When a condo busts: Part 1, down to the bottom
Who, considered purely from the perspective of a resident, is the ideal landlord?
When the issue of rent collection is taken out of the equation, the landlord is the head of management and maintenance, functions that homeowners experience and multifamily flat-dwellers do not. Meanwhile the condo – seen by any as superior living, the benefits of ownership without the headaches of management – is more organizationally fragile than it appears. It requires a very high quorum of participation to assure that things done for all are paid by all, and in some cases, whether they are done at all.
What happens when the condo sales cycle busts is well illustrated by this little New York Times tale of woe from the hotbed of see-through verticals,
Peter Zalewski, a broker for Condo Vultures Realty in
Barbara Sanz has never missed a mortgage payment, but the plunge in real estate is punishing condominium owners like her anyway.
I wouldn’t choose ‘punishing,’ which implies volition and intent. Penalizing, to be sure. Or said another way, sometimes risks happen.
You cannot win, if you do not play
Four years ago, she bought her first condo in a glassy new
A condo with units unsold or being foreclosed is like an apartment building with vacancies (the unsold) and evictions (the foreclosures) under way. Those units are no longer economic contributors, they are economic drags. But whereas in a rental, vacancy is the landlord’s problem, in a condo, each owner is collectively part of the common-area’s landlord group. So they pass the hat:
It works until it doesn’t
Each of the remaining owners has had to chip in an extra $1,000 assessment and $50 more a month for cable and Internet.
That is on top of Ms. Sanz’s $450 monthly maintenance fee.
Actually, that arithmetic’s not as bad as it sounds. Let’s presume the $1,000 assessment is a one-time for one year. It’s $83 per month, bringing the total maintenance fee to $533. $533 x 83% (100% sold minus 17% in foreclosure) = $442, which is just about equal to $450 x 100% (full sell-out). In short, the occupieds are paying for the maintenance costs of the vacancies, just as we’d expect.
Even though she pays more, her building has broken washers and dryers and unusable exercise equipment, and her hallway is spotted with mold.
That’s because she’s not paying enough, which is a choice the condominium owners have collectively made. Perhaps they will change their minds as the burdens of being amateur landlords impress themselves upon the owners.
You will be when you see the condo fees
“It’s not fair,” said Ms. Sanz, a 32-year-old event planner. “The first two years, I enjoyed all of the benefits of living in a condo. I’m disappointed now. I hate the way the building looks.”
What does fair have to do with it? I understand your frustration, but suppose things had gone well, and your condo had appreciated 20% a year for several years while your payments remained flat? Would that have been more fair – or just, more lucrative?
When people buy condos, they expect their monthly fees will cover many of the responsibilities that they would otherwise have as owners of single-family homes, like cutting the grass and paying the water bills. Now many find themselves nagging each other in the hallways to pay their assessments and adding special fees while haggling over chores.
As anyone who’s ever tried to coordinate an extended family’s outing to the movies knows, the larger the group, the greater the difficulty of achieving any kind of functional consensus and the magnitude of the logistics required for something as simple as transport to the cinema. That’s why food courts and multiplexes were invented – because any five people have at least eight opinions about what to see or eat.
Being a landlord means being knowledgeable and decisive, and well capitalized. All of the condo owners thought they were buying this based on a projected sales pattern, and they were happy enough to have the speculators buying flats in the boom times, running up the values of the homes they occupied. Now the system has broken down, and the unit owners are lost.
We were supposed to ride, not push!
In Miami, Chicago and San Diego, condo owners are adjusting to the economic woes, sometimes by mowing themselves and working shifts for building security — all while lamenting their lost community.
Do-it-yourself is a tempting scrimp … but an imprudent one. First of all, if you wanted to be in the maintenance or groundskeeping business, you wouldn’t have become an accountant or a neurologist. Second, those who do tend not to be thanked by those who don’t, and thus come to resent those who don’t.
“What motivated people to go into the condo market in a way that led to overbuilding was the expectation that it would be easier than owning a home on a maintenance basis,” said Sam Chandan, chief economist at the real estate research firm Reis.
Not just easier, but also cheaper, and more centrally located.
“The downside is that your fate is tied to 50 or 100 other people who may stop making their condo payments.”
Linked, yes, but not without remedies. Condo fees are an assessment against one’s unit. Why don’t the new amateur landlords just enforce their rights?
That gun belongs to the condo, you know
The pain in the condo market, mostly in urban areas, may not only be deeper than in the rest of the housing market during this downturn but more prolonged.
As I wrote in State of the Market 8, Unsold condos and rental reversions, everybody wants what everybody wants; nobody wants what nobody wants. (Isn’t guru-dom profound?)
Being a guru works for me!
Bargain hunters say they are reluctant to buy into a building even when the upfront cost seems low because they might have to pay unexpected fees as distressed neighbors default on their mortgages or just stop paying the association fees that cover everything from taxes to pool maintenance to air-conditioning repair.
Marcus & Millichap Real Estate Investment Services, which is based in
“We have not even approached the bottom and will not approach the bottom until 2009,” said Hessam Nadji, managing director of research services at Marcus & Millichap.
That’s touching bottom within the condo segment, you understand. Owned single-family homes will touch bottom much more quickly, and their prices will have dropped much less.
I want the shallow end of the price-drop pool
The shabby condition of some condos means potential buyers insist on especially steep discounts on foreclosed units.
Big discount on the third one
A shabby exterior is more than just a knock against curb appeal, it’s an indicator of dysfunctional ownership. As the article’s vignettes demonstrate, ownership dysfunctionality can be extremely expensive.
Alessandro Comoglio, a 34-year-old investor from
Evidence of hard times in a condo in
His willingness to spend stopped short of $200,000 for the condo units, which once sold as high as $700,000, according to the broker, Peter Zalewski. Mr. Comoglio also wants a written guarantee that he would not have to pay more fees.
Mr. Comoglio may want what he wants, but the condo may not grant it to him. Meanwhile, behind Mr. Comoglio there will be other brick-kickers.
Pretty shabby construction if you ask me
“Nobody knows if the worst is yet to come,” he said. “Nobody knows how much prices will continue to drop.”
Spoken like a bottom-feeder!
Plenty of bargains down here in the weeds
[Continued tomorrow in Part 2.]
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