The Tycoon Report

Got Condo Fever? Beware!

Friday, August 29, 2008 | Ethan Roberts

This past week, as I was sweeping the raging flood waters of Tropical Storm Fay off my screened porch for about the 14th time, I began to fantasize a little bit about selling my single family home to buy a condo. I'm sure some of you home owners can empathize. Sometimes the weekly lawn mowing, trimming, weeding, pressure washing and other routine chores we do for the pride of home ownership just get to be a little too much. So I started visualizing myself on a sunny condo balcony, overlooking the beach, with a stunning ocean view ...



And a nice big pool that someone other than me gets to clean, balance the chemicals, and rid it of the bugs, frogs, worms, and occasional snakes ...



My daydream continues as I see myself frolicking around an exercise room that I don't have to share with the ironing board, four suitcases, and 57 assorted items for next year's garage sale ...


Folks, I guess you could say that I had a good case of condo fever! But that's when I decided to take a chill pill, and remembered the harsh realities of the 2008 condo market, as well as the various "joys" of condo ownership.

First, for anyone who doesn't already know, let me define what a condo is. The term "condominium", or condo for short, actually describes a form of ownership. A condo buyer receives a deed and owns real estate, just like a single family residence. The difference is that the condo buyer receives complete title only to the four interior walls and within, and also owns a percentage of the common elements of the condo, such as land, sidewalks, roofs, lawns, etc.  Most condos are attached units, similar to apartments in design. Unfortunately, that can mean more noise and less privacy. Some are single story, others two stories. 

Unlike most single family homes, a condo will have a monthly maintenance fee, which is often several hundred dollars or more.  These fees pay for the maintenance and repairs to the exterior of the buildings, landscaping, swimming pools, exercise rooms, tennis courts, etc., and may also include some utilities. Condos are governed by Covenants and Restrictions that are often long and complex, and not often or easily changed. Some Covenants may prohibit or restrict pets, and even the renting of one's unit. Clearly, condos are not for people who want to march to their own drummer.

However, there are some advantages to owning a condo. Condos are often purchased by busy professionals, retirees, or young singles and couples who can't afford single family homes or don't want the maintenance headaches. Condominium communities are sometimes great places for people to meet other singles or couples who share common interests through planned activities. 

But as investments, think of condos like volatile, low-priced stocks were in 2000. When the market became frothy in 2005, condos began to appreciate at a faster rate than single family homes. This was because condos were cheaper and less work to maintain, which made them more attractive to the late-to-the-party-investors and people looking for second homes.

But when the market peaked by the late fall of 2006, condos were the first type of homes to take a nose dive. A flood of condos hit the market, and inventory numbers jumped. People who bought at the top of the market with sub-prime loans were forced into foreclosure, and this created a glut of unsold condos, which drove prices lower. In addition, thousands of speculators buying new condos still under construction either pulled out prior to closing and lost their binder deposits, or tried to sell after closing but could not find buyers at the higher prices they were seeking.

From there, it all went downhill, and 2007- 2008 have been miserable years for the condo market both here in Florida, as well as nationally. According to the National Association of Realtors (NAR), U.S. condo sales declined 11 percent from 2006 to 2007.

1)  A high tenant-to-owner ratio makes it difficult for an owner occupant to secure a mortgage.
2)  The recent glut of foreclosures may have driven monthly fees higher, as condo boards are forced to raise their fees to cover monies that aren't being generated from vacant units.
3)  Many buyers are forced to pay one-time assessments for community problems that may have been announced prior to their purchase.
4)  Overbuilding and apartment conversions to condos during the past six years may limit future upside appreciation.

There are several condos in Northeast Florida where the condo board is suing the building developers for shoddy construction, resulting in massive rehabilitation costs. These costs have doubled the monthly condo fees for the owners, and in some cases have led to additional foreclosures for people who were able to pay their mortgage, but could not afford the higher fees. 

Another problem is that lenders do not want to provide loans to condo buyers in developments where there is ongoing litigation. So only cash buyers can buy the foreclosures, leading to huge price reductions. One very attractive condo had several foreclosures, which originally sold for $150,000 or more, being dumped by the banks for $50,000- $60,000. But the problem for investors is that the condo fees have ballooned to more than $500 a month.  Between the fees, taxes, and insurance, the return for rentals is just not sufficient, and right now investors don't want to gamble on future condo appreciation. So owner occupants can't buy them and investors don't want them. Thus, the units continue to sit unsold for long periods of time.

The annual statistics from my local Multiple Listing Service (MLS) tell the story:  

2005:  3,362 closed sales         

2006:  3,287 closed sales

2007:  2,351 closed sales

2008:  932 closed sales (through August 28th)

The 2008 partial year number prorates to about 1,420 sales by year end, which would be a 57% reduction from 2005 levels. 

There are currently over 2,300 active condo listings, and another 370 that are pending closings. Many of those in pending may never close, due to financing difficulties. Currently, the average number of days on the market for condo sales is 106, while in 2005, the average was only 51 days. The average priced sale in 2005 was $252,434. Today it is $222,807.

These statistics are similar to the national existing Condo/Co-op sales figures put out by NAR, which showed a decline from 896,000 sales in 2005, to 801,000 sales in 2006, and 713,000 sales in 2007.
So after I finished digesting all these facts and figures, my enthusiasm and fantasies about condo living had diminished considerably. Yes, Tropical Storm Fay was a royal pain. And yes, sometimes living in the single family home means headaches. But for the reasons outlined above, I still won't be trading in my home for life in the condominium any time soon...

And to all of you who find yourself battling against the big storms over the next few months, as I did recently, I urge you to stay home (unless told to evacuate), stay dry, and above all else, stay safe!



See you next week!






Ethan Roberts
Contributing Editor
The Tycoon Report