Be Wary of Buying Condos in this Market
Those great looking foreclosure deals on condos may turn out to be a trap for unsuspecting homebuyers.
- MORTGAGE EXPERT, DETROIT, BIRMINGHAM, BLOOMFIELD, ROCHESTER, ROYAL OAK, TROY, MICHIGAN
There are a lot of apparently great foreclosure deals on condominiums on the market right now, but you definitely want to do your homework before buying 
one.
Attached condos (those sharing at least one wall) in most areas of the country have lost a higher percentage of value than single-family houses. Worse, that trend is expected to continue, probably even get worse.
Why are condos losing value faster than stand-alone homes?
When a condo owner starts getting behind on their mortgage, they usually also stop paying their Home Owner Association (HOA) dues. If enough owners fall behind on their HOA dues, the association has to cut back on their budget, which could affect the upkeep of the common areas. As the problem gets worse, maintenance can be affected and even major projects like roof repair put off. Depending on the association's reserve funds, they may be forced to raise HOA dues for the rest of the condo owners.
All of these issues will push the value of all condos in the complex lower. Who wants to buy a condo in a crappy looking building? How great of a deal is a condo for $50,000 if the association fee is soon doubling from $150 a month to $300? 
These problems will only get worse as the associations get further behind on their expenses because of owners not paying their monthly fees. In July a condo association in Florida was forced into bankruptcy due to unpaid HOA dues. Many more associations around the country are expected to soon follow. Bankruptcy won't be an easy solution though, as associations have really no hard assets to sell and no way to go after delinquent HOA dues.
One more issue will have a huge affect on condo values - when more than 15% of owners fall behind on their HOA dues, FNMA, FHLMC & FHA will no longer allow mortgages on the units in the condo complex. When that happens the only way for a condo owner to sell will be to an all cash buyer - driving prices down even further.
If you plan on owning a condo until the market turns around and can afford to absorb higher and higher association fees, then go ahead and buy a condo. Otherwise, I highly recommend doing a lot of due diligence on the condo association's budget and reserves before buying.
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In addition to real estate lending, consulting and investing, Drew Sygit writes & speaks about the mortgage & real estate industries. He holds mortgage industry designations CMPS, CMC, CRMS, CMLO, CALO, has an MBA and is an approved industry instructor. He's presented, spoken and/or written for HUD, Financial Planning Association, Financial Planners Association of Michigan, Michigan Association of CPA's, Institute of Continuing Legal Education, Oakland Real Estate Investors Association, North Oakland County Board of Realtors and numerous industry publications. For speaking engagements and questions he can be reached at dsygit@TheLendingEdge.com. He also publishes his own blog: http://drewsmortgagenews.blogspot.com.
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Your advice is solid, as always, Drew -
and for folks like me who are already condo owners, the news is grim. But I really, really appreciate the point that if 15% of the co-owners are behind on their HOA fees, the FNMA, FHLMC & FHA will no longer allow mortgages on the units in the condo complex.
I'm posing the question to my Association Board - what percentage of our owners are delinquent? - and sort of scared to hear the answer.
Great point Linda! I should have considered those who are already condo owners. My advice is to get involved and ask a lot more questions of your association board. Ask/demand to see the financials and the plan to address any shortfalls.
Most people don't realize that an association usually just puts a lien on a condo unit where the owner hasn't paid their association dues for several months.
If the unit goes into foreclosure, the foreclosure sale wipes out this junior HOA lien. Once the unit is foreclosed on, most lenders don't pay HOA dues either. Associations need to make sure they start the lien process all over again, but all they can really do is force the lender to pay the delinquent dues when they sell the unit.
In Michigan, it now takes up to 6 months for a lender to get to a Sheriff Sale and then a homeowner has another 6 months of redemption period. That's a total of 12 months a condo owner could be living in their unit without making mortgage payments, but still enjoying the amenities provided by the association.
Associations can get more aggressive in pursuing condo owners going through the foreclosure process. It could be as simple as sending the owner a letter asking them to at least pay their dues even if the unit is going to foreclosure. Neighbors can contact neighbors to make this request more personal. An association facing serious financial issues can appeal to the lenders holding foreclosed units to pay the HOA dues to avoid the association having to file bankruptcy, which would further drive down the value of the foreclosused units.