By Deborah Goonan, Independent American Communities
One very important consideration for condo buyers: be aware that you may someday be forced to sell your condo unit, perhaps even at a financial loss. The risk is very real and substantial.
That’s a dirty little secret that’s not disclosed to condominium buyers before they sign the sale agreement and agree to a mortgage.
How can this happen?
First let’s review a few key facts.
A condo unit is part of a larger condominium association, a legal concept that creates joint ownership of common elements. You generally own your unit from the walls inward, but the condo association owns everything else: common hallways, stairways and elevators, shared areas such as a pool or common lobby, the exterior envelope of the building or buildings that are part of the same association, parking areas and surrounding grounds.
In other words, condo owners share substantial assets and liabilities. Exterior and common area maintenance, plus the cost of insurance and management of the property, can become quite expensive over time. As the physical property ages, it will require more and more costly maintenance, repair, or replacement of components: the roof; exterior paint, brick, stucco, or siding; central heating and cooling systems; shared plumbing lines; resurfacing of a parking lot; elevators; exterior walkways, catwalks, balconies, or stairways, and more.
The cost to own a condo generally increases with time. But the value of that condo often decreases over time, particularly if the property is not maintained in pristine condition, or becomes outdated.
In addition, each condo owner is granted voting interests equivalent to the percentage of ownership in the association. So someone who owns a larger condo unit than you do, or someone who owns more condo units than you do, gets more “votes.” The condo industry designed condominium and homeowner associations so that the more assessments you pay, the more voting interests you are entitled to.
It sounds good in theory, but this corporate “voting interest” concept has a dark side, too. Read on.
At some point, many condo owners conclude that it’s no longer practical to invest thousands of dollars per unit to bring the property up to current safety and convenience standards. Many of your neighbors may decide they’d like to cash out by selling the entire association to a real estate investor, taking their share of the purchase price per unit owned, paying off their mortgage, if they still have one, and moving out.
Here’s an example in Chicago, where investors are eager to purchase condominiums and convert them to rental apartments.That’s because, in the current economic environment, there’s more demand for rental apartments than condominiums.
Owners of 116 units in Barry Quadrangle Association have already had one unsolicited offer of $28 million, which they rejected as too low. But, it prompted the owners to put the entire condominium project up for sale, in hopes that an investor will pay them a fair market value.
It is rumored that owners are hoping for a sale price closer to $40 million.
This big Lakeview condo complex is poised to go rental
Now if you have owned your condo for many years, and your mortgage is paid off, you might be delighted with the sale price.
But keep in mind, there are details missing from the report. We don’t know how many units are owner-occupied as opposed to tenant-occupied. Condo associations with a high percentage of tenant-occupancy are more likely to vote for a sale of the entire association, mainly because tenant-occupied units tend to be owned by investors or reluctant landlords who might be more than happy to unload the financial burden, especially if they can make money on the deal.
But as an owner-occupant, you’re more likely to have an emotional attachment to your condo – it’s your home, after all. Even if you’d prefer not to sell, you won’t have a choice, as long as there are enough condo owners that do want to sell. (In Illinois, 75% of votes must be cast to terminate the condominium association. Other states require at least 80%.) And you might still owe a substantial balance on your mortgage, particularly if you purchased recently, with a very low down payment.
How would you feel about being forced to sell and lose money on the deal, because you’re outvoted by the majority of condo owners?
Another very real possibility is that your condo association can be hijacked by a hostile investor. That’s exactly what’s happening in Siesta Key Condominium Association in Palm Cove, Florida.
An investment trust owned by two individuals – James and Jonathan Riley – purchased most of the 30 units in the association. Along with the units, The Riley Family Trust purchased the interests of a sufficient number of votes to take over the condo board, and to initiate the process of converting the condo association to rental apartments.
In this case, it is mathematically impossible for condo owner-occupants to prevent a condo termination and conversion.
As a result, several condo owners are being forced to sell, even though they had not been planning to move. Chances are high that the investor’s offer will fall short of what remaining owners need in order to pay off outstanding mortgages. Owners have retained attorneys to represent their interests.
In the state of Florida alone, the process of terminating condo associations by hostile investor takeover has occurred hundreds of times since 2007. Most of those takeovers occurred following the real estate market crash, so investors were able to force owners to sell their units for far less than they paid at the time of purchase.
Palm Cove condo owners forced to sell, face legal battle to stay in their homes (WWSB ABC-7 VIDEO)