Mike wrote to me with a question that is on the mind of anyone who owns a condo in a building where there is a short sale or foreclosure.
To give you some history, back in 2006 during the boom I was thinking of jumping into the real estate market out of fear of being out priced. I settled upon a condo in the newly built ….[condo complex in a north shore town]. I made an offer on hand’s down the nicest 1 bedroom in the building… The original owner bought it preconstruction and got every conceivable perk added. Huge granite island, granite in the bathroom, California closets. The unit was phenomenal…My offer at the time was $340,000, which got accepted, but I got cold feet and backed out of the deal. I still follow the buildings sales out of curiosity and I recently saw this same unit go on the market in a short sale for $240,000 and was eventually sold for $220, 000. Before this even the worst 1 bedrooms in the building were selling for $300,000+. It seems to me that this sale will be used as a starting point for all future sales in the building, immediately putting every other one bedroom owner at least 100k under water.
Did the bank just literally cripple this building and its tenants?
In general, a single distressed sale in a condo complex is not going to drag down the value of every unit like it in that building. It takes three to tango, for appraisers. Appraisers are aware that a comparable property is distressed, and takes that into consideration. Unless there is an epidemic of distressed sales in a building, a new, low price-point has not just been established by this one, low sale.
Looking a little deeper, Mike really dodged the bullet by having cold feet. There are two sales in that building in the past year and a half that indicate declining prices that could put other owners underwater. Only one of these was lender-involved; the other owner did not owe much on his unit.
The unit that just sold for $220,000 has been going downhill since the day the original owner closed on it. The first purchase was in the mid $360,000s, the second (the one that Mike put $340,000 on) closed at $315,000. This $220,000 sale took nearly 200 days to accomplish, and it started at $310,000.
The other unit sold in that building was a two-bedroom unit. It was first purchased in the mid $370,000s, near peak. It sold for $260,000 a bit over a year ago.
In 2009, two-bedroom units were still selling in the $300-teens. There is a trend here that Mike should be happy his feet told him to walk away from. But short sales are not the cause. Short sales are the result.
Advice for would-be condo buyers:
Watch for supply and demand issues. Some cities have neighborhoods full of condos that are more or less the same. (Same size, same neighborhood, similar amenities. Variations are mostly condo upgrades and the view out the windows.) Since there are a lot of them, any demand gets watered down. Prices get watered down, too.
Beware of size and convenience issues. One-bedroom condos and condos without parking take a beating when supply is high and demand is low. If one building in an overbuilt neighborhood does not have central air conditioning, but the others do, that building will take a hit.
Any other stigmata of condos to avoid that you want to add to this list? What are you falling condo stories?
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