Condos have grown to become an important habitat for urban centers in North America. Considered a carefree lifestyle living alternative, they have become very popular, especially in the last 10 years or so. Single people, childless couples, and retirees seem to be particularly drawn to them, primarily because of the convenient comforts in and around them.
However, for many buyers and unit owners, condo ownership can be ambiguous and complicated. Since condos are not based on the same ownership structure as traditional (freehold) houses at street level, comparing condos to traditional houses is like comparing apples to oranges. Ownership of a condominium is based on a two-level ownership system. One level belongs to the individual unit itself, and the second to the prorated and undivided interest of all common elements in the condominium complex, including the land below the complex. While the unit owner receives an individual deed to his unit, it is contingent at all times and subordinate to the master deed of the second-level property, represented by the common elements of the condominium complex. On the contrary, a traditional house, structured by its simple property title, gives its owner absolute and exclusive ownership of both the land and the house built on it.
The main distinction here is that the owner of the individual unit is not the absolute owner of the condo property. Sharing a common roof and the rest of the condo complex with the other unit owners makes them an intrinsic part of the jointly owned commune. Therefore, the value and fate of any individual unit depends on all unit owners electing competent leaders (board members) to govern their condo complex diligently, and paying property tax on time. estate, monthly maintenance fee, and special appraisal, as they become due. .
These are two vitally important prerequisites for any condo complex to be professionally managed and fiscally healthy to preserve the value of your units in the future.
One important thing to keep in mind is that the loss of property to the homeowner does not negatively affect any of your neighbors. In contrast, the loss of your unit by the condo owner automatically affects all of your neighbors, the other unit owners in the same condo complex, by increasing your financial obligations to maintain the entire complex. The more unit losses, the greater financial burden on the owners of the remaining units to maintain the complex.
Condominium complexes are comprised of unit owners with varying financial strengths. Some buy all their units for cash and others with a hefty down payment. Many others can only afford to buy their units with very small down payments, facilitated through secured high-index mortgages, also known as Monster, mostly guaranteed by taxpayers. Economic policy makers, through quasi-government-formed insurance agencies like Fannie May, Freddy Mac, and CMHC in Canada, have been approving and encouraging such (subsidized) purchases to stimulate the economy for quite some time.
In times of a healthy economy and vibrant real estate markets, the condo scene, as long as it is not overvalued, can be a viable alternative to the traditional homes for which it was originally designed since its inception in 1965. Its volatility comes into play in times of excessively inflated prices, oversupply, unemployment and interest spikes.
As a general rule, owners of financially weaker units are the first to succumb during economic adversity. Their units are repossessed and sold for forced sales. If adverse conditions persist, over time, pressure on the remaining unit owners to shoulder the financial burden of maintaining the entire complex can start a ripple effect. More unit owners may succumb to financial pressures, especially when there are no buyers of new units available on the market.
To realize what can happen to condos in the extreme, one has to look at what happened to cooperatives or “Co-ops”, a concept very similar to condo-like ownership. The Great Depression of the 1930s caused dozens of cooperative owners, unable to cope with their financial problems, defaulting on their maintenance fees and common cooperative mortgages. That precipitated the catastrophic failure of large-scale cooperatives. Should the economy stagnate again, condominiums, many of them funded to the core, may end up suffering their demise just as cooperatives did some eighty years ago.
To avoid such terrifying scenarios, the public should be aware that buying a condo complex is not a worry-free property arrangement, as many believe. In fact, it is fraught with dangers. The popular assumption that buying a condo unit frees you from your complex property concerns is totally wrong. The public needs a warning about condo ownership.
Government regulators and policy makers should keep in mind that condos are the most volatile of real estate products due to the financial diversity of their residents. Financially weak unit owners with little or no equity in their units should realize that defaulting on a condo’s mortgage and maintenance fees will cause them to lose their units, resulting in financial liabilities that could haunt them for years. Politicians and regulators in charge must realize that in the next big market correction, the trade-off of stimulating the economy by inducing financially weak buyers to buy condos with little or no down payment can backfire, resulting in taxpayers pay the bill for defaulted policyholders. mortgages. Worse still, vacancies due to the aftermath of unit owners without equity capital could cause disastrous consequences for the remaining unit owners and their complexes.
To prevent such possibilities and ensure that condominiums remain a viable and sustainable form of housing, certain safeguards must be restored, one of which was previously used by financial institutions, to benefit the future of the condo industry.
A mandatory minimum down payment of at least 35%
Before government insurers stepped in to insure high-rate mortgages on condominium units, financial institutions insisted on a 35% minimum down payment. Knowing that condos were exceptionally risky, they would not provide mortgages for more than 65% of their unit value. Their risk was later minimized, in fact almost eliminated, once insured government agencies began providing them with guarantees in case of eventual defaults.
In doing so, a vehicle was formed whereby a traditional tenant with very little cash available could purchase a condo unit without depositing much of his own money (equity). This government-subsidized policy had induced dozens of traditional tenants, many of them turned speculators, to buy as many condos as possible in order to keep the housing sector as a strong contributor to the country’s economy.
The imperfection of such a socialist system was put to the test during the real estate collapse of the early 1990s, where due to oversupply the pool of legitimately available buyers dried up, causing a drastic reduction in unit values of properties. condominiums and massive defaults. by owners of units without equity. Those hardest hit were taxpayers, who paid banks billions of dollars for defaulted mortgages through government insurance agencies.
A second test of system imperfection occurred in the United States in 2008, where again, home prices, and particularly condos, experienced a devaluation of up to 50% in many major urban areas. Once again, it was the taxpayers who had to pay the bill for the defaulted mortgages.
It seems that not much was learned from such failures. A recent MarketWatch article titled “Opinion: Buying a Home Soon Will Be Easier, But Don’t” from October 24, 2014, quotes the FHFA Director as saying that Fannie Mae and Freddie Mac plan to guarantee some loans with such small payments. like 3%.
Given that most economists agree that we currently live in an economic bubble with over-inflated home prices, we must ask ourselves if we can afford to sit back and wait for the next market crash that would lead to another major condo devaluation. The next such accident could affect not only taxpayers, but also the number of homeowners who would lose their condo units. It is quite possible that condominium complexes that are left with many vacant units could end up in insolvency, eventually transforming into ordinary apartment buildings. The damage to the economy, indeed to the whole of society, could be very serious.
In order to preserve the condo industry and to minimize the risk of taxpayer liability in the event of potential massive defaults, condos should be excluded from high-ratio secured mortgages. Condo buyers must again be required to make a down payment of at least 35% of their own money if they wish to purchase a condo. Since they no longer qualify for government-guaranteed insurance on their mortgages, and condos continue to be overpriced, banks may insist on even higher down payments. As scary as it sounds, this would actually lead us back to free market politics, on which our society was founded. Well-governed condo complexes, made up of unit owners capable of paying for their distinctive lifestyle, would be in a much better financial position as their individual owners would deposit their own (substantial) equity in the units, leaving them in a much better position. to cope with future increased maintenance costs. Your individual and collective financial strength would ensure the preservation, even improvement, of your units and complexes for times to come.
Disqualifying condos for high-rate secured mortgages would not weaken the real estate industry. In fact, it would entice developers to build more affordable apartment buildings to house members of the public who cannot afford to buy real estate, and it would relieve taxpayers from paying high-ratio secured mortgages on delinquent condo units.