Q. I have been renting a condo that I'd like to buy. The developer has dropped prices by almost half since the place was constructed three years ago. But the building is only half full. Should I buy or look for something else?
— Bonita Springs, Fla.
A. When it comes to multifamily buildings, the old song applies — people who have people are the luckiest people in the world.
With fewer people in the building, those who are left wind up footing the bill for all of the building's expenses, from window washing and pool cleaning to big-ticket costs like roof repair and boiler replacement.
Your building is fairly new, so major repairs probably haven’t been needed yet -- but the need for them will inevitably come. And since many developers subsidize maintenance and amenity costs to keep condo dues low and attract buyers, you should expect that these fees will rise, possibly precipitously, once the developer leaves (hopefully because he has finally sold all of the units, not because he has gone bankrupt because they didn't sell).
Keep in mind that the more fancy amenities your complex has, from exercise rooms to elevators and tiki bars, the more you and your neighbors will eventually have to pay for their upkeep. Before you buy, look at the association's "reserve study" — assuming it has one — to get an idea of replacement costs for the various items in your complex. The study also shows each owner's financial responsibility at present and in the future, once the developer leaves. You should add a little more to this projection, since it's possible that a prolonged recession will lead to continued foreclosures — and when a resident stops paying condo fees, the rest of the residents have to pick up the shortfall until either the lender or a new owner repays them.
The tsunami of foreclosures may also make it difficult for you to get a loan. As of March 1, Fannie Mae will no longer be financing new condo developments where less than 70% of units have been pre-sold. Before, the cutoff was 51%. It also bans mortgages in projects where 49% of all units are owned by investors, where more than 15% of owners have fallen behind on paying association dues or where more than 10% of the units are owned by a single investor, individual or company. Freddie Mac is getting tough on condos, too: Recently, it upped the minimum down payment on condo loans to 25%.
All of these rules reflect the new reality of condominiums, which started selling at a faster clip than single-family homes in 2002 as the housing bubble expanded (largely because they were easier to flip), but soon became overbuilt. Now sales are lagging. According to the National Association of Realtors, it would take a little more than nine months to clear the supply of single-family homes on the market at the current sales pace, but almost 15 months to sell off all of the condominiums.
For all this, I wouldn't want to declare categorically that you shouldn't buy this unit — once you have done your research, you may find that the big discount on the price outweighs the risks. But don't go into this deal unless you have the cash to handle possible spikes in monthly fees and assessments, and can stay for a few years until the condo market recovers.
This article was written by June Fletcher for The Wall Street Journal.
