Condo Bargains: How to Score the Best Deals

Why You Should Buy

Goal: Calculate whether the deal is worth the hassle.

The first question to ask is: Why are you buying this condo? If it’s for an investment or a vacation getaway, the lower price may not be worth the current headaches and hidden costs. (We’ll get back to those in a minute.)

But if your intention is to move right in, this is a good time to trawl the market. Most obviously, the price is right: Nationally, condo and co-op sale prices slid 19.8 percent between the second quarter of 2008 and the second quarter of 2009, according to the National Association of Realtors. As of the NAR’s August report, the national median sale price is $178,800. And prices vary widely: In Las Vegas, prices have plunged a heart-stopping 54.1 percent, to a median $66,400.

Moreover, the great deals — particularly on new condos — let you be particularly picky. Look for a condo association with plenty of reserves and a condo developer with a strong track record.

And some buyers have an added incentive to buy now: If you haven’t owned a home for the past three years, you might be able to get in on a first-time-buyer tax credit worth 10 percent of the purchase price, up to $8,000. (To cash in, you’ll need to close the sale by December 1, 2009.)

But here’s a reality check: Buying a condo these days requires more due diligence than ever to avoid the potholes left by the busted boom.

• Financing is exorbitant for second-home and investment condos — if you can even get a loan. Expect to pay 6.3 percent, for instance, instead of 5.3 percent for a primary residence.
• In the worst-hit condo markets (Florida, Vegas, Phoenix), Fannie and Freddie are constantly concocting ever more stringent regulations.
• Homeowners associations traumatized by rising foreclosures and owner delinquencies are shutting down luxury amenities to preserve cash. It may not be much fun to live in a development that has sacrificed its pool, spa, and golf course to the god of fiduciary responsibility.
• Developers want out, out, out, which means that they’re cutting corners to finish up buildings. Lawsuits abound between dismayed owners of new, flawed units and developers whose projects don’t look like the sales brochures.

Oh, and a hefty down payment will help, too.

So, are you sure about this? If yes, it’s time to go shopping. There’s lots to choose from, so narrow down your choices in advance. Focus on the type of development you want (high-rise? townhouse?) and your top-choice neighborhoods. Prioritize your short list according to lifestyle (amenities) and monthly costs (condo fees, commuting costs, and so on).

Money and Mortgages

Goal: Determine how you’re going to make the finances work.

The next question: How will you pay for this condo?

If you’ve got enough cash on hand to pay for it outright, you’ll avoid a host of closing complications. You’ll still want to get an appraisal, but you can handpick an appraiser who knows the neighborhood, the development, and the developer — and who won’t compare your condo to foreclosures sold dirt cheap, as we’ll explore below.

Paying in cash also means you can drive a harder bargain, especially with a developer. The sale is more likely to close quickly — or at all — than a financed deal.

One caveat: If you’re not buying a brand-new place, don’t pay all cash for a torn-up unit, figuring you’ll quickly get a home-equity loan to pay for the improvements. It’s tempting with a foreclosure. But you’ll just be chewed up by the lending machine after the purchase, instead of before — not much of an advantage.

For the rest of us, mortgage experts and realty agents say it’s best to shop for a lender before you start shopping for a condo — preferably a local lender that specializes in condos. Otherwise, you can wind up stuck in the shifting sands of Fannie Mae and Freddie Mac requirements like these:

• Some developments must be at least 70 percent sold and/or owner-occupied for a buyer of just one unit to get approval for a Fannie- or Freddie-backed loan. A spate of foreclosures in a building can drop the owner-occupancy rate below the presold and occupancy requirements. If that occurs when your deal is in process, Fannie or Freddie won’t buy the loan from your lender.
• The two big secondary lenders are now charging an additional upfront fee — currently 75 basis points — for condo sales involving down payments of less than 25 percent.
• And condos in Florida are so risky that Fan and Fred staffers are taking a harder look at many developments and lenders in that state before approving deals — with the aim of finding the good exceptions.

Hometown lenders should know the exact sales status and reputation of the developer, development, and building you are considering. Make them earn their fees by clearing the way through the regulatory brambles.

And because lenders see condos as riskier bets, they may try to charge you a full percentage point more than you would pay on a loan for a single-family home, says Greg McBride, senior financial analyst with economics firm Bankrate.com. “The significant rise in [borrower] defaults has made lenders and investors very squeamish,” he says. “These are deemed as much riskier transactions because of their use as second home, the predominance of investors, and the oversupply.”

Prove that the condo will be your primary home, he adds, and you may be able to negotiate a lower rate.

Developer’s Pain, Your Gain

Goal: Be a shark, and hunt down the best deals.

In many markets, the best deals are brand-new condos in newly or nearly completed developments.

Conversions — condos fashioned from existing rental buildings, thanks to some strategically placed granite and lots of white paint — are cheaper for a reason, say real estate agents who specialize in condos. Often, developers looking for quick flips haven’t improved the mechanical systems of their buildings — and that can spell big bucks down the road for basic upgrades of the roof, furnace, and electrical systems.

Instead, look for a deal from the many developers now under pressure from their investors and financers to sell out their buildings. Forget those ubiquitous banners trumpeting “sold” percentages. No unit is truly sold until it closes, and many supposedly “presold” contracts — written before the buildings were completed — are now falling apart. That leaves the developer with a random selection of units that his investors want him to dump, and that translates to a bargain for you.

In some markets, condo-developer defaults are hitting 30 percent. Signs that a developer needs cash now include auctions of unsold units and liens filed by contractors in court against the developer. Be sure the developer’s prior projects stand up to scrutiny (any lawsuits?), and, if so, move in for the kill.

Due Diligence

Goal: Do your homework to avoid any nasty surprises.

With so much chaos in the market, you’ll need to scrutinize the development’s financials and condo documents like never before. Here’s how to dig up potential problems.

• Find out how many owners are in arrears on their association dues. Even 10 percent is worrisome, but 20 percent or more is “scary,” says Pat Young, sales director at swanky Chicago development Metropolitan Towers.
• Examine the warranties and guarantees, and check out the claims against the developer’s prior projects. Leaky windows, shoddy plumbing, and other infrastructure problems develop over time and may not emerge until the warranty has expired. Interview the owners who moved into your building first to learn how the developer corrected any problems in their units. To reiterate: A local real estate lawyer is essential.
• Examine the association’s minutes to see what they’re cutting — pool maintenance? — and to see whether the board is whipping up any moneymaking schemes that will crimp your access to amenities you’re paying for — like renting the party room to outsiders.
• Have your lawyer order up a “reserve study” — an analysis of the financial and structural history of the development — recommends Roy Wagner, a partner with the Milwaukee law firm von Briesen & Roper, and chair of the construction section of the State Bar of Wisconsin. It’ll cost you a couple of thousand dollars, but it’s worth it to make sure you have no financial surprises down the road. (Think special assessments, lawsuits, construction headaches, and the like.)
• Learn if and how the board has changed rules about renting out units. If you run into financial trouble, you’ll want the flexibility to rent out your unit.