Everyone has read or heard of the problems in the housing market. But most of the news articles and commentary have focused solely on the single family home situation, whether townhouse or detached. The economic recession and foreclosures have created significant problems for condominium owners and buyers that have not been as widely publicized. So if you own a condo, or think you might like to, you should pay attention to these issues before you want to sell or buy.
Condominiums became popular as the price of owning a single family home grew, giving first-time buyers an option to become homeowners. Owning an apartment in a larger building, however, brings a secondary player into the process: the condominium association. The association is in charge of caring for the building itself, for the benefit of each individual unit owner. When a buyer goes to their bank to buy a condo, the bank not only has to approve the buyer for the loan, they also have to look at the condo association to make sure that its being well run, and is doing a good job of looking out for the property in which the bank will be investing the buyer’s mortgage.
For that reason, lenders and the Federal Housing Administration maintain lists of “approved” condominiums for which they will approve mortgage loans. The criteria for this approval are important, and should be examined by every condominium association Board of Directors and considered — along with their condo bylaws — as an important guideline for their operations. When your association falls off of these approved lists, it becomes much more difficult for your unit owners to sell their homes, which means prices fall and you have a group of unit owners who are not very pleased with your stewardship of their investments.
So, what are these criteria? Here are some of the items that can severely jeopardize your association’s ability to be approved:
• pending litigation against the condo association, or by the association against the builder/developer.
• 15% or more of the owners being delinquent on their condo fees, even by just one month.
• a high percentage of investor-owned units, or one entity owning more than 10% of the units.
The exact percentage varies, depending upon the type of loan or the lender, but in general terms
an association should keep a watchful eye on the number of investor-owners, and make sure that
the public record is correct as it classifies which units are owner-occupied and which ones are not.
• lack of a reserve fund equal to at least 10% of the annual budget.
• lack of necessary insurance coverage, both property and flood insurance.
If your condo association has issues with any one of these bullet points, it could mean that buyers will have a difficult time getting financing to move into your building, and that your current owners are unable to sell quickly and for the best value.
One other item for condo associations to consider: are your condo fees themselves becoming barriers to buyers? For instance, if a typical buyer interested in your building can afford a total monthly payment of $1,500 — including taxes, condo fees, insurance, principal and interest — they most likely can’t afford to purchase a unit and live in your building if the condo fee is $500 a month. Yet, I’ve seen the number of non-luxury condo buildings in the Baltimore area with condo fees far above $500 per month growing in number, squeezing out the buyers in need of financing that they rely upon to absorb units for sale. With those buyers no longer in the picture, your building now has to rely upon cash-rich buyers and investors as purchasers, prices have to fall to reduce the cost of financing, or the units may go unsold and your current owners move out and rent their property, becoming investor owners. If your condo association hasn’t submitted its subcontractor agreements or management contracts to competitive bidding in a few years, its time to do it. Saving money and lowering condo fees — while still maintaining and caring for the property — will be essential exercises for every condo trustee!
** Richard Pazornik of SunTrust Mortgage provided essential lender information for the writing of this article. He deserves my deepest thanks for sharing his expertise.