The Condo Crunch

By Renae Merle
Washington Post Staff Writer
Saturday, November 29, 2008

Complaints about condominium living used to involve mainly squabbles about noise levels and pet policies and simmering resentment over a new paint color for the lobby. But the economic downturn is forcing condo owners to turn their attention to money matters that make one resident's budget crunch everyone's problem.

More than two years into the housing slump, the challenges facing Washington's condos are mounting. Sales prices are falling and are not expected to stabilize soon. The number of condo owners not paying their association fees is rising along with foreclosure rates, creating a budget crunch weighing down many communities.

In the face of budget shortfalls, some associations are taking drastic steps to cope, including delaying maintenance and hiking monthly assessments. Others are setting aside part of their budget to cover delinquencies for a time or looking for ways to help owners catch up on payments.

The options can often be limited by owners' personal financial realities. "In the past, you could get a 10 percent increase in fees without stirring the water. Now if you ask for 5 percent, you are cut off at the knees," said David I. Caplan, chief executive of Baltimore-based Community Association Management, which runs communities in Howard and Anne Arundel counties. "People aren't willing to see their fees go up drastically because they are worried about their own finances."

Navigating the economic downturn is tricky, experts said, and condo associations must weigh budget concerns against retaining the community's value. Cut back on too many amenities, and a condo risks putting itself at a competitive disadvantage. But if the board raises fees or imposes a special assessment to make up for a budget shortfall, the potential for scaring away buyers can be even higher.

More home buyers are carefully examining a condo's finances before closing a deal on a unit, according to real estate agents. "I think [the housing downturn] makes condo buying stickier because the management of a condominium is going to be more important," said Andrea Evers, an agent in the Dupont Circle office of Evers & Co. "I think it's important for a buyer to do even more work to make sure the building is well run."

The problem may get worse before it gets better, according to some industry watchers. Foreclosure rates for condos have been rising. By the end of October, 1,208 condominiums were in the foreclosure process in the Washington area, according to RealtyTrac, a research firm.

The average sales price of new condos fell 3.6 percent in the Washington area during the third quarter compared with the same period a year ago, according to a study by McWilliams Ballard, a condo marketing company, and Delta Associates, a research firm. The impact on existing condos has been even more dramatic: Sales prices fell 8.1 percent during the third quarter. At the current pace, it would take 8.2 years to sell the finished and almost-completed new-construction condominiums on the market, according to the study.

The condo market, where the earliest signs of weakness in the overall housing market emerged in late 2005, will probably not stabilize in the District and its inner suburbs until the end of 2009 or even 2010, said William Rich, who follows the market for Delta Associates. It will take longer for the outer suburbs, such as Loudoun and Prince William counties, to recover, he said.

The market downturn has been particularly difficult for owners who bought into newly constructed buildings. Some developers have delayed promised amenities such as pools or jogging paths. After selling a portion of available units, others are renting out unsold units as apartments.

"It leads to some difficulty in future planning because the apartment-dwellers aren't interested in the future," said Jason Fisher, a real estate lawyer with Lerch, Early & Brewer of Bethesda who represents condo associations.

But if the developer leaves those units empty, the condo owners face another set of problems. It can be more expensive for those condo associations to obtain required insurance. Before writing policies, insurers weigh vacancy rates, which can leave a community vulnerable to vandalism or crime, said John Manougian, president of the John Manougian Insurance Agency, a provider of condo insurance based in Silver Spring.

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