Condo talk: Can you still by a condominium?

 
Posted4/8/2011 12:01 AM

In this stagnant real estate market with short sales, foreclosures, bankruptcies and defaults, it might be deemed a fool's paradise. There are bargains galore for the willing buyer, yet, what are the risks so you don't become a second-generation casualty?

Finding a property to buy is the easy part, as is finding a property that costs less than half of what it cost five years ago. Buying a single-family home is relatively easy if you can find the right property for the right price, obtain financing and can afford the payments.

 

You can buy a townhouse or single-family home in an HOA (homeowners association) and it is merely a question of finding out whether the association has enough money to maintain the property.

The problem purchase is in the condominium building. How many buildings from three-flats to 35-story high-rises were developed or converted by quick-buck artists during the go-go period of 2000-2005? How many of these fine upstanding individuals walked away as soon as the market crashed? How many buildings were left unfinished for the few owners to dig deep in their pockets in order to keep going? How many buildings have more unoccupied units then the number that were initially sold?

There are a lot of questions a potential buyer must ask in order to avoid signing on to someone else's big liability. The condominium form of ownership is still a good way to start out in the real estate market or downsize from a bigger property. For some people, not having to deal with maintenance, grass cutting or snow removal is a big plus, but a buyer must do their homework and ask the right questions.

One must always keep in mind that if it is too good to be true, it is.

So, beginning with a hypothetical property that seems like a good buy, here is an analysis to go through in order to avoid becoming another statistic. You must not skimp on the cost of professional services as you begin this process. You will need the assistance of a good accountant, an experienced real estate lawyer and a qualified building contractor. You may now commence the process.

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First, a thorough physical inspection of the property is essential. How old is the building? Was it new construction or a conversion? Walk the hallways, the staircases, ride the elevator, look in all the cracks and crevices. Does it need paint, new windows, were the roofs replaced, the exterior tuck pointed, new balconies etc. Search the records of the office of the clerk of the circuit court to see what lawsuits have been filed, particularly foreclosures. This information may be available from a thorough review of association records, but before you even get there, one visual picture is worth a thousand words. If there is any doubt, walk away.

Second, you must inquire what percentage of the building is owner occupied. Condominiums have historically amended their declarations to prohibit or restrict rentals and -- without getting into the academic argument about the rights of tenants or their level of interest in taking care of the property -- it is more important as a new buyer to know how many units are being rented. If it exceeds 10 percent you need to know, by whom. Is it the developer who got stuck with unsold units and is renting them out? Is it the condominium association that has taken possession of a number of units to collect back assessments, or a bank that has foreclosed on a batch and trying to recoup some of its investment? If any of these conditions exist, again, walk away.

Third, if the building is new construction or a new conversion, how many units were sold to consumer purchasers? A building may be sold out, but as we have seen in one instance, in a 300-unit building the developer sold 100 units, found an investor to take 100 units off his hands and rent them out, and 100 sat empty. Buying a unit in this building may be the biggest bargain in the world, but you do not want to buy into this building.

Fourth, lender underwriting can actually be a saving grace at this point in time. Considering how difficult it is for most people to obtain a mortgage in times of tight money, a lender will be more diligent than ever in loaning money to a buyer in a precarious scenario. A diligent buyer should not necessarily rely on the lender as an ally and verifiable source that condo finances are sound. However, the information a potential buyer obtains from his lending sources can be another level of protection before making a risky investment.

                                                                                                                                                                                                                       
 

Condominium buildings may be hit with record numbers of defaults, resulting in evictions and/or foreclosures. However, if you have a 10-year old building in which all units had been sold initially, and due to the economy, 10 percent of the building is delinquent in their assessments and/or behind in their mortgages, this building may be hurting -- but for the long haul it will right itself as the economy improves.

However, a building that became the hunting grounds for under-capitalized investors and flippers who walked away may take years to recover, if at all.

A recent phenomenon in the condominium industry is buildings actually filing bankruptcy or defaulting on loans. It was not too long ago that this was unthinkable. Articles have appeared in the media about buildings with minimal units occupied, with the remainder held by a bank and the owners having to perform their own services such as cleaning, maintenance, etc., because there are not enough owners to sustain a budget that hires out services.

Lastly, there is a miniboom beginning with smaller, lower-priced properties being constructed that are affordable and have financing available. One must still proceed cautiously in considering a purchase. An established builder or experienced contractor is never a guarantee, but the developer's track record goes a long way toward at least instilling some confidence. Buying real property always has some risk involved.

At this point in time, it should not be viewed as an investment instrument, but rather a place to live. With the assistance of the aforementioned professionals and little bit of luck, you can still buy a reasonably priced condominium without losing your life's savings.

• Jordan Shifrin is an attorney with Kovitz Shifrin Nesbit in Buffalo Grove. Send questions for the column to him at jshifrin@ksnlaw.com. This column is not a substitute for consultation with legal counsel. Past columns can be read at www.ksnlaw.com.