Long Beach Real Estate-Long Beach Condos

Long Beach Condos - Let The Buyer Beware

A must read before purchasing a Long Beach Condo

The condo market in this country is huge. Baby boomers are downsizing and professionals are buying condos and lofts near work.  It's an opportunity for renters to become first time buyers which they didn't think they would have again after the sellers market drove prices far above their reach. 

In my opinion the condo market in Long Beach, and nationwide, may be in for a few rather large shockers which could rattle more than a few cages.  We have already come across several HOA's in, or very near, serious financial jeopardy.  Many condo owners purchased using ARM's through 2006 prior to the sub prime implosion.  When those ARM's adjusted some of these homeowners found themselves unable to pay the increased loan amount and the HOA fees.  Rather than lose the condo (their home) some stopped paying the HOA fees in order to continue paying the mortgage.  At this point the HOA should step in and take the action dictated in the CC&R's but with so many homeowners in trouble and choosing this road they have had to examine their options as well.  The HOA is supposed to foreclose on those units per most CC&R's.  It is expensive to foreclose and when you are dealing with multiple owners in the same complex that cost can become exorbitant and unmanageable.  The available funds to move forward with the foreclosures often just don't exist because the reserve fund has been driving the operating account and is depleted. 

The effect of non-payment of monthly HOA Dues

Monthly HOA fees are designed to cover the monthly expenses of the complex.  When there is a shortage the HOA must put to a vote the decision to draw funds from the reserve account into the operating account in order to cover expenses.  Many HOA's have been depleting their reserves in this fashion for the last several years and are coming close to wiping out their reserves, or are there now. 

Lets compound the problem.  HOA's regularly must deal with major expenses, some expected, some not.  If the roof or plumbing begin to fail there is only so long that you can put band-aids on them until they actually fail and create widespread damage in units.  Even in a good market it is rare for any HOA to have ample funds to replace either of these or any other large repair without an assessment as these are high ticket items which require a vote of the HOA and the members.  Condo owners who are in trouble or are in default on their HOA's, have lost their jobs or are afraid they are about to lose them will not vote for any additional expenses.  Assessments and/or increases in the monthly HOA dues will also be needed to replace badly depleted reserve funds, these are also subject to a vote.   

Imagine this, or similar, scenarios across multiple HOA's over the course of the next 5 years.  Compound that with the fact that most new buyers in these condo complexes are coming out of rent as first time home buyers and are buying the absolute most they can afford.  There is no room in their budget for assessments, large or small, and in some cases a simple $100 increase in HOA would strangle them.

Eventually the work will have to be done.  Eventually the assessments will have to happen both for repairs and to replenish reserve funds.  The assessments that are coming down the pike in many condo complexes as the market turns around and tries to correct itself will be profound.  This downturn will have to be paid for. 

Several major Long Beach condo complexes are currently facing litigation for a variety of situations.  These litigation's have the potential to cause future assessments and/or HOA increases.  Read the minutes, if there is even a hint of litigation inquire and assess the details, speak to your financial advisor or attorney.  Will this litigation cause an assessment that you could not handle financially?  Do your due diligence, find out if a situation exists and how it will affect you as a future homeowner in the association. 

First time buyers likely will not have equity to borrow from to cover the cost of the assessments in the next 5 years, appreciation will come slowly when the market begins to turn.  Some of these condo purchases will fall to foreclosure.  5 years from now my prediction is that about 80% of the owners in these complexes will be first time buyers that purchased through this downturn.  This has the earmarks of a potential disaster. 

As these units fall to foreclosure some of the banks will pay the back HOA fees and perhaps the assessments. The banks, however, are in no way obligated to assume these expenses and there is no guarantee that they will do so moving into the future.  The HOA  expenses are technically the obligation of the foreclosed former owner.  While the same may be true for assessments, special assessments not yet due would be the responsibility of the bank.  But by then it won't be enough to fix the problems, many associations will be too far gone and the money will not arrive in a timely manner, if at all. 

Condo buyers are given a year of monthly HOA minutes, financials, CC&R's, budgets, rules and regulations while in escrow, some read them, some don't, some understand, some don't.  We explain things to them, they go ahead with the purchase bright eyed and hoping for the best because for them the real miracle is home ownership. 

Every condo association is required to have a reserve study and to update it every other year because of changes in the Davis Sterling Act. 

The banks are still sitting on a large number of foreclosed properties, in many cases they have left the non-paying owners in them to deflect utility bills the bank would otherwise be required to pay.  Keeping the owners in them for the moment also keeps them from being broken into and damaged, another expense the banks would otherwise absorb.  Eventually these properties will become available for sale and another large group of renters will move up to home ownership. 
 

When the foreclosures are released many buyers who have waited for the last 2 or 3 years will be shocked to find they cannot compete with their FHA loans and their 3.5% down, they are already experiencing this.   I presume this will keep the amount of government backed loans down a bit.  

There are new FHA requirements:

• FHA now requires a minimum of 10% of the amount of the annual budget be available in reserves.
• FHA also now requires that no more than 15% of the homeowners are delinquent. 
• All FHA approved projects will have to re-certify every 2 years. 
• There are no more "spot" approvals possible. 
  

These requirements will make an already difficult condo search more difficult as less buildings qualify for FHA loans. 

Banks already want to see 10% to 20% in down payment and respectable credit scores, not so many first time buyers have that.  Conventional loans at 10% down are tough to get and usually become 15% before the loan closes.  Interest rates will probably go up by summer, right after the tax incentives expire, this will knock down buying power yet again. By summer a lot of buyers who waited will not be able to buy or will have to reduce the price range they are searching in. 

We are short inventory to sell.  When a nice property comes onto the market it is often buried in multiple offers. There are all cash and large down payment buyers out there scooping up most of the decent properties coming onto the market.  Few FHA buyers are buying because they either cannot compete or don't like what they can buy in their price range. 

All in all it is a difficult scenario.  Between the financial world and what is going on at street level in real estate, we have real potential for further financial disasters. 

Take care when you are purchasing condos &/or lofts (condos) both in Long Beach and nationwide.  Carefully review all of the documents presented to you before deciding to go forward.  Determine if the HOA is financially solvent enough for your comfort level, the responsibility is ultimately yours.  Review your personal financial situation.  If the monthly dues are increased or a substantial assessment becomes a reality will you be able to access the funds to satisfy it?  If you don't understand what you are reading have your financial advisor, accountant or attorney review the documents before you move forward. 

When you are ready to buy call your Long Beach expert.  Laurie Manny 562-212-5420.

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Laurie Manny Long Beach Realtor® (562) 212-5420 244 Redondo Avenue Belmont Heights Long Beach, California 90803 Buyers/Sellers/Investors Homes Condos Income Properties 1031 Exchanges