Avoiding the Condo Blues
Avoiding the Condo Blues
There are lots of reasons people buy condos, and being known in your area as an attached property expert can be a great way to expand your business. But there can be pitfalls you need to avoid if you’re going to be successful. In this article, I will discuss some of the most common issues that pop up in condo transactions and how you can avoid them to get the deal closed.
This is a big one, especially since the market crashed. Distressed sales — foreclosures and short sales — continue to surface in many condo buildings. And if someone isn’t paying the mortgage, the condo dues are probably being neglected as well.
Herein lies the problem: The buildings run on the assumption that they will get a fixed amount from each unit owner on a monthly basis to keep the building running. When the building’s association doesn’t have enough money to pay its bills, they need to raise additional funds by either increasing monthly assessments or leveling special assessments. The problem with this, however, is that it may push other unit owners who were on the verge of default into default because they can’t meet the additional financial obligations. It’s a vicious cycle.
How you can help your clients: Know the buildings in your area. The buildings with issues will be easy to spot on the MLS as they’ll be the ones where no deals involving financing have closed in ages. You can also search public records for foreclosure filings in the building, speak to the management office, and talk to people you know who live in the building to find out the scoop.
Rental and Lending Issues
Another major problem clients face purchasing a condo is that things can affect the property value over which you have no control. An example is the percentage of rentals in a building and its relation to my first pitfall, financial issues.
If too many people in the building are upside-down on their mortgage and cannot sell, then they may consider renting their units as an alternative. But if too many people in the building are allowed to rent — usually 50 percent of the total units — the vast majority of lending programs will not approve the building, and thus, no loans will be given. This can have a catastrophic effect on values, but unfortunately HOAs often times have to choose between forcing people into foreclosure to preserve the ability for new purchasers to finance or allowing the current owners to rent out the unit. It’s a double-edged sword.
How you can help your clients: Always know the percentage of rentals before you submit an offer! Knowing this information, along with whether there are any lawsuits or liens and how many units in the building are behind on their dues, is key information that will give you a strong indication of the overall health of a building long before you are even given all the condo documents in the attorney review process.
The last pitfall you’ll want to help your clients avoid is building issues. Unfortunately, as with all professions, there are good and bad builders. A major problem we’re seeing in the marketplace is that some buildings were built poorly, and thus have problems that are either ongoing or just surfacing.
There were a lot of sub-par condos put up during the boom time, and even if the unit looks wonderful from the inside, there can be danger lurking just outside — or even in between the walls.
Mold, substandard construction practices, and massive city code violations are just some of the problems that I’ve heard about in the news lately, and I’m talking about some of the premier buildings in my market of downtown Chicago. Certainly not what you’d expect!
How you can help your clients: Make sure that the buyer and buyer’s attorney have the chance to review all the condo association documents for any previously mentioned issues with the building in meeting minutes, budgets, and so on. In addition, you’ll want an experienced home inspector who understands condo construction to give a thorough examination not only of the interior of the condo but of the entire building itself. Of course, there’s no way to guarantee anything, but you owe it to yourself to create the best scenario to mitigate risk and ensure your clients have made as sound an investment as possible.
Condos are wonderful dwellings for many reasons and can provide a potent new source of clients for your growing business. Take the time to identify the pitfalls, make a plan, and stay organized to ensure that your clients’ best interests are protected and that your name is associated with expertise in this great niche market within our industry.