Tuesday, November 9, 2010

What Can a Basement Tell you About the Condo Financials - Update



Remember this article........

This past week I had a client who wanted to see a unit in the building that inspired this article - the unit that had really poor condo financials and a basement full of junk.  I took him and while we were standing in the unit I explained, in person, about what I found while in attorney review, a year earlier with another client..... the condo association has no reserves and many of the common area elements are in dire need of repair.

What was interesting was how the price has dropped and what happened with the association in general.  When I showed the unit last year, it was listed at $320,000.  The comp analysis I did at the time came up with $305,000 not accounting for the state of the Association.  The property is now listed for $249,000 and is a short sale.  The property will likely sell for about $215,000 because it's a short sale.  Is $85,000 enough to take the risk of what common elements will have to be repaired for which there will have to be an assessment to all owners (some of whom are defaulting on their home owners' association fees)?

I understand that one of the units in the building sold last year but that individual owner had to pay to do something to the roof to get it past the inspection because the association had no money to do it and he wanted out. 

I would bet good money that the purchaser of the unit that sold last year and the eventual buyer of the unit that is on the market now, is an investor/developer who is going to try to buy all of the units on the cheap, make the needed repairs to both the units and the building and then resell the units at market.  That's exactly who should buy this unit.  Someone who has the expertise to assess how much it will really cost to renovate this building.  The buyer is going to make a bet.... can I buy the units cheap enough to fund the common area repairs, update the units a little and sell at a profit? 

The inspection that was done last year by my client's inspector as part of attorney review was a former builder.  He inspected the building but even he would have had to go well beyond an inspection to cost out the damage to all of the common elements.  He would have had to pull things up and look below the roofing material go back and cost things out.  For my retail client this was just not what he wanted to get involved in.

The lesson here is if you buy a condo you still have to stay involved enough to make sure the building is being managed well.  This building got to this state after years of neglect.  I am sure the owners all felt it was someone else's job to take care of the building and it's not.  When you buy a condo, it is your responsibility.

Many like to blame the property manager.  No.  It's the Board.  The property manager can only do what he is authorized to do and it's not going to include the one off, special project to repair the roof, replace common area plumbing or re-pointing.  That direction must come from the owners.

The building had 8 units and a total of 4 either have or are in the process of foreclosure.  These folks lost the equity in their unit and their credit because of their own lack of involvement.

Hire a good property manger, watch the books whether you are on the Board or not, run for a Board spot, make sure your building is keeping up with both ongoing maintenance and capital projects.

Here is the original article . . . .


As a realtor, I get to go see many buildings, how people decorate, how they live.  One thing that I think has been really interesting is what a basement often says about the building (yes, when you are in real estate these odd things interest you).  I have found anecdotaly, there seems to be a correlation between what the basement looks like and the financial standing of the Condo Association.

Here is a basement where clearly unwanted belongings were left to die.  Some of them, like the table look rather "kitchy" but left unwanted in the basement it takes up space, creates a hazard and makes it difficult to see issues with the plumbing and other fixtures in the basement.




Often, residents leave items like this in the basement because they do not want to incur the expense or inconvenience of having them carted or selling the item.  Clutter like this doesn't happen overnight.  The Board should really have had it cleaned up but often times, especially in smaller condos, there really isn't anyone at the helm.

Owners often want to blame the property manager but really the Board runs the building.  Typically when an Association is first established, they hire a property manager who is given direction via the contract between the Association and the Property Manager.  A good contract will outline what the property manager is responsible for doing, e.g., collecting, depositing and accounting for monthly maintenance fees, seeing that the building is cleaned weekly, taking care of emergency repairs to common areas, etc.  A property manager cannot just decide by itself to spend Association resources unless it's set up in advance.  A board member needs to notice something like this, meet with the board and set policy authorizing the property manager to discard abandoned items, only allow specific items for basement storage or what ever policy the Board sees fit for common area usage.

Here is a sign from a well managed condo that stipulates just what can be left in the basement.  Look how neat it is otherwise.






How does this relate to finances?  A cluttered, messy basement is a visible sign that the Association/Board is not engaged in managing the building.

Provided by Donna Antonucci
Prudential Castle Point Realty
201-240-6832
donnaantonucci@gmail.com
http://www.hobokenrealestatemonitor.com/
http://www.hobokenrealestatevalue.com/




There have been many instances where my client really liked a unit in a building that had a basement that was a mess only to go into attorney review where in due diligence we discovered all kinds of issues with the Association.  I always ask the listing agent if they want to tell me about any issues with a building at the time of the bid.  An ethical agent will be upfront about it but unfortunately, either deliberately or not, many agents don't always admit upfront that the building is having an assessment, or there is a reserve or other issue.  I think it's foolish, because it wastes everyone's time.  It's imperative that you hire an experienced, competent, ethical agent that will help you through a thorough due diligence.  A good listing agent will also explain the consequences of poor financials and poor building maintenance to a seller so that the seller is realistic about the listing price and/or takes action to rectify the building's issues.

To give you some numbers on what this could mean here is an example.  My client bid on a building like this.  In attorney review, the Association had $2,000 total in its bank account.  The roof was in horrible condition and had been left in need of repair that there was water damage well below the roof.  Instead of being an $8,000 job it was going to be a  $25,000 + job per the inspector.  The buidling needed to be repointed at an approximate expense of $40,000.  It was so bad, the lack of mortar was compromising some of the seals on the windows.  These two needed repairs noted by the inspector hired by my client would end up being a $6,500 assessment per condo owner (10 unit building).

It didn't make sense for my client to ask for a concession.  He knew that I asked upfront about the condition of the building, any assessments etc (I had the email to prove that I asked).  He was irritated with the lack of transparency and no longer trusted them.  Also, because there was no way of really knowing how much water damage there was until the roof was actually repaired my client would be taking a big risk even if the seller offered a sizable concession.  The repairs really needed to be made by the building so there was absolute certainty on how much it cost and it really was the responsibility of the existing owners who should have been accruing for those expenses all along. 

Within 6 months, half of the building's 10 units were on the market.  All of these units will have to sell well below market price, unless all of these owners pay in a large assessment to cover these major repairs and get them done before even more damage is incurred.

Provided by Donna Antonucci
Prudential Castle Point Realty
201-240-6832
donnaantonucci@gmail.com

http://www.hobokenrealestatemonitor.com/
http://www.hobokenrealestatevalue.com/



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