Consider Association Solvency Before Buying A Condo

There are plenty of real estate bargains out there, especially if you are interested in a condominium.

Existing condominium and co-op sales declined 1.9 percent to a seasonally adjusted annual rate of 530,000 in November from 540,000 in October, and are 32.2 percent below the 782,000-unit tax credit rush one year ago, according to the National Association of Realtors (NAR).

Condo bargains

Condos are also getting cheaper. The median existing condo price was $165,300 in November, down 5.5 percent from November 2009.

"At the current stage of the housing cycle, condos are offering better deals for bargain hunters," said Lawrence Yun, NAR's chief economist.

But before rushing to buy a bargain condo, make sure you look into its homeowners' association, which is responsible for maintaining the exterior property and common areas. All property owners are usually required to be members of the association and pay a monthly fee for its support.

Often these fees can be several hundred dollars per month. With many units sitting empty and in default, it's possible an extra financial burden will fall on those owners who remain.

Serious problems

After a recent survey, the Community Associations Institute (CAI), an association of homeowner associations, said 45 percent of community managers reported their client associations faced "serious" problems as a result of the housing and economic downturn, while nine percent describe the impact as "severe."

Nationally, about 62 million Americans live in homeowners associations, condominium communities, residential cooperatives and other planned communities, according to the group.

A quarter of community managers reported more than five percent of their units are vacant, largely due to foreclosures, the inability of non-resident owners to sell or rent their properties or owners simply walking away from their mortgage and homes.

Another 29 percent reported vacancy rates of three to five percent.

"High delinquency rates put a lot of pressure on associations to meet their obligations to the homeowners who are paying their fair share," said CAI Chief Executive Officer Thomas M. Skiba, CAE. "When some owners, including banks that have foreclosed on homes and now own them, don't pay their share, other homeowners often must make up the difference in higher regular assessments or special assessments."

Yes, even banks are behind in their payments. And Marketwatch.com recently reported that some lenders are even delaying the seizure of condos in default because they don't want to be on the hook for the fees, which must be paid month after month. All of this has a negative affect on the ability of associations to collect assessments, placing a financial strain on associations and their residents.

Essential services

Associations rely on homeowner assessments to fund services such as utilities, trash pickup, snow removal, road and building maintenance and landscaping. Assessments also fund a wide variety of amenities like swimming pools and playgrounds.

Assessment delinquency rates have more than doubled since 2005, according to CAI. Today, 65 percent of associations have delinquency rates exceeding five percent -- compared with just 19 percent of associations in 2005.

More than 30 percent have delinquency rates exceeding 10 percent, and for one in 10 -- or close to 30,000 associations --the rate is more than 20 percent.

As foreclosures continue, the problem could get worse because banks seem to be among the worst offenders when it comes to paying association dues. According to CAI, more than 70 percent of the bank-owned properties are not making timely assessment payments to associations.

Many associations, Skiba says, are also forced to curtail services, which can further depress property values.