Q: I live in a building that will be converted to condominium ownership within the next few months. I have been given the option to purchase my apartment at what I believe is a fair price. I am concerned, however, that if the developer cannot sell too many units quickly, I will be responsible for paying a larger share of the condominium fees than my budget will permit. Can you explain how this works?
A: There are two elements to your question. The legal part is fairly easy. The economic part requires, in part, gazing into a crystal ball to determine whether a condominium conversion is a good long-term investment.
When a building is converted into a condominium, the developer legally owns all of the units. Until the units are sold, the developer has a responsibility to keep the project alive. Even during the early stages of the conversion, there are many expenses, such as for fuel, electricity, maintenance and taxes.
Developers treat the issue in one of two ways. In some projects, the developer will assume responsibility for costs attributable to the unsold units. Thus, for example, in a 100-unit building, if the developer has only sold 30 units, he will assume complete responsibility for paying the share attributable to the unsold 70 units.
Another way that developers handle this issue is to make up the deficit for the actual monthly expenses. Under this approach, if the actual bills for the month are $3,000, and if condominum unit owners have contributed $500 toward the monthly maintenance fee, the developer will pay the balance of $2,500 to keep the bills current.
As is evident under this approach, however, as more unit owners begin paying their monthly fee, the developer's share of the of the budget becomes reduced -- and ultimately stops. Under this approach, the developer does not contribute a fair share toward any reserves.
Either way, however, the developer is responsible for the upkeep of the condominium until control is turned over to the unit owners. At that time, the unit owners will have to determine the adequacy of the annual budget. In many instances, the developer may have "low-balled" the budget for the purpose of attracting buyers into the project. It is important for you to analyze the budget carefully, to determine whether it is appropriate for the building.
Legally, because most condominium projects require mortgage financing arrangements, these projects must adhere to secondary mortgage market standards imposed by the Federal Home Loan Mortgage Corp. or the Federal National Mortgage Association. Guidelines of these agencies require that 70 percent of the units in the condominium project must be sold to bona fide purchasers who have closed or who are legally obligated to close.
Thus, if your project needs the approval of the secondary mortgage market, your developer will not be able to sell any units, to you or anyone else, until this 70 percenty mark has been reached. If 70 percent of the units are being sought by purchasers, you have at least some assurances that the project has potential.
The sales contract that you will be asked to sign should have language to the effect that if 70 percent of the building is not sold, your contract will be cancelled and your deposit refunded in full.
The other part of your question is much harder. In effect, you are suggesting that even if 70 percent of the building is sold, the project may still go sour and you will be stuck with the unsold units. This always remains a possibility. The developer may turn to renting the unsold units, or may be required to "dump" the units at a lower price, so that they can be unloaded.
Here, you will have to use your crystal ball. Condominium sales in the Washington area have been surprisingly strong. Many would-be homeowners, seeking tax benefits and appreciation, have found they just can't afford houses here. Often, a condominium is the only answer, and in effect, has become the "starter home" for many Americans.
My crystal ball tells me that if you can afford the monthly payments -- including the mortgage, taxes, additional insurance and the condominium fee -- you should consider buying your unit. After all, despite all of the legislative talk about condominium moratoriums, it is doubtful that any truly effective moratorium will ever be enacted. You may find that your next apartment will be converted shortly after you move.