Do Your Homework When Buying Condo Foreclosures

Foreclosed condominiums can make a good investment for some people under the right circumstances, but there are some issues unique to condos to consider. Whether you are buying your first condo to live in, or buying a number of condos as an investment, it’s necessary to do some homework to be sure that you don’t have a lot of headaches down the road. While the following tips apply for condo buyers in general, they are especially pertinent to those considering condo foreclosures.

condominiumSome condos appear to be a bargain since prices have dropped so much. However as the market deteriorates further it will become more and more obvious that there are condos that are no bargain even at 50% or 60% off the bubble prices. One analogy would be dot com stocks–was a dot com company a bargain if it’s stock dropped 50%? Not if it later went out of business and the stock became worthless. Condo complexes don’t usually go out of business, but some can become near worthless if things go badly enough. Some properties have very little value, regardless of what they were worth during the bubble. I’m not saying this to scare anyone away from condos, rather to urge caution and careful study.

Nobody should use prices during the bubble as any sort of measure of current value. That was the bubble, an unreal world. We have left the bubble, and are now back in the real world.

Rules governing condo bylaws vary from one state to the next, so the first thing a serious investor or prospective homeowner should do is look over your state’s laws. For example, in Florida, a lender foreclosing on a condo is responsible for paying six month’s back dues or 1% of the mortgage value of the condo, whichever is less. This could be very important to you if you were an owner in a condo complex with a lot of foreclosed units–it could mean that your dues could be raised to cover the shortage in dues from the units that were no longer paying, or that services could be cut due to lower revenues.

Condo ByLaws

The rules governing how a particular condominium association operates are generally referred to as the ByLaws, although the name may vary in some states. At any rate, these are the rules drawn up by each condominium association which govern how the association is run. These rules must conform with the state condo laws.

One thing to look out for is the provision for collecting back dues, which should be governed by state laws. Some states have weak provisions for collecting back dues, and consequently there can be more problems in collecting dues, especially during a recession. In an expanding economy when the value of condos is rising, most people will pay their dues, but in a bad economy when the condos drop in value, many people will start paying late or not at all.

Some states make it easy for the condo association to foreclose on units with dues in arrears, and some don’t. This may sound like a minor matter, but if a third of the owners in a condo complex pay late, it can make for serious cash flow problems. If the association starts foreclosure on a couple of units, it can scare the others into catching up on their dues payments.

If you find a condo complex you would like to invest in, get a copy of the association bylaws before you get too far along, and read it carefully. It’s also a good idea to talk to one or more of the association board members, and if you have the time, attend an association board meeting. Association board meetings can be exceedingly tedious, but this is where the dirty laundry gets aired, and you can find out more there than just about anywhere else. If they talk about back dues and collections at a board meeting, you know that it may be becoming a problem there.

If you can, also try to find out what percentage of condos in a complex are owner occupied versus rental units. Many condo owners will rent their units out when they can’t sell, and this can make for a lot of problems, since few owners are professional managers. Also check as to whether the complex has an office on the premises which can manage rental units for absentee owners–this can solve many of the problems associated with rental units.

If you can, also try to look at the association’s income statement, and if you don’t understand such things, find a friend who does. Check on how much is owed in back dues, and also check on what their bank balance is.

Construction Quality

Some condo complexes are very high quality, and, at the opposite end, some are converted low-end apartments with mediocre construction quality. Most fall somewhere in between.

Other things being equal, the complexes with the lowest construction quality (converted apartment complexes for the most part) tend to be the most heavily foreclosed on, with the largest drops in value. This may be good from a standpoint of getting units for the lowest price, but it can also mean endless management headaches, bad neighbors, and a very long time before values recover.

Higher quality units tend to hold their value better, and tend to recover more quickly from price drops. When renting, higher quality units of course normally attract better quality tenants as well.

Places with mediocre construction quality can also be a real headache to maintain. Apartment complexes were often built to only have a functional life of maybe twenty or twenty-five years in the first place, and when converted to condos they just don’t hold up that well over time.

Higher quality features to look for (in garden-type units) are pitched roofs, staircases not exposed to the rain, brick veneer on most exposed surfaces (or stucco on the west coast), patios, fireplaces, covered parking or garages, etc. Cheapie converted apartments will lack most of these features.

Another thing to consider in condos is that no matter how much money you dump on a unit (unless it’s a top end property, penthouse, etc) the unit will generally be worth what other units of similar square footage in the complex are worth. Dropping say $30,000 on a new kitchen for a condo where similar units are selling for $140,000 wouldn’t make much sense, and a unit with such a kitchen, while it may be nice, usually won’t sell for a whole lot more than $140,000.

Association Management

Some condo complexes have an outside management company handle day-to-day management duties like grounds maintenance, collecting dues, paying bills and so on.

This is usually a good thing, but don’t be lulled into a false sense of security. Even the best management company can’t normally prevent foreclosure of units where the owners can’t pay their mortgage, or prevent falling property values.

In a complex with a management company, it’s probably worth your while to give them a call and try to get a bit of information about them. Also walk around the complex and look for any deferred maintenance issues on the exterior of the property–paint, roof, steps, landscaping, pool and so on.

Also ask about the association insurance policy. Most association insurance policies cover the exterior of the building, and normally you only have to get a policy to cover your contents. You should have a look at their policy to see exactly what their policy does and doesn’t cover, so you aren’t unpleasantly surprised when something does happen. Some associations also carry very high deductibles to save money, so you should be aware of this as well.

Wild Price Swings in Condo Values

In a bad market, condos are usually the first properties to fall in value and the last to recover, other things being equal. This may not always hold in very large urban markets with high end condos–like New York or Chicago–but it does tend to be true in most of the country, at least away from city centers.

Consequently it’s often possible to get into condos for less money than houses, before houses have bottomed out, and still get a bargain.

Probably the wildest swings in values will occur in low end condos in bubble markets. These places are often purchased by people who can just barely qualify, and when something goes wrong, back to the bank it goes, since these people often have few resources in reserve. Some low end complexes in bubble markets may see drops of 70% or more in value in this cycle. Often the only people interested in buying foreclosed low end condos are investors, since the complexes often look a bit run down by this point, and many units in foreclosure are a bit run down on the inside as well.

If you have the stomach for the hassles, low end condos can bring a lot of bang for the buck, but be careful that the condo association doesn’t have problems that could overwhelm them. With a lot of foreclosures in a complex, it can also mean that the makeup of the residents can change, sometimes for the worse.

Special Assessments

When a condo association has a large, necessary expense that is too large to be covered by the ordinary dues collection, they will often declare a Special Assessment, to be paid by all condo owners in the complex.

This could be for things like replacing the roof, parking lot repairs, sewer line, etc. Ask before buying whether the association is considering a Special Assessment, and ask about any that have been declared in the past.

Buying Many Units in One Complex

It’s sometimes possible to buy many units in a single complex, and this can represent a special opportunity if everything goes well.

You might be able to purchase a number of units at auction all at once, or perhaps from a single lender who has taken a number of units from another investor. Or perhaps you buy a few units in a property, and buy more as they become available.

In condos, normally each unit owner gets a vote, so if you have a lot of units it can be easier to get your way on some matters. The flip side is that you may want to be cautious about buying units in a complex where one owner owns many units or a majority of the units, particularly until you find out whether their interests may conflict with yours.

If you’ve invested in single family houses, you probably know how much work it is to manage houses in different locations, and the right condos located in one location can make things a lot easier. On the other hand, if you owned an apartment complex you would obviously have more control, but you would also have to deal with the lawn, outside maintenance, water bill, insurance policy, etc. With condos the association normally takes care of these matters.

Whether you have one unit or many units, it’s important to realize that with condos, you are to some extent joined at the hip with other condo owners. If your neighbors start having wild parties or selling drugs or rebuilding cars in the parking lot, it won’t be so easy to evict them as it would be if they were tenants in an apartment complex, particularly if they own their unit. The bylaws of course help, and if the state laws are good that also helps, but homeowners aren’t tenants and can’t be summarily evicted so easily.

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