You may be familiar with the Latin phrase, “caveat emptor,” or “let the buyer beware.” This is an expression in commerce that basically means that they buyer is taking on the risk of purchase, without warranty. In today’s condo market, it’s not only important to take that expression to heart, but also to just be aware, when it comes to choosing that perfect condo.
I get questions almost daily from Realtors regarding the health of specific home owners associations and condominium projects. Guidelines have tightened up, but the larger issue is that there are many condo projects out there that are just not in a healthy financial situation. Whether the potential buyer knows it or not, they are entering into a condo association. It isn’t far off in some cases from buying into a small business. The health of that business should be front and center when making a decision about buying into that building. Without a doubt, it will be a factor when going to finance the unit.
The most common issues we are seeing with unhealthy condo buildings tend to involve owner occupancy rates and balance sheets. As more and more owners move on from units they cannot or are unwilling to sell in this market, more renters are installed in their place. The higher the rate of renters in any condo building, the less desirable that property becomes to most lenders.
Balance sheets have been affected by the current economy, as well. With people already underwater on units, potentially unemployed or even facing foreclosure, unpaid assessments and special assessments can be a big problem. If a unit owner is unable to pay their mortgage, they are surely not paying their assessments. Special assessments, like it or not, are part of living in almost any condo project at some point. If a percentage of unit owners are unable to contribute towards the special, it can mean that projects are delayed, which can further affect the health of the building itself.
Fannie Mae and Freddie Mac have also made changes regarding how they view commercial space in residential condo buildings, making some projects more difficult to warrant. There has always been a 20 percent threshold for commercial space in a condo building. But, it used to be that the commercial space could be separated in the declarations from the residential space. Fannie and Freddie no longer recognize this and force an appraiser to make a determination of what percentage they deem the commercial space to take up in the total square footage of the building. This is making entire projects basically unwarrantable in the eyes of Fannie and Freddie.
So as a Realtor or buyer, what can you do? Ask questions. Understand that you are entering into a small business, as well as a living space. Demand to see budgets and declarations before you purchase the unit. Ask about the rental policies and number of renters in a building. Find out what percentage of unit owners are paid up to date with their assessments. I still see some clients fighting with the seller and listing agent for declarations, weeks into a transaction. This is a set up for disaster that could be avoided early on in the transaction. Be diligent, and be aware.