Condo Troubles Further Squeeze Property Lenders

[TexasLawyer]

Source: WSJ

Condo Troubles Further Squeeze Property Lenders
Full Force of Glut Is Felt
As Buyers Back Out;
'More of the Iceberg'

By ALEX FRANGOS
August 25, 2007

For the nation's real-estate lenders, the other shoe may be about to drop: condominiums. Already plagued by rising home-loan defaults and foreclosures among overstretched consumers, major markets across the country -- including parts of Florida, California and Washington, D.C. -- are seeing rising foreclosures and bankruptcies of entire condo projects.



The problems are emerging as some buyers who signed contracts to buy new condos two to three years ago, when construction was just starting, seek ways to back out as they encounter trouble getting financing in the suddenly dicey mortgage market. Falling prices are forcing appraisals down, so banks aren't willing to lend the full amounts that people committed to in the sales contract.

"Closings that are scheduled to take place are not taking place," says Marvin Moss, a North Miami Beach real-estate attorney. He is suing several developers to help clients get out of contracts.

The condo market, while tied to the housing market overall, behaves differently under stress. While a single-family home builder generally constructs units as orders come in, a condo developer builds all at once and hopes for the best, adding risk. So while the speculative overhang of newly constructed single-family homes may have peaked in many markets across the country, the full force of the condo glut is starting to hit now.

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Read more: http://online.wsj.com/article/SB118799900508008451.html?mod=hpp_us_whats_news

[NYC]

1. ...The full force of the condo glut is starting to hit now...

...While a single-family home builder generally constructs units as orders come in, a condo developer builds all at once and hopes for the best, adding risk. So while the speculative overhang of newly constructed single-family homes may have peaked in many markets across the country, the full force of the condo glut is starting to hit now...

I'm not sure I agree that the single family home problem has peaked.

[DURHAM D]

2. Existing condos have a problem also.

I manage shared interest communities. I have one condo community consisting of 130 units (kind of a low end complex) that is really struggling. As I type, three units have been foreclosed on by their lenders, two units have been foreclosed on by the homeowners association and three unit owners have filed for bankruptcy in the past two weeks. In addition, seven other unit owners have been turned over to an attorney for liens and collection activities. The outstanding assessments amount to well over one month's operating budget.

Note: In the past when a lender foreclosed on a unit they immediately began to pay the monthly assessments due from the date they took possession. They no longer do. Apparently the lenders don't have the money either.

This means that the 115 unit owners in good standing are paying for the water, the homeowners insurance, the pool maintenance, the landscapers, the outside lights, etc for the those not paying. The worse part is they will also have to pay the legal fees involved in collecting and foreclosing on the non-payers.

Meanwhile, the units owners are wanting new pool furniture, new landscaping, more pole lights, and every piece of lattice and trim painted or replaced that shows any sign of wear.

The Board has called an open meeting for next week to discuss the state of things. It won't be pretty.

[TexasLawyer]

4. wow

That sounds like the makings of an economic death spiral-- more and more expense thrown onto fewer and fewer laps.

I feel for you and the unit owners.

[DURHAM D]

5. The Board did not want to call a meeting.

They are afraid that if the other unit owners find out their neighbors aren't paying then they will stop paying. Honestly, that may be the result but I felt it was the right thing to do.

I had to force the Board to call this meeting by making it clear I would resign if they did not make the entire situation more transparent. It came to a head when the Treasurer said he was going to list his unit before word got out. I talked to him about his fiduciary duty but I might as well have been talking about fudgesicles.

This community is 25 years old. The units are medium priced (first time buyers mostly) for the area so they have a lot of turn over - thus a lot of high loans to value the past 5 years. I expect problems to migrate to all of my other communities but hopefully on a less alarming scale.

Thanks for the good wishes.

[amitten]

6. I'm looking to buy a townhome soon...

Each unit has 4 townhomes attached. Does this mean if one of the owners forecloses, I will have to pay extra somehow?

I don't get how this works, and I'm not sure if the realtor I have will be up-front about this.

[DURHAM D]

8. How many townhomes in the entire community?

What state are you in?

How much is the assessment? Monthly or yearly?

But yes - when a unit owner(s) stops paying their assessment they are in effect borrowing money from their neighbors because the common bills still have to be paid. Getting them to pay or forcing them out of a community by foreclosure is expensive. All the other unit owners will have to help pay for the legal fees/court costs.

Frankly, most realtors know less than nothing about how shared interest communities work. They practice built in ignorance.

[amitten]

9. Well, about 40. The assessment is monthly.

I live in Texas.

[DURHAM D]

10. First you need some financial info.

Ask the seller for - 2006 Budget vs. Actual, 2007 budget vs. actual thru June of 2007, how much money in Reserves (savings), and if any unit owner is more than 90 days late in paying assessments. Study the budget - the line items are the best indicator of what your assessment is used for.

Be certain you understand what part of the exterior of the units you are responsible for repairing/replacing, including the roof, and which parts the Association pays for (collected through the monthly assessments). Given that the assessments are low I would guess that you personally will be maintaining most of the exterior. This is where most real estate agents get lost (or lie depending on how you see it) - they tend to tell all buyers that the Association takes care of everything on the outside.

If you find out that the Association assessments are used for roofing and and the Reserve figure is a low amount you need to ask more questions.

With regard to your concern about foreclosures. Ask your realtor about turn-over. If a large number of units have been re-sold in the past 5 years (or the complex is less than 6 years old) you can assume that some owners have purchased with what would be considered high-risk loans. In other words, nothing or little down (high loan to value) and ARMs that could be getting ready to or have already bitten them in the butt. On the other hand, since you appear to be in Austin, you may not have much to worry about - last I looked that was still a good housing market.

Foreclosures - if an owner stops paying on their mortgage the lender will foreclose on them and pay the costs ($1200-$2000). If they stop paying their assessments the Association will foreclose on them - spending unit owners monies to remove them from the Association - again up to $2000. In both cases whatever assessments were owed to the Association at the time of foreclosure will most likely never be collected. In other words - the other 39 unit owners will be required to pick up that slack.

[amitten]

12. So, this is how it works for ALL condos everywhere?

Also, these units are brand new so they won't have any history when I move in.

The assessments are for the roofing, gutters, paint, and landscaping.

[DURHAM D]

13. You just gave me two very important pieces of info.

(1) They are new
and
(2) They are condominiums.

Are you sure they are condominiums? Townhomes can be condominiums but they can also be something else all together. This is a really, really important piece of the puzzle.

If the townhomes are condominiums (have your real estate agent read the first page of the Declaration to make sure it is a condo organized under Texas state law) the Association generally will be taking care of the exteriors - siding, painting, roofing, trim, decks, patios, gutter cleaning, etc. The Association "owns" all of these elements. As a result of that ownership the Association also carries a master insurance policy that includes the building and your unit but you will get an additional policy called an HO6 for portions of your interior. Since the Association basically owns the buildings it will have to maintain them. You will have a 1/40th undivided interest in everything in the complex.

In a townhome that is not a condominium you will "own" the lot and everything on the lot - the land underneath your unit and probably a few feet of the yard in front and behind, the support walls, the exteriors including your roof and your gutters, perhaps half the party walls, etc. You will likely need to have a full homeowners insurance policy (HO3). The Association will only "own" the areas that are common to all (parking lots, pool, clubhouse, dumpster corrals, etc.) but nothing on the lots. However, and this is the tricky part, even though an Association does not actually own the stuff on the lots or insure the stuff on the lot (your unit) it may have provisions in the governing documents that says they maintain some of the stuff they don't own - like gutters and roofs and paint.

Because they are new they won't have any Reserves. However, the current assessment sounds too low. This is for a reason - developers set the assessments in the beginning and they feel like they have to have low assessments in order to get the units sold. Also, after a unit is complete (but not yet sold) the developer has to begin paying that monthly assessment to the Association. However, the developer will retain control of the Association until a certain portion of the units have been sold and they actually don't usually bother to pay them. A new complex transitioning from developer to owner control is usually a very painful process for the unit owners.

Something to keep in mind. Even though this is a new home you should have a home inspection. That inspection should include the outside of your building. Because the units are sold directly from the developer to the first unit owner there is no one to do a punch list for the exteriors of the buildings. They put them up fast and move on. Buyers think someone else has the job of checking behind the builders to make sure of the workmanship but no one actually performs this task.

Good luck.

[amitten]

14. Thank you. n/t

[sarcasmo]

11. Good luck finding someone being upfront with you this climate.

I would suggest holding back on that purchase until you research the situation a little more, just my humble opinion.

[salin]

16. Thanks for your postings.

Very interesting reading/insights. Fortunately I am not buying at this time, but I do have friends who are now, or soon will be, looking to buy. Having a rudimentary understanding of the condo market (and now the difference of associations related to town homes) is helpful.

I would think that when more than 10% of the units are in trouble, that it is going to take some work to convince folks not to act on impulse as one of the Board members already indicated the desire to do so (list). Then again, securing credit to buy somewhere else just got harder - so perhaps the same market instabilities that have led to the problems, will act to keep people from jumping ship prematurely.

Best of luck to you.

[cliss]

3. Here's an example -

in our lovely little neighborhood, a builder has been developing a condo project. It's been going on for about 1 year. Lots of dust, noise, tearing up the neighborhood.

About 1 month ago, the development stopped cold in its tracks. Nothing. Just a nice looking sidewalk, and sticks in the ground where a beautiful 5-acre homestead used to be.

It seems that this gung-ho builder got caught in the credit trap. He's obviously been cut off by the bank. He MIGHT be able to secure more financing, but at what cost? He's going to have to pay a premium. Just imagine his payroll costs, over a year of tearing up an old neighborhood. Multi millions, I'm sure.

And even if he gets his financing, what then? His condos will be finished, JUST as the market disintegrates. I bet you he's got stomach acid churning in his stomach, as he lays in bed at night.

[1932]

7. Soft landing. It's just a correction.

Remember that lullaby from earlier this year?

[trof]

15. You can add Alabama gulf coast to the list.

Condo-mania in Gulf Shores and especially Orange Beach.
They couldn't put them up fast enough.
Rampant speculation...'flipping'.
Some pre-construction contracts changed hands 4 or 5 times (or more) before someone actually got a key to the front door.
And now the chickens have come home to roost.

[Demeter]

17. Thanks For Posting This Article and Thread

Gonna use it to try to beat some sense into our Cooperative, which is hot to convert to condo.

Some people will believe any kind of lie that comes down the pike, if they think they get something for nothing out of it.

In a co-op, if the resident doesn't pay, they are evictable.

[PDX Bara]

18. Thank you for the information

I bought in September 2004 in a retiree condo community that is 40 years old this year. I paid for my own inspection report by an independent inspection company which was $275.00 well spent in my opinion. A unit with the same layout and square footage and some basically cosmetic interior upgrades sold a few weeks ago for just a few thousand less than double what I paid. I consider myself lucky to have purchased my place when I did.

[PDX Bara]

19. Thank you for the information

Oooops! Double post...sorry.

[Javaman]

20. There are more condos being built here in Austin that you can even imagine...

starting at 200k for 650 sq ft. 3 bed room for over 2 mill.

I see them as giant grain silo's in a few years.

[TrogL]

21. I used to be President of a condo association

...and you've summed up the situation exactly.

Many people get themselves into condos without realizing how much power the condo board has.

During my tenure we had a whole host of problems that were NOT the current board's fault but came to light during my time. It all started with one leaky roof and one clogged toilet. We had inspectors in and before we knew it we needed to (all in the same year):

• replace all the roofs and shingling (wood rot)
  
• replace all the sewers and water mains(bad construction 30 years ago)
  
• replace all parking lot wiring (this is Canada - car block heater plugins) (not to code)
  
• pave parking lots (sewers ran under them)
  
• replacing all fencing (wood rot, sewers)
  

or else the Board's property insurance would be invalid as would be individual owner's insurance (for not maintaining the property).

The fallout from that was many owners had to rewire their houses because they connected to the parking lot wiring and once you've got a code violation - it extends to the house. Many were still on two-wire or 60 amp (supposed to be 100 amp).

To do this, we had to do a one-time levy of $10,000 per condo owner (over and above their own expenses) and double the condo fees for the next five years. Many owners had to move or re-mortgage. I got surprisingly few death threats.

A few people went to their lawyers to told them to this time actually READ the Condominium Act. The board had acted properly.

When you are told the condo fees, they are what the Board expects them to be. The Board has no control over what happened 30 years ago, acts of God, changes in building/electrical codes or anything else but has to follow the law.