Buying a home in DC can seem nearly impossible for a lot of people, but there’s an untapped supply of condominiums east of the Anacostia River that would be very affordable for many, even at market rates. But a number of condo owners associations in the area are in bad financial shape, which creates barriers to both buying and selling them and amounts to lost opportunity for the community at large.
Many condo buildings east of the Anacostia have a higher-than-average number of owners who are behind in their condo dues. Many mortgage lenders won't qualify loans on units in buildings with this issue, so many would-be buyers can’t buy in these buildings.
So when someone really has to sell— say they’re leaving the area or want to buy another house but can’t carry two mortgages— they’re forced to take a lower price. If a seller can’t or doesn’t want to sell at a loss, they have no choice but to stay or rent their place out. Both options tie up equity that could otherwise go somewhere else.
When so-called “regular” (owner-occupant) buyers can’t get loans, the only buyers left are investors (usually cash buyers) or, if circumstances are right, owners who can afford to make a much larger down payment than would usually be expected. A smaller pool of potential buyers means lower demand as well as lower sales prices.
Even with ready, willing, and able buyers looking to buy homes in one of the District’s most affordable areas, there are sellers (or, at least, would-be sellers) who can’t get market value for their property thanks to condo association problems.
Why can’t lenders approve loans in these buildings?
Lenders typically don’t hold and service any of their mortgage loans— they instead sell them to investors in the secondary market (like Wall Street). In order to keep their loans tidy and attractive for the resale market, lenders keep to guidelines provided by Fannie Mae and Freddie Mac. One of Fannie Mae’s stated guidelines for condo buildings requires that delinquency rates be no higher than 15%.
Another Fannie requirement calls for investor ratios to stay below 49%— that is, owner occupied unit must make up 51% of the building’s units. So if the number of investors creeps up in a building (as it does with cash buyers or owners who have moved out) it can further impede loans on such a building. Thus the downward spiral.
Some lenders can still qualify in buildings with such issues, but only for buyers with higher down payments (at least 10%) and higher credit scores. If there is litigation going on in the building (let’s say the condo association has sued one of the owners for past due balance, or a contractor has sued the building for failure to pay) then you can forget about qualifying a loan.
Financial problems can mean all kinds of problems for condo associations
If there aren’t enough funds in the association’s reserve account, regular common expenses, such as roof, exterior paint, landscaping, common hallway carpet, stairwells, and general building maintenance, get deferred. When funds aren’t there to repair big-ticket items (such as a roof, or elevator repair) the burden falls on the owners. If there’s no money, or if owners are tapped out, then the work gets left undone and a building falls into disrepair.
This is obviously detrimental to every owner, not only for aesthetic reasons but also safety, comfort and general enjoyment of the property. If the situation is left to deteriorate, the downward spiral could end with a defunct condo association— and that’s a complete legal mess.
When you have distressed associations, the effects are far reaching; for sellers who are forced to sell their property at a loss, for other owners in the building who suffer from property devaluation and increased shared cost burdens, and for the community as a whole, which can’t attract new owner occupant residents to diversify and improve the income base, which would stabilize and help grow the local economy.
It seems that in some of these buildings, a good number of owners have financial duress and cannot or will not pay their dues. If there were a way to help these owners, or help the associations “help” owners (by providing legal assistance to enforce dues payment and/or force sales by delinquent owners) then troubled asssociations could get back into the black and financially healthy.
Doing this could help attract new, dues-paying residents who would breathe new life into associations, and in turn help prices come back up to their fair market values. New residents and that wanted to keep buildings in better standing would also likely be an overall benefit to the community.
Here’s an example of how this dynamic plays out
Here’s one example of this situation playing out at a mid-size condo building (about 40 units) just two blocks from the Benning Road Metro that was developed and newly renovated in 2007. I’m a real estate agent, and I helped a client purchase a unit here a few years back.
According to a recent conversation with the listing agent, sales had started at a fast clip in 2008 with prices in the low- to mid-$200,000s. As the 2008 recession took hold, sales slowed, and by the time my client purchased in 2011, prices were down to $150,000. The most recent sale in the building took place in 2013, and it was a foreclosed property which went for $99,000 to a cash buyer.
According to a resident in the building, since a good number of residents have stopped paying their condo dues, for reasons no doubt varied, the association has suffered extreme financial distress and all owners have felt negative effects— the worst of which is the extreme devaluation in their property values.
There are different measures that can be taken against owners who do not pay their dues. Associations can place liens on the property, but they wouldn’t be able to collect until the owner decides to sell so this isn’t always helpful. As long as owner pays his mortgage, the banks won’t foreclose.
Associations have the power to force the sale of a property once a delinquency gets to a certain point— but this is an expensive legal process, and may require a board vote. So it’s a sticky situation and responsible owners are being left holding the bag in many cases.
To solve this problem, perhaps loans could work a little differently
It’s in the interest of residents of these buildings, and these neighborhoods in general, to bring these condo associations back to black so that they can begin regaining their market value. We’re talking about a recently renovated 2-bedroom condo with secure parking and a balcony just two blocks to Benning Road Metro here! If banks can work out the financing, the demand will be there.
Perhaps the city could help by creating a task force to provide assistance in the form of legal and/or technical advice to troubled condo boards. This could help with getting associations back on track and, when necessary, help associations take action against owners who aren’t paying.
After all, most condo boards are made up of regular people who may not have the experience or expertise necessary to handle such complex procedures. And if an association forecloses on one or two condo units, it should create a strong deterrent for any other owners in the building who might have considered skipping their payments. It’s a tough approach, but then again it’s unfair for owners who pay on time to suffer such extreme devaluation of their property values (as well as all the other negative attributes that come with an underfunded building).
Another solution could be to provide some amnesty for distressed owners— maybe in the form of financial advice or, ideally, help refinancing into loans with better interest rates.
Another way to help would be to make sure that condo buyers get better educated on the legal ties that bind when you purchase in an association, and of course the importance of paying condo dues on time.
Finally, since Fannie and Freddie set the guidelines, perhaps the agencies could set a requirement that mortgage lenders, rather than homeowners, pay the condo dues on a regular basis for higher risk buyers (buyers with lower downpayments).
Lenders could do this by lumping the condo dues in with the monthly mortgage payment and then paying dues out for the borrower every month from an escrow account (similar to how they pay property taxes and insurance for their borrowers). This would act as a safeguard for all condo buildings by ensuring monthly dues get paid and, as a result, easier for associations to stay healthy and in the black. It ties the responsibility of condo fees to banks rather than owners, and so it would be up to them to foreclose if the buyer stopped paying their monthly mortgage. And since a condo owner is owner of his/her own unit as well as part owner of the association, it would make sense to tie the lender’s collateral in some partial way to the association as well as the unit.
I’ve worked with a number of clients who could have bought east of the Anacostia at the market rate prices, if only their loans would have worked out. The area provides good value with a great location: median “sold” prices of non-distressed condo sales were $150,000 in the past year (when distressed median “sold” prices were at $62,000).*
I’d love to see more of this inventory get opened up for the general public and not just investors or buyers with cash. That would mean more options for homebuyers who are priced out of most of the rest of the city as well as help spur economic growth in neighborhoods that could use it.
*This info comes from MRIS (Metropolitan Regional Information Systems), and should be considered reliable but not 100% guaranteed.