The Condo Trap

Posted here.
http://www.streeteasy.com/nyc/talk/discussion/8339-nyt-the-downside-for-condos-in-a-downturn

Defaults on common charges began to spike last fall, according to lawyers hired by increasingly jittery boards to file liens (the first step toward foreclosure) against owners in arrears.

“I think it’s safe to say that the value of any apartment purchased in the last two years is less than its purchase price,” said David Kuperberg, the president of Cooper Square Realty, a Manhattan property management company. “The simple calculation is that if you bought an apartment a year ago and financed 90 percent of the purchase price, as many did, and now it’s worth 20 percent less, you’re upside-down as an owner.”

And getting worse.

so what do you do if you are in contract to close on a condo that you have been in contract for over a year?

Apologies West81st.

Many condos will weather the downturn, because owners over 5, 10, or 20 years have the equity to cover any unpaid common charges. If certain condos face distress, they may become vulture investment opportunities.

Thanks Angler7,it was one of the better articles on the subject,And makes you think about a condo,especially in one with 40 or less units or one that is not finished.This will change my search,thanks again

bds: you should be scheduling an emergency meeting with your independent financial advisor immediately. If you don't know what to do, you haven't been on top of your financials. If you were planning on an ARM versus a 30 year mortgage, what are you going to do when you have to refinance in 5 years and place is worth less than the amount you owe on the ARM? At least with a 30 year mortgage you don't have that to worry about. I assume it is new construction since you've been in contract so long. How solid is the project? How much of the attraction to it were amenities that will be eliminated? Are you planning to live there until the abatements are about to expire? What if the value hasn't increased but monthlies are about to sky-rocket--a very real possibility if you have only a 5 year horizon. What is it takes 10 years to appreciate in value? Where will that leave you in terms of resale?

You must have answers to these questions that you can live with. I've been saying for 18 months on here that new condo construction is a high risk investment--and yet otherwise smart people just blithely keep ignoring the huge risks and others just rant on about the downside of coops. It isn't rational.

Condo developers with inventory can't be very happy about this article. If we didn't have a chill already...

I did a quick back of the envelope analysis, and this article rings an unnecessary alarm for many condos. Here goes: I live in typical "seasoned" condo: ONE QUARTER of the units have traded in the las FIVE YEARS, according to SE. If we assume worst case: HALF of those units go into foreclosure and the owners fail to pay common charges for two years, then 12.5% of the common charges would need to be satisfied by the remaining 87.5% holders for two years. We can assume that for all practical purposes anyone holding for greater than five years has enough equity to satisfy common charges in a foreclosure proceeding. In these rough estimates that means common charges would need to increase by 12.5 / 87.5 = 14.3% for two years. Given the improbability of that many foreclosures, I'll accept the risk that my common charges may increase by less than 15% for a short period.

PMG - I think you are right concerning more established condos, and many have made the point that the home search is case-by-case. Personally, I have a strong bias towards condo ownership but have kept my distance from new construction for many of the reasons outlined in the article (particularly the amenities sink hole and tax abatement hook). The article did sharpen my thinking on the primacy of lien holders. Bottom line is that with any form of communal ownership your lot lies in the success of the community.

michele1045 - You are welcome. I direct you to the thread started by Katie_eh which offers some thoughtful responses to the Co-op v Condo dilemma. That thread and this article have also shifted my search priorities.

http://www.streeteasy.com/nyc/talk/discussion/8209-co-op-vs-condo-risks-worst-case-scenario

Plus co-ops are less risky because they cost less per foot and per amount of living space. Less money tied up = less risk to meet living needs. The extra money can be used for consumption or other investments. The best financial move is to pay less to live in the manner one wants. Co-ops win all around. I like 100-plus unit buildings with near 100 percent ownership and a large reserve fund and low monthlies. We have had good success with estate sales, so we only pay for the renovations we want. I never understood the love for tacky condos. Give me white brick 60's over glass wall 2000's any day.

happyowner - I like your philosophy and now view co-ops in a more favorable light. My guess, however, is that the condo premium will evaporate in this housing downturn. Heck, the carrying costs alone (post year-5 on a tax abatement schedule) were destined to contract that spread even in a frothy real estate market. There will be great deals per square foot on condos going forward. For the true homeowner the financial decision will come down to the monthlies.

Happyowner - not sure I agree with your reasoning that co-ops are necessarily lower risk due to their lower cost per foot.

A whole new set of risks arise with co-ops, the first that come to my mind being whether I can sell or rent my property when I want, to whom I want. And one may argue that a financially shaky co-op is in not much better a position.

citi - the first that come to my mind being whether I can sell or rent my property when I want, to whom I want.

Depends on how you look at this. A large well-run building will restrict sale only to financially qualified people. While it might be to my advantage to be able to sell to an unqualified person with a funny mortgage, and not to restrict my buyer pool to qualified financially sound people, I don't view this as a long term negative overall, since such people will, if I live in the building a long time, be my neighbors.

People I see renting their places are those who borrowed too much to begin with, have little equity, and desperately try to rent rather than take a "low" price. Again, I do not see this as much of an advantage. Best to have people with money and jobs to begin with, and only to purchase if you are in the same boat, and want a place to live long term, not flip for imaginary profits.

The best financial move is to buy the least amount of property you need for your general living standards, and to pay as little as you can for it, and not to move very often to avoid real estate fees and moving costs. Co-ops beat condos on this criterion, since condos are more expensive per foot for a similar location.

I suspect that condos that weather the downturn are going to adopt many of the restrictive ownership rules of successful co-ops. There likely will be parity in pricing, if not better deals, as the tax abatements expire. In fact, there could develop a co-op premium as fully baked condo monthlies and the altered landscape of true ownership (vis-a-vis lien obligations) are realized.