Condominiums from a Financial Perspective

I thought that it might be helpful to review the market trends and underlying forces over the past 5 years as influencing factors affecting condominium versus traditional single-family ownership. It is generally understood that an aging population, central urban locations, detailed construction improvements, innovative architectural techniques, low financing rates, greater availability of credit and the changing demographic trends have been responsible for the accelerated levels of condominium ownership.

The ideal of the two-parent family with 2.2 children living in a suburban house is being supplanted by an array of arrangements, including single professionals, divorcees, active retirees and single parents. For many, an urban condo has become more luxurious and convenient than a house with a yard demanding maintenance. I believe that the condo market reflects a truer picture as a market forecaster than any other indicator.The underlying factors for this belief are the basic observations of the differences in ownership. Condo owners, of course, buy the walls and interior of their apartment and a percentage of the building's common areas, which are typically managed by a condo association. With a condo, there's no adding floor space or big improvements, if you see a price change it is purely appreciation or depreciation. The factor of major improvements to a dwelling is absent. Therefore, condo prices show greater volatility and the condo buyer acts more like a growth stock investor and is quick to react to what they perceives is happening in the market.

Buying a condo is a lot like buying a share in a closely held-publicly traded, non-profit real estate holding corporation. But, many buyers spend more time researching a used car purchase than they when they are buying a condo. The buyer is effect becomes a business partner with strangers in a multi-million dollar real estate development partnership. Again, NAR stats reflect that one in three homeowner associations, (HOAs) are unable to meet major repair and replacement obligations because of insufficient reserves. When a HOA can't financially take care of itself, typically it seeks additional funds in the form special assessments. The portion of an association's budget called the reserve fund reveals how much cash is available for upcoming obligations. If the HOA has less than 30% of the reserves then the reserves would be thought to be in a "poor" condition. In the past, the highest and best uses of land were commercial, now this emphasis has been shifting to residential. And, within this category the most influential factor has become condo ownership for private use or investment. This ratio determines the strength of the condo market. Since the height of the market, July of 2005, the underlying condo value has declined primarily on the miscalculation of the speculator investor.

The urban market is only now showing isolated signs of recovery to the high-end market niche. Second home and vacation markets have not experienced the wide swings and in our belief whereas prices must decline on many individual units to "create a sale" the trend remains unique in the potential represented here in the Lakes Region. I want to offer my opinion that no condo is perfect. And because of this I recommend that any buyer hire at their own expense a certified property inspector to make a detailed property inspection and attend the physical inspection of the unit. Just because as a condo buyer you only are buying the interior of the unit you still should have a clear picture of the overall quality of the construction. And with the inspector's summary, which will include discovered flaws, you will have a stronger position for negotiations prior to closing. It is the interests of both parties to find a solution or solutions to allow the agreement to go forward.

jferriman@spencerhughes.com (603) 520-5385