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Condo foreclosures draw banks eye
Some banks are ending up as unwitting condominium developers when they foreclose on troubled projects, a local lawyer said.
The trend could feed a market for real estate specialists in finishing and marketing foreclosed projects that encompass both traditional and site condominiums, said Rob Davies, an attorney at Warner, Norcross & Judd.
When the project is a site condominium, unfinished projects tend to include roads and utilities, he added. Site condominiums appear to be similar to subdivisions, but homeowners jointly own the common areas such as roads, signs and landscaping. They became a popular way to develop neighborhoods as an alternative to the lengthier and more stringent process for subdivisions.
“Banks don’t want to the own property,” added Gail Madziar, vice president of membership and communications for the Michigan Bankers Association. “They want to keep whoever owns that condo in there.”
While there have been cases of Michigan condominiums still under development that have gone under before all units are sold, the bigger issue for banks has been “when they take a property back, they have to deal with the non-performing loan on the books,” Madziar said. “I haven’t heard a lot about banks finishing them to sell.”
Davies said that once a bank takes possession of a condo project, the law gives it the same responsibility as a developer for items such as taxes, insurance and association dues for units it owns.
“They also step into some construction warranty obligations,” he said. “It’s possible to avoid some of that but the banks need to make sure they structure the transaction correctly in order to do that.
“The banks I think obviously would prefer to help the developer along and potentially refinance loans and/or restructure or modify them, keep the development afloat to avoid having to take over the project itself. Unfortunately with the economic climate we’re in, they’re not always able to do that.”
Owners of other units in the project have rights under the law, as well, Davies said. However, a bank takeover usually generates confusion.
“Banks are not used to having to communicate with an association of homeowners,” he said. “They are learning they have to get ahead of that and, from day one, meet with them, explain to them our plans and tell everybody, we are going to work through these issues and get a successful development.”
Davies said some banks are shifting personnel to deal more intensively with coordinating their responsibilities, and in some cases are hiring consultants for management and marketing.
“In order to keep the development afloat, someone is going to have to spend some money,” he said. “They need to find the right person to market the property. They need to find the right price point.”
Usually potential condo dwellers are amendable to buying into projects that are least 75 percent done, he said. But those 25 percent or so finished are more likely to attract another developer who is willing to take over the project, he said.
“The real crucial point is, how well is the development built and how well is it maintained?” he said. “Where we see the biggest problems is a condo project that’s been around for 10 years and they haven’t saved up enough money to, for example, buy a new roof … and now each owner is assessed $10,000 a year.”
Madziar said that in Michigan, there was just too much construction and that has resulted in soft prices today. “The market has to balance itself, and that’s part of what we’re seeing.”
Foreclosure is not the only way that banks sometimes take possession of in-progress condominiums, Davies added. A common alternative is the deed in lieu of foreclosure.
“In Florida and Las Vegas, they’re seeing these same exact issue, a ton of these issues. There’s a lot of troubled projects in both those states. We’re seeing a lot action in Michigan, as well as the Midwest, but in Michigan especially because of … site condos,” Davies said.
“Up until two years ago, we really hadn’t seen much of this work at all,” he added. “Within the last six months, it’s really picked up. Hopefully, within the next year, year and a half, it will start to slow down again and we’ll start seeing some success stories.”