As a result, many banks stopped lending against condominiums altogether. This reduced the number of buyers to only cash buyers. The combination of a large supply of properties for sale, and a small number of cash buyers pushed prices down even further. Stories of properties selling for 60-70% below construction cost were common in many states.
Think about it from the perspective of a lender. In a conventional property, the lender qualifies the borrower AND the property. It’s the same with a condo, only much more complicated. Qualifying the property involves examining the individual unit and the homeowner association. Assessing the financial health of the homeowner association requires a much deeper analysis.
- How many units are owner occupied?
- How many units are rented?
- How many are vacant?
- Is everyone paying their condo fees regularly?
- What is the state of the capital reserve fund?
- Is there any deferred maintenance that can result in special assessments?
Many lenders have decided to solve the problem entirely by setting strict criteria to qualify a condo for lending. Only a small percentage of condos nationwide fit this criteria.
If you subscribe to the contrarian view of investing, these properties can represent a great opportunity. But you must know that this would be a speculative investment. You would be speculating that prices will return to more normal levels at some point in the future.
In addition, this will be an investment with very low liquidity. You would have great difficulty in selling a property the very next day and turning a profit. I generally prefer to buy investments that are at a discount to the current market conditions. That way I’m assured that I can change my mind and still not lose money.
While prices are likely to increase in the long term, you don’t really know when your investment will pay off. If business conditions change and we experience a further deterioration in prices, you would be left holding a property that is more expensive than current market conditions.
At US Real Estate Partners, we believe that the time is not right for condo’s yet. We’re waiting to see the lending guidelines relax further before embracing this class of property. In fact, we’re negotiating the conversion of properties from condo to freehold in order to improve their market attractiveness.
What do you think? What’s been your experience?