Foreclosed Condos: Buyer Beware!

Friday
May 21, 2010

I was speaking to a client the other day who recently purchased a foreclosed condo as an investment. And while there are many good bargains to be found in the the condo market, I would be very, very cautious about purchasing a condo today – whether for investment or otherwise. Here’s why:

When you purchase a condo, not only are you buying your particular piece of property, you are buying into the financial condition of the entire association.  When a unit owner goes into foreclosure, they not only quit making their mortgage payments, they typically also quit paying their assessments. And while the association has some legal recourse to collect past due asssessments, that entails a lengthy legal process – and the accompanying fees that go with it. Even so, the association lines up with other creditors for payment and may have limited success in ever retreiving monies owed. In the meantime, it falls on the other unit owners to pick up the budget short-fall. It  can work an undue hardship - particularly in a small association.

The condo market has been particularly hard hit with foreclosures. This only makes sense. Condos are typically how first time buyers enter the real estate arena and first time buyers have been the hardest hit in this down turn. Also, because condos are how many first time buyers enter the real estate market, they were the hottest commodity in the boom – ergo the hardest hit in the bust. Many condo developers came to market with new projects just before or as the market began to turn. It is pretty easy to find bust condo developments today where only a small percentage of units were ever sold. These developments are typically not mortgagable.

In the situation of a bust condo development, the developer often resorts to renting out unsold but finished units. However, when the owner occupancy ratio falls below 65% or 70%, lenders will not make loans against that property. Individuals that DID buy into the association are literally stuck with an unmortgagable – hence an unsaleable - unit. They are not even able to refinance their existing loan to take advantage of current low interest rates thereby reducing their monthly payments.  

And so begins the downward spiral…

I am involved in a transaction right now where my buyer is exploring purchasing a unit in a bust condo development. The developer was unable to sell enough units to satisfy his loans -  and so ended up giving his unsold units back to the lender. Of the original 60 units, 35 of them are now REO’s. (Just imagine what the 25 individual owners who did buy have had to endure these past 2 years while the foreclosure was in process!) Most of the 35 units were only finished to the point of drywalling. It is  up to the new individual purchasers to put in their kitchen, baths, interior trim - including flooring, etc. Most lenders will not lend against an unfinished, uninhabitable property. The bank that took back the units is doing the financing themselves – rolling the cost of completing the units into a final end mortgage. They really have no choice if they want to sell units to anyone other than a cash buyer – at an even more deeply discounted price then they are currently selling them. The appeal to my buyer is that he has the wherewithal – both financially and otherwise – to complete the unit. He will be able to purchase a unit that originally was selling in the low $400,000’s for half of that. As a long-term hold, he will probably do very well, although it is a gamble. However, he is committed to the long term ‘work out’.

I am NOT saying don’t invest in foreclosed condos.  Just make sure you are extra cautious about your due diligence. You want to go into your purchase with eyes wide open. and know what you are actually buying into. If you need help or have more questions, just give me a call. I would be happy to help you as best I’m able. You can reach me at 888-834-7085 (toll free) or by email at mnack@mnack.com

“To Your Success!
mary!