Why You Should Buy
Goal: Calculate whether the deal is worth the hassle.
The first question to ask is: Why are you buying this condo? If
it’s for an investment or a vacation getaway, the lower price may not
be worth the current headaches and hidden costs. (We’ll get back to
those in a minute.)
But if your intention is to move right in, this is a good time
to trawl the market. Most obviously, the price is right: Nationally, condo and
co-op sale prices slid 19.8 percent between the second quarter of 2008 and the
second quarter of 2009, according to the National Association of Realtors. As
of the NAR’s August report, the national median sale price is
$178,800. And prices vary widely: In Las Vegas, prices have plunged a heart-stopping
54.1 percent, to a median $66,400.
Moreover, the great deals — particularly on new condos
— let you be particularly picky. Look for a condo association with
plenty of reserves and a condo developer with a strong track record.
And some buyers have an added incentive to buy now: If you haven’t
owned a home for the past three years, you might be able to get in on a href="http://moneywatch.bnet.com/saving-money/blog/ask-agent/better-hurry-to-take-advantage-of-the-first-time-homebuyer-credit/690/">first-time-buyer
tax credit worth 10 percent of the purchase price, up to $8,000. (To cash
in, you’ll need to close the sale by December 1, 2009.)
But here’s a reality check: Buying a condo these days
requires more due diligence than ever to avoid the potholes left by the busted
- Financing is exorbitant for second-home and investment condos —
if you can even get a loan. Expect to pay 6.3 percent, for instance, instead of
5.3 percent for a primary residence.
- In the worst-hit condo markets (Florida, Vegas, Phoenix), Fannie
and Freddie are constantly concocting ever more stringent regulations.
- Homeowners associations traumatized by rising foreclosures and
owner delinquencies are shutting down luxury amenities to preserve cash. It may
not be much fun to live in a development that has sacrificed its pool, spa, and
golf course to the god of fiduciary responsibility.
- Developers want out, out, out, which means that they’re
cutting corners to finish up buildings. Lawsuits abound between dismayed owners
of new, flawed units and developers whose projects don’t look like
the sales brochures.
Oh, and a hefty down payment will help, too.
So, are you sure about this? If yes, it’s time to go
shopping. There’s lots to choose from, so narrow down your choices in
advance. Focus on the type of development you want (high-rise? townhouse?) and
your top-choice neighborhoods. Prioritize your short list according to
lifestyle (amenities) and monthly costs (condo fees, commuting costs, and so
Money and Mortgages
Goal: Determine how you’re going to make the
The next question: How will you pay for this condo?
If you’ve got enough cash on hand to pay for it
outright, you’ll avoid a host of closing complications. You’ll
still want to get an appraisal, but you can handpick an appraiser who knows the
neighborhood, the development, and the developer — and who won’t
compare your condo to foreclosures sold dirt cheap, as we’ll explore
Paying in cash also means you can drive a harder bargain,
especially with a developer. The sale is more likely to close quickly —
or at all — than a financed deal.
One caveat: If you’re not buying a brand-new place,
don’t pay all cash for a torn-up unit, figuring you’ll
quickly get a home-equity loan to pay for the improvements. It’s
tempting with a foreclosure. But you’ll just be chewed up by the
lending machine after the purchase, instead of before — not
much of an advantage.
For the rest of us, mortgage experts and realty agents say it’s
best to shop for a lender before you start shopping for a condo —
preferably a local lender that specializes in condos. Otherwise, you can wind
up stuck in the shifting sands of Fannie Mae and Freddie Mac requirements like
- Some developments must be at least 70 percent sold and/or
owner-occupied for a buyer of just one unit to get approval for a Fannie- or
Freddie-backed loan. A spate of foreclosures in a building can drop the
owner-occupancy rate below the presold and occupancy requirements. If that
occurs when your deal is in process, Fannie or Freddie won’t buy the
loan from your lender.
- The two big secondary lenders are now charging an additional
upfront fee — currently 75 basis points — for condo sales
involving down payments of less than 25 percent.
- And condos in Florida are so risky that Fan and Fred staffers
are taking a harder look at many developments and lenders in that state before
approving deals — with the aim of finding the good exceptions.
Hometown lenders should know the exact sales status and
reputation of the developer, development, and building you are considering.
Make them earn their fees by clearing the way through the regulatory brambles.
And because lenders see condos as riskier bets, they may try to
charge you a full percentage point more than you would pay on a loan for a
single-family home, says Greg McBride, senior financial analyst with economics
firm Bankrate.com. “The significant rise in [borrower] defaults has
made lenders and investors very squeamish,” he says. “These
are deemed as much riskier transactions because of their use as second home,
the predominance of investors, and the oversupply.”
Prove that the condo will be your primary home, he adds, and you may be able to negotiate a lower rate.
Even a fire-sale price may not survive the appraisal The upshot: Appraisers are being randomly assigned to The dust is still settling on the new appraisal
Brace for the Appraisal
process, thanks to the ever-changing regulatory landscape. In May, Fannie and
Freddie laid down a whole new set of rules on href="http://moneywatch.bnet.com/saving-money/blog/ask-agent/the-appraisal-mess-and-how-its-hurting-home-sales/603/">real
estate appraisers, who can no longer be chosen by lenders. Appraisers must
consider only very recent sales — and the entire condo development
must be approved by the two jumbo lenders.
pending sales, and many aren’t familiar with the nuances of a
particular development or neighborhood. And because appraisals must include
only very recent sales, and many condos are in foreclosure, chances are your
condo will be valued against recently sold foreclosed units. That can set off a
death spiral for your deal in which your lender won’t OK the loan
because the appraiser has compared your deal to foreclosures.
guidelines, but it is OK for your real estate broker to give the
appraiser recently sold comparables to validate the price for your deal.
Even a fire-sale price may not survive the appraisal
The upshot: Appraisers are being randomly assigned to
The dust is still settling on the new appraisal
Developer’s Pain, Your Gain
Goal: Be a shark, and hunt down the best deals.
In many markets, the best deals are brand-new condos in newly or
nearly completed developments.
Conversions — condos fashioned from existing rental
buildings, thanks to some strategically placed granite and lots of white paint —
are cheaper for a reason, say real estate agents who specialize in condos.
Often, developers looking for quick flips haven’t improved the
mechanical systems of their buildings — and that can spell big bucks
down the road for basic upgrades of the roof, furnace, and electrical systems.
Instead, look for a deal from the many developers now under
pressure from their investors and financers to sell out their buildings. Forget
those ubiquitous banners trumpeting “sold” percentages. No
unit is truly sold until it closes, and many supposedly “presold”
contracts — written before the buildings were completed —
are now falling apart. That leaves the developer with a random selection of
units that his investors want him to dump, and that translates to a bargain for
In some markets, condo-developer defaults are hitting 30
percent. Signs that a developer needs cash now include auctions of
unsold units and liens filed by contractors in court against the developer. Be
sure the developer’s prior projects stand up to scrutiny (any lawsuits?),
and, if so, move in for the kill.
How to Make a Developer Weep
Clearance sales are often announced first to potential buyers who’ve
already toured the building and signaled their interest. By the time the
reduced prices are advertised through the MLS and newspapers, the best units
may be claimed.
design center. Developers typically finish unsold units with standard
appliances and fixtures. If you covet the upgraded finishes, negotiate for the
developer to give you upgraded appliances, fixtures, tile, and floors.
building, the unit, and all appliances.
position it as a take-it-or-leave-it proposition. Unlike brokers representing
single-family homes, developers hate to haggle.
low, solid offer than a higher, shaky offer.
cut in the rush to complete the building.
Goal: Do your homework to avoid any nasty surprises.
With so much chaos in the market, you’ll need to
scrutinize the development’s financials and condo documents like
never before. Here’s how to dig up potential problems.
- Find out how many owners are in arrears on their association
dues. Even 10 percent is worrisome, but 20 percent or more is “scary,”
says Pat Young, sales director at swanky Chicago development Metropolitan
- Examine the warranties and guarantees, and check out the claims
against the developer’s prior projects. Leaky windows, shoddy
plumbing, and other infrastructure problems develop over time and may not
emerge until the warranty has expired. Interview the owners who moved into your
building first to learn how the developer corrected any problems in their
units. To reiterate: A local real estate lawyer is essential.
- Examine the association’s minutes to see what they’re
cutting — pool maintenance? — and to see whether the board
is whipping up any moneymaking schemes that will crimp your access to amenities
you’re paying for — like renting the party room to
- Have your lawyer order up a “reserve study” —
an analysis of the financial and structural history of the development —
recommends Roy Wagner, a partner with the Milwaukee law firm von Briesen &
Roper, and chair of the construction section of the State Bar of Wisconsin. It’ll
cost you a couple of thousand dollars, but it’s worth it to make sure
you have no financial surprises down the road. (Think special assessments,
lawsuits, construction headaches, and the like.)
- Learn if and how the board has changed rules about renting out
units. If you run into financial trouble, you’ll want the flexibility
to rent out your unit.
Jay Michael is only in his mid-20s, but he’s So when Michael laid eyes on a much-coveted Michael had thoroughly researched the building: Michael’s advice: Mine public
A Trump in the Making
already developing a career in real estate. He and a partner in Estate Properties
have lined up investors to buy blocks of Chicago-area condos from failed
developers for as little as 30 cents on the dollar. They fix subpar mechanical
and electrical systems, charge rent on the low end of the market, and still
reap a healthy cash flow.
duplex unit in a 1926 Gothic tower in Chicago’s Gold Coast
neighborhood, he put his investment strategy to work, waiting out two richer
offers that both fell apart when financing collapsed. It took him a year, but
he scooped up the unit earlier this year for $925,000 — $300,000 less
than the most recent collapsed deal.
the history of the condo; how much units appreciated from one sale to the next;
and how the association spent its fees. So when the 3,500-square-foot unit came
back on the market for the third time in a year, he was ready. Using the sales
history of the building, plus estimates from contractors for gutting and
renovating the kitchen, bathrooms, and bedrooms, he thumbnailed the likely
postimprovement value of the unit at $1.5 million. Michael put down $508,000 to
qualify for the maximum Fannie-backed loan of $417,000. That let him channel $400,000
in cash for the renovations.
records for tidbits that reveal the seller’s negotiating position. “Look
at tax records to see what other [property] investments the seller may also
own. If he’s overleveraged on real estate, he may have a weak
financial position and be willing to cut a very good deal just to get some cash
in the door,” he says.
Jay Michael is only in his mid-20s, but he’s
So when Michael laid eyes on a much-coveted
Michael had thoroughly researched the building:
Michael’s advice: Mine public
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