for sale. If more than 10% are on the market, that's another red flag.
- How many units have been foreclosed on in the last couple of years or involved in a short sale, which is where a borrower on the brink of foreclosure is allowed to sell a home for less than they owe on the mortgage. A rash of these is another sign of a troubled building.
- How many units are owned -- and rented out -- by investors. If it's more than 10% of the building, that's a concern. And if more than 10% of the building is owned by a single investor, that's a big red flag.
Smart move 2. Study up on the homeowners association.
Once you have chosen a building, read reports from meetings of the association. This is where everyone gets together to discuss the building's structural and financial health. Look for recurring -- and unfixed -- maintenance problems and plans to raise monthly fees or impose a big special assessment to cover major repairs, such as a new roof.
Don't just ask the manager for minutes from the last few months. Get them for the last few years. They will show you whether the building has been doing well for a long time or taken a recent downturn.
Then, review minutes from the association's board of directors' meetings.
The issues a board must deal with will give you a good idea of what it's like to live in the building. Was the manager out to lunch when an emergency struck? Does it take weeks to get a leaky faucet fixed? Is a rude neighbor ruining life for everyone around him?
If these minutes aren't available from the management office, the seller should have them.
Smart move 3. Walk the building.
Look at more than the unit for sale. Visit the clubhouse, laundry room and parking garage. If basic maintenance isn't being done, you'll see it. Look for foreclosure notices on doors, too.
As you inspect the building, stop to chat with anyone you see. Ask how happy they are with their homes, the building management and each other. Do they get along with their neighbors? Do they find themselves paying for repairs the building should handle? If there are serious problems, it won't take much to prod disgruntled residents into telling you the dirt.
Smart move 4. Review the financials.
If you get to the point of making an offer, you'll receive copies of the association's financial records. Here's what you need to look at:
- How many owners are behind or just not paying their association fees? If more than 10% are delinquent on payments or the building is out of money, you should strongly consider withdrawing your offer.
- How much money does the condo have in reserve? This is the money the association has put aside for major maintenance, such as a new roof or air-conditioning system. In general, an association should have the equivalent of 25% of its annual gross income in reserve. If the building's reserves aren't sufficient, there's a good chance you'll get hit with a special assessment when the next big expense comes up.
- How often are special assessments levied? If the board is always going back to owners for more money, it means there's not enough money in the reserve. Also, ask whether any special assessments are under discussion or planned.
Smart move 5. Look at the unit's tax assessment.
The collapse of the housing market has left a lot of condos with tax assessments vastly higher than the real value of the property. Consider: You could buy a condo for $250,000 that was last assessed at $500,000, and you'll got socked with that high tax bill when you close on the unit.
Yes, you can appeal the assessment, but that takes time. Just be sure the tax assessment is in line with real values before you make an offer on the unit.
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