Courtesy MLS: Maison Grande Condo
It seems it was just yesterday when everyone was rushing to convert a rental building into a condominium and sell the units to buyers who were clamoring to buy anything that went for sale.
Not long ago investors were pounding the doors of landlords who owned multi-unit buildings from as small as 10-units to large 200-unit buildings.
There was money to be made. The modus operandi was simple: buy a rental building, update the lobby (if it had one) and common areas, possibly give it an exterior paint job, then either sell the units as is or offer kitchen upgrades. Then invest some more money in marketing and just wait for the clients to rush in.
And rush they did. Many were camping outside sales offices, waiting for the opportunity to put a deposit into a unit, unseen. Sometimes not just for one unit but for multiple units although developers tried to ration the supply among all buyers.
Now it seems that some condominiums should have never had converted in first place. Now many stand half-empty as speculators or first-time buyers find out they could not afford those units. Other residents are not paying their maintenance, property taxes or mortgage loans.
Without the maintenance dues, condo associations have no income with which to pay their utilities such as water, salaries and even their insurance policy. This one is a particular important as no lender will provide a mortgage loan unless the association has an updated insurance policy (although a borrower could in theory pay for a personal policy).
For remaining residents, they are left to pay for the expenses of others who quit paying. Eventually, under increasing special assessments (becoming so recurrent that are no longer special) and higher maintenance fees, these homeowners themselves end up not being able to afford their maintenance fees.
Now condominium associations are being forced into bankruptcy. They have had to resort to this strategy because they have ran out of cash and are so behind their bills with no chance of raising the money to get current.
One of the latest casualties has been the Maison Grande condominium in Miami Beach which has recently filed for bankruptcy protection in U.S. Bankruptcy court in Miami.
Perhaps under a Chapter 11 reorganization, some bills will be cut and under the power of the court, it is a possibility that the Associations will have to become more like a business: taking over delinquent units (ones that even lenders have stopped paying the maintenance), cleaning them up and renting them to the public. For those condos that are oceanfront, they could possibly begin allowing access to the beach for the general public for a fee that would include parking and use of the pool.
Whatever it is that these Associations do in order to raise necessary funds, the current situation is evolving and there is no rule book. We will see more Associations go bankrupt and possibly sell itself to investors who will probably who will unwind the condominiums back into rental apartments with some of current owners ending up as shareholders in exchange of their units.
For buyers looking for bargain condo units there is a reason to be careful. Not only they should be inspecting the condition of the unit but they should also be inspecting the financial condition of the Condominium Association very carefully. Looking at the association budget, the number of units which are delinquent and asking questions about the current financials should be as important if not more important than checking out the gym and the pool area.
Comments
so true. here goes the neighborhood. they should not have let those peolpe in! very nice article.
Most states require some kind of "disclosure", specific information that the seller is required to provide to the buyer prior to the purchase of a condominium. Normally, these are provided by the management company or the association itself.
GET IT!
For foreclosures, the bank may not want to provide it and they or the real estate agent may ask you to waive the right to see it. DON'T!
If the law allows, make them give it to you. If not, and they won't, get it anyway. Then read it, especially the parts about budget and "special assessments". IF you can't get it, PASS on the purchase.
What brought the Maison Grande into bankruptcy was the ridiculous "Entertainment Lease" that the original developer had with the building, whereby all the unit owners paid a monthly fee of $112,000 for use of the swimming pool. When the developer sold off the units in the late 1970s, he held onto the pool (a practice later decried and prohibited by the Supreme Court of Florida) and has steadfastly refused to negotiate with the building to sell his interest to the unit owners.
Now that 10% of the building's units are in foreclosure, and the HOW payments have thereby been reduced commensurately, there was no money to pay for the Entertainment Lease, and the Maison Grande was forced into bankruptcy so they could continue to pay for the general upkeep of the property, as well as utilities and security.
Want some irony? The building compelled owners to pay $25,000 per unit three or four years ago in a special assessment, to fix up the pool area. Now the pool is off limits.
Bankruptcy is not a proper vehicle for condos. In the case of the Maison Grande perhaps it will work so that they can get out of a very bad lease deal. However, as long as there are owners in the building there is a revenue source for a judge to tap into with a special assessment. Perhaps some fine legal mind will figure out how to use bankruptcy as a proper legal procedure for a condo, but so far I don't see it as a viable solution. On the other hand it is all up to the judge and the appeals courts and guess what? Lots of billable hours and fees for the attorneys. Once again condos 0 and attorneys 1.
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