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 connot 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, but determining whether a converted condominium is a good long-term investment calls for a little crystal ballgazing.
When a building is converted, the developer legally owns al the units. Until they are sold, the developer is responsible for keeping the project alive. Even during the early stages of the conversion, there are many expenses, such as for fuel, electricity, maintenance and taxes.
In some projects, the developer will assume responsibility for costs attributable to unsold units. In others the developers make up the deficit for the actual monthly expenses. Under this approach, if the actual bills for the month are $3,000 and if 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 second approach, as more unit owners begin paying their monthly fees, the developer's share of the budget is reduced and ultimately is eliminated. Under this arrangement, 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 owners will have to determine if the annual budgetis adequate.
In many instances, the developer may have "low-balled" the budget to attract buyers. 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 condomimium project must be sold to bona fide purchasers who have closed or who are legally obligated to close.
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 have to "dump" the units at a lower price to get them sold.
Here, you will have to use your crystal ball. Condominium sales in the Washington area have been surprisingly strong in the past, although recently there has been a significant slowdown because of high interest rates. Many would-be homeowners, seeking tax benefits and appreciation, have found that they just can't afford houses here. Often, a condominium is the only answer.
My crystal ball tells me that if you can afford the monthly payments, including the mortgage loan, taxes, additional insurance and the condominium fee, you should consider buying your unit. After all, you may find that your next apartment will be converted shortly after you move.