Condo Buyers Need to Beware

I am getting a lot of calls lately from first time buyers looking to buy condos. Primarily because so many people are priced out of the market for single family homes and townhouses. With the lower prices these days there seem to be a lot of good condo deals on the market these days. However, all is not as it seems and I caution  prospective condo purchasers to be careful. Right now, I can think of three problems associated with condos that are popping up and making it very hard to get loans to purchase or for sellers to sell.

Non owner occupancy. There has been a flood of investors snapping up condos for cheap. They are mostly all cash buyers looking for attractive short sales or bank owned properties. In the past many of these investors were rehabbing and flipping the homes-which is a good thing. However, with the low costs of units and cheap financing many are buying condos in order to hold and rent them out. Typically, rental properties get less care than owner occupied properties and if there are too many rental units in a condo development then it becomes very difficult to obtain financing for prospective buyers who are looking to use FHA or minimum down conforming loans. Currently FHA guidelines allow no more than 50% of the homes in a condo project to be non-owner occupied, and a lot of projects are failing to make the grade and losing FHA approval.

Delinquent condo association payments. FHA refused to approve a project where more than 15 per cent of the units are 30 days or more behind on the payment of condo fees to the association. With the state of the economy this is a growing problem as many condo projects are now falling above this level.

Condo projects that are entering a new maintenance cycle. During the last boom in the late 1980's many apartments were rehabbed and converted into condos. These units are now entering into a 25 year cycle where key upgrades and repairs are needed. Things such as expensive new window or roofs or parking lot repaving come at about this stage. These major repairs cost big money and a lot of condo projects have underfunded reserve funds and just do not have the money on hand to pay for this work. When this happens it usually means that special assessments are passed on to the current unit owners and these generally are added to the monthly condo fees. I am seeing some units in the area where the monthly fees are topping $1,000 per month. When faced with the reality of this tough market many sellers have to cough up the full balance for these assessment at settlement. Smart buyers are checking and passing up on projects have a history of passing large assessments to the owners.

This does not mean that all condos are a bad buy, and certainly there are some very nice condos in the area. However buyers need to be very careful when looking at that condo "deal' in today's market. The best bet are newer condos or units that have been recently rehabbed and converted. In this case, FHA financing is usually readily available and you are pretty sure that you will have at least two decades before serious physical upgrades are needed. I really like some of the condo conversions that I am seeing in the District these days. Some really fine older buildings with modern units inside. A nice mix in my opinion.