Home Buying in Los Angeles>Question Details

Mj, Home Buyer in Los Angeles, CA

What's the risk of buying a condo in a building where 30% of the units are in foreclosure and owned by the lender?

Asked by Mj, Los Angeles, CA Tue Feb 22, 2011

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In my oppinion, it's pride of ownership. Simply put, renters don't have the same vested interest as owners. So, it may be difficult to get absentee owners involved in HOA decisions as they don't always show up for the meetings. And, as mentioned below, it may be difficult to obtain a loan. If it's new construction, that may be different as there may have been a pre-arranged agreement with the developer and lender. And the lender/developer may have a preferred local lender that knows the ins and outs of the project. If it's a traditional resale, you shouldn't have as much of a problem as bank's look at about 50% or more being owner occupied ok before raising the down payment past 30%+. Since this sounds like a case-by-case basis, check with your lender before writing an offer. Overall, like anything in real estate, decide how long you want to onw the property and base the pros/cons of ownership to ROI in the future.
0 votes Thank Flag Link Wed Mar 2, 2011
You are probably looking at an influx of investors which in turn will lead to tenants living in those units instead of home owners. I would love to give you more information about the specific areas you are interested in.

Thanks

David Akram
Realtor, DRE# 01891274
661-505-8550
Century 21 All Moves
Contact: http://contactme.davidnewhome.com
Web: http://www.DavidNewHome.com
FREE Monthly Newsletter: http://newsletter.davidnewhome.com
Web Reference: http://www.DavidNewHome.com
0 votes Thank Flag Link Wed Mar 2, 2011
If there is 52% ownership that's ok.when it falls below that you are looking at cash buyers and or investors..with that you will be dealing with tenants oppose to other homeowners..
0 votes Thank Flag Link Tue Feb 22, 2011
It will be difficult obtaining financing, but also on a personal level, even if you are purchasing for cash... you should be proud of your ownership and buying into a building that has suffered so could limit future appreciation as well as getting quality neighbors....

It is not always the property you buy... it is the neighbors you buy...
Sincerely,
Richard "RJ" Kas (SFR, SRES)
"Representing the finest properties from Los Angeles worldwide"
KAS Properties - Coldwell Banker Previews International - Beverly Hills East
9388 Santa Monica Blvd, Beverly Hills, CA 90210
310.859-5334 office - 310.488.9826 mobile - 310-273-0670 fax ATT: RJ
RichardKas@gmail.com - http://www.RJforLA.com - DRE: 01352771
Sellers Buyers Investors Leasing Consulting
0 votes Thank Flag Link Tue Feb 22, 2011
You may have a difficult time obtaining financing and when you want to sell, unless the foreclosures are not cleared up, you will have a difficult time selling. In other words, the price will need to be below market for the condo to sell.

If you need assistance, feel free to contact me.

Lori Matson
Keller Williams
310-994-5894
0 votes Thank Flag Link Tue Feb 22, 2011
When you have a condo building with a high volume of foreclosures, many of owners of the units in foreclosure have not paid their HOA dues current prior to foreclosures. The Dues will be made current when either the bank/lender pays for them or when the new owner purchases the property. This unfortunately causes the HOA to have a lack of funds in reserve until the HOA dues are paid current.

If the property needs maintenance, and there is a deficit of funds available in the HOA account, either the maintenance will be deferred until funds are available, the HOA may have to raise the funds via assessments on the other unit owners, or wait until the foreclosed units pay their dues current.

The condo complex may or may not have deferred maintenance, and if there is an emergency like a plumbing issue, leaky roof, or some other issue, it may take a while for it to be resolved.

It is always a good idea to check the amount of reserves the HOA has.
0 votes Thank Flag Link Tue Feb 22, 2011
1. prices fall
2. HOA assessment and/or dues increase to make up shortfall
3. If Lenders won't finance prices fall further

Would evaluate much differently if you are purchasing as your residence or a short term or long term investment.

Realtrs do more than find a property or find a buyer. We assist with the hard stuff.
0 votes Thank Flag Link Tue Feb 22, 2011
Dear Mj,
I have sold a couple of condo's where the entire building was bank owned. My clients were able to get rock bottom prices for new construction and the bank was pleased to be able to sell the development. No problems so far with either property.
By the way, there was no problem obtaining FHA financing for either project, so it depends upon the situation with the builder, bank and listing firm.
0 votes Thank Flag Link Tue Feb 22, 2011
It does sound like a buying opportunity. However, are you looking to own or invest? In either case, 2 issues predominate--having extra cash to cover increasing HOD for the missing 30% and the overall value. Picking up extra HOD is not a position to be in if you are cash-poor after buying. Review your area's inventory turnover rate (this could go on for quite a while). As for overall value, anticipated sale prices will be depressed until the surrounding area sees recovery. Less of an issue if you buy for the long haul. Significant vacancy can also see increased criminal activity.
0 votes Thank Flag Link Tue Feb 22, 2011
Hi MJ:

Future value price of these condos would most likely decrease with over abundance of homes for sale, more negotiation for buyers. Another factor would be that most lenders will have a designated number of owner occupancy required for them to be willing to give loans out to the buyers. Too many of these problems can cause the condo to be able to sold only by cash. Cash buyers will not be able to pay the market value, the condo community over all will be sold at lower price than its surrounding community. However, if the buyer purchase it at a very low cost, in a long run, it will eventually be a good payout.

Alisha Chen
Cornerstone Real Estate International
alisha.chen@cs-rei.com
0 votes Thank Flag Link Tue Feb 22, 2011
The prices are soft. There is a likelihood that the bank will reduce prices overtime to below those presently listed, reducing values and the comparable prices for units in the building. As the sold prices decline this will in turn reduce the value of units purchased early on and throughout the building. It would be smart to make sure you are purchasing at the optimum price. There are tricks that Seller's and Buyers use that work around what appear to be the sold prices for units in the building that in essence create an "artificial" value for units in the building. Lastly, with regard to financing, there are likely lenders in place allowing for the purchase of the condos.
0 votes Thank Flag Link Tue Feb 22, 2011
First off, getting a loan will be nearly impossible wiht FHA or even conventional. Bill did a wonderful job below with his explaination. To sum it up, the writing is on the wall this is probably not going to be a very good investment.

IF you are considering making an offer, give address to your lender first (if you are not pre-approved do so) and check before you make an offer as I suspect you will not be able to get a loan on it.

Best of luck.
Spirit
0 votes Thank Flag Link Tue Feb 22, 2011
Mj,

The extent of services provided by a realtor are many but during a time of financial uncertainty buyers need to be cautioned about extensive vacancy and distressed sales. Today's buyers need to be made aware of the condo's financial stability from every respect and made aware of issues that may affect their purchase. With a 30% vacancy/distressed rate and additional home likely headed toward entering the market, the trend is heading in the wrong direction for buyers that are seeking stability.

The question becomes, "who is paying the necessary community fees?" If the management of the community has been conveyed to the local HOA, this additional financial burden will likely land in the lap of the balance of home owners. Additionally, as time passes and there is no resolution many distressed communities must resort to decreased amenities to survive. This means cutting back on or eliminating maintenance, closing pools, eliminating supportive services, etc. Of greatest concern should be the HOA's ability to meet their insurance expense deadlines. Once a community meets this level of distress a multitude of advanced problems enter the picture.

Our recommendation: smart buyers should be taking into consideration not only the vacancy rate and distressed sales issues, but the communities financial picture as well. When in doubt.....keep looking!


Good luck,

Bill
0 votes Thank Flag Link Tue Feb 22, 2011
Financing would be difficult under FHA or other programs...

Also, more than likely the HOA budget is running negative as most people under foreclosure stop making their HOA payments... no revenue means delayed maintenance, etc. An insolvent HOA may be forced to increase its dues... either as a one time deal or their monthly dues...

I would ask to see the HOA budget and operating statements before deciding to buy, but you can do that as part of your contingencies after your offer has been accepted.
0 votes Thank Flag Link Tue Feb 22, 2011
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