Condo ownership is, at best, only temporarily affordable

By Deborah Goonan, Independent American Communities

As real estate prices start to climb, the industry is once again pushing low down payment home loans, luring first-time homebuyers with relatively inexpensive condominiums and townhouses.

Buyer beware.

In the previous two decades, when developers were building condos and selling apartment-to-condo conversions faster than they could build and renovate them, millions of first-time home buyers and retirees scoffed up so-called “affordable” units.

But many condo owners have since found themselves caught in an affordability trap, as assessments and fees have increased, and continue to rise, much faster than their household incomes.

Westlake Village in Portland, Oregon, is a typical example.



Condo Residents Discover That Home Ownership Is No Guarantee Against Displacement in Portland’s Housing Market

At Westlake Village, the conflict among neighbors has become so intense the board hired a security guard to police the association’s meetings.

By Rachel Monahan | Published September 20 at 5:33 AM Updated September 20 at 11:18 AM

Willamette Week
Maricela Ramirez’s story is a familiar one in today’s Portland.

She came to Oregon more than a decade ago from Northern California, seeking a more affordable place to live. Now, as housing costs climb across the city, a renovation of her building is poised to hike her monthly bills faster than her fixed income can keep pace. Ramirez, 58, fears she’ll end up on the streets.

“I’m just very scared,” she says.

But this tale comes with a twist: Ramirez owns her home.

The people threatening to drive her out aren’t greedy landlords but her own neighbors, who also own condos in a modest complex at the edge of Portland’s West Hills.

The trouble started in June, with a letter from the condo association to owners. It announced a special assessment, and offered the option of a $6.4 million loan rather than charging condo owners their full share for the repairs immediately. The association described plans to redo the siding and insulation on buildings, and replace windows and doors as well as balconies.

That burden is felt unequally by the condo owners. More than 80 owners at Westlake Village don’t live there and rent out their units as an investment or provide them for relatives. But for many of the residents—retirees, people with disabilities, or those barely scraping by—the cost of repairs may be too much to bear.

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Even if a home is affordable to buy, it may not remain affordable to own.

As Westlake Village owners have learned, when buildings, surrounding grounds, and amenities age, maintenance expenses will increase substantially.

Of course, some maintenance and repair is unavoidable. Doors and trim require fresh paint. The roof eventually needs to be replaced. Pool equipment breaks down and must be repaired or replaced. Many owners of association-governed housing underestimate the future cost of necessary maintenance. And most associations fail to reserve a sufficient portion of regular assessments to avoid unplanned expenses, even for basic, predictable repair and replacement.

Owners of homes in any association-governed community cannot avoid rising assessments. Condo and townhouse owners are especially likely to feel the pinch, as well as homeowners in communities with plentiful recreational amenities.

The more services the HOA promises to provide, the more it will cost homeowners to maintain their lifestyle over time.

But that only tells part of the story.


Fixer-upper communities

Another problem arises due to the core conflict in HOAs. People who own condos or houses do so for different reasons, and they rarely share the same values, preferences, and priorities.

When real estate is priced low, and sale prices in the surrounding area start rising, savvy investors scramble to acquire bargain-priced condos. It is very common for a core group of investor-owners in an association-governed community to insist upon expensive, nice-to-have upgrades and renovations.

Fixer-upper buyers and homeowners who use their condos primarily as real estate investments are often enthusiastic about major renovations. They see community improvement expenses as a way to increase desirability of their condo units for future tenants and tourists. As landlords, they may even be able to write off most of their expenses, reducing their taxable earnings from rent.

Likewise, some owner-occupants, who can well afford the upfront costs, may value keeping up with the latest styles and trends, upgrading energy efficiency, and adopting the latest technology.


Community improvements can break the bank.

But every so-called affordable condo or HOA community also has its share of homeowners who simply cannot afford to pay thousands for one or more special assessments to cover the costs of upgrades. Many cannot even afford to pay their share of assessments over time, especially if it requires owners to pay hundreds of dollars more in monthly fees. Owner-occupants who have stretched their finances to buy a condo or townhouse are most likely to fall into this category.

And as Westlake Village owners are learning, as fees begin to rise, condo owners who can no longer afford to pay are forced out, sometimes against their will.

Chances are high that their homes will be purchased by other investors  – or even the same investors – increasing the number of votes in favor of expensive improvements and upgrades.


Owner-occupants are at a disadvantage in affordable condo, HOA communities

The corporate structure of association-governed communities tends to work better for well-funded, business-minded real estate investors than it does for traditional homeowners or wishful-thinking real estate investors that lack insider knowledge of industry trends.

In a slow real estate market, smart investors and developers acquire homes at low prices, then hold onto them for several years, collecting rental income to recoup their upfront purchase price. During this time, assessments remain as low as possible, and investors rely upon fellow association members to share maintenance costs of the community. Owner-occupants, in essence, reduce landlord-owners’ cost of doing business.

In a hot real estate market, investors and developers switch gears,  seeking ways to increase their equity and profit potential. If the market demands condos for purchase, units will be sold at higher prices to lock in a healthy return on investment. But if the market demands apartments for rent, the majority of resales will shift from owner-occupants to investors.

When 75-80% of units are owned by investors and non-residents, condo termination (condo-to-apartment deconversion) becomes an attractive option to create new, more profitable business opportunities for investors.

Unfortunately, by the time owner-occupants hold a minority interest in their association, there is little they can do to prevent being squeezed out of their own community.




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