Is it Really Time to Buy a Condo?
By Robert Jones
Inventories are rising, prices are falling, investors are bailing out, and developers are getting desperate. For someone with a little extra cash, this may look like the perfect time to buy a new-construction condo. After all, you’re getting a brand-new building with slick finishes and great amenities at a fraction of what it would have cost a year or so ago. Seems like a no-brainer, right?
Not so fast, say the experts. Before you sign on the dotted line, there are at least three big questions to ask yourself:
1) Can I get financing?
No matter how good your credit, you may be surprised to discover the answer is “no.” Lenders these days are taking a hard look at buildings, not just buyers. If the developer of your condo has shaky finances or the building appears to have a large percentage of contracts from investors, many banks won’t lend to you even if your credit score is a perfect 800.
For instance, BankUnited recently made headlines when someone leaked a list of 191 condo projects—mostly in South Florida—for which the bank refused to write loans. Almost every high-priced, high-profile building in town was on the list, sending shudders through the real estate community.
2) How do I feel about renters?
Faced with a glut of unsold units, some developers are seeking to cut their losses by retaining deeds to those units and simply renting them out as apartments. That may keep the association out of bankruptcy, but it can also raise a number of problems for the few buyers who find themselves surrounded by a sea
of renters.First, renters tend to be harder on common areas. They have no long-term stake in the community, and they can’t be fined for violating the rules of the association—just a few reasons that apartment buildings have a different “feel” from luxury condo buildings.
Second, if the developer still owns a large number of units, he will continue to control the board of directors, making decisions that largely favor his own interests rather than those of the buyers.
Finally, when you’re ready to re-sell your unit you’ll be competing with the developer, who has more marketing muscle and more inducements to offer. Plus, you may bump up against federal lending guidelines that make it harder for prospective buyers to get a loan when the proportion of renters in a building exceeds 40 percent.
3) How much can I afford in monthly maintenance?
Sure, the asking price looks like a bargain after that big price cut, but how affordable will the condo be if monthly maintenance fees suddenly double or triple? Depending on the default rate in your building, it could happen. When burned investors simply turn over their keys to the bank and walk away from their condos, the remaining unit owners can find themselves paying a much greater share of maintenance costs than they had bargained for.
Most states require banks to continue paying maintenance fees when they foreclose on a condo unit, but not indefinitely. In Florida, for instance, banks are off the hook after six months. If units sit empty longer than that—a definite possibility in an extended downturn—the association is forced to divvy up costs among a smaller pool of owners, resulting in significantly higher monthly assessments.
Of course none of this means that buying now is out of the question. For buyers with a long enough timeframe and a sufficient tolerance for risk, new-construction condos could prove to be a goldmine down the road—but in the meantime, the road could get a little bumpy.