The Dark Side to Condo Investing

Everyone who owns a piece, shares ownership of the single pie plate and responsibility for its maintenance and upkeep. The cost of maintenance is divided among all the pie owners based on the day to day costs and reserve costs, or money set aside for future repairs. We've all heard about the great deals to be had in the condominium market with dropping prices and increased foreclosures, but what about the dark side to these investments. Surely the high rate of foreclosures and struggling economy has had a negative effect on the condo industry.
To understand a little more about how condominium ownership works, relate it to owning one piece of a pie. Everyone who owns a piece, shares ownership of the single pie plate and responsibility for its maintenance and upkeep. The cost of maintenance is divided among all the pie owners based on the day to day costs and reserve costs, or money set aside for future repairs.
If some of the owners are unable to make their payments and their units go into default and eventually, foreclosure, attempts are made to re-sell the unit. However, when new building assessments are completed and a large percentage of units are still sitting vacant, then it's up to the other owners to pick up the slack for maintaining the building. The result is an increase in condo fees. In some areas of South Florida, these fees are almost $1 a square foot and rising. This expense, along with a mortgage, is enough to scare away many buyers.
Unlike a mortgage where you can lock into a payment for 5 years, condo fees can go up every year depending on the vacancy rate and general state of disrepair in the building. The established condos with long-term residents are doing much better than many of the newer buildings still containing a number of developer-owned units.
A condominium such as The Mark on Brickell, had units listed for $600,000 a few years ago; those same units can be purchased for about $200,000. Sounds like a great deal? About 30 percent of the units in the condominium are in default which has resulted in condo fees of about $1,000 or higher. It doesn't take a large amount of vacancies to make a difference, in a smaller building in North Miami, just two foreclosures resulted in a maintenance fee of $1,500.
In addition, some banks are wary of financing mortgages for units in buildings that have a high percentages of foreclosures. Even if a buyer decides to take the plunge, financing may be a problem.
Condo vacancy rates may lead to higher maintenance fees, but this is usually the final result after months of budget strain due to overdue or delinquent payments. During this time, owners may experience a poorly kept building while the complex puts off small projects to save money in the interim. Often the reserve funds are depleted in an effort to make up the difference, but these accounts are left with dangerously low balances in the event of major repairs.
Janet O. Aronson of the Braintree law firm Marcus, Errico, Emmer & Brooks, which represents 2,700 condo associations in Massachusetts, New Hampshire, and Rhode Island, reports the firm has seen a 150 percent increase in fee arrears in the last two years. This coincides with the time frame that subprime mortgages were so popular. In 1992 a "super lien" law was adopted in favor of condo associations in the event of a foreclosure. This enabled them to collect up to six months worth of delinquent payments, and giving them "front of the line" priority over lenders. As soon as the condo sells, any outstanding fees are paid out to the condo association.
The effect of one person's debt weighs heavily on all the building's owners. It is essential that condo associations are meticulous about debt collection by containing the problem before it spills over and impacts all the occupants.