In this market, condo buyers beware

March 12, 2012
| By Bill Hall |
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Failed residential and commercial condominium projects dot West Michigan. Unable to sell units, developers have had their loans called. Dozens, if not scores, of projects are now in the hands of mortgage lenders.

Developers and mortgage lenders are unloading units at fire sale prices — which makes it a great time to be in the market to purchase condominium units. Whether you are a business looking for an office condominium or would like to invest in one or more residential units, you can find some great deals on price.

Price is one thing — many units are selling at a fraction of their original asking prices, far less than replacement cost. But you must look beyond unit price. Make sure to check the health of the condo project as a whole.

Each condo project is run by an association of its unit owner-members. The association is organized as a nonprofit corporation governed by a board of directors elected by the members. An association assesses its members for the costs of running the project — maintaining common areas, private roadways and the structure of multi-unit buildings, buying insurance and managing the project. It then makes sure those tasks are done, usually by hiring a condominium management company.

In many projects, though, the developer owns so many units that it controls a majority of the votes in the association, appoints its board of directors and officers, and effectively runs the association. The association may hire a management company for the project owned by the developer. If the developer is insolvent, or has turned over the project to its mortgage lender, the association may have suffered.

Unit values

Before agreeing to buy a condo unit at a great price, consider the following:

Is the association in good standing? I have found that many distressed developers have let the association's filing with the state lapse. The association no longer exists to insulate its members from liability for running the project and must be reinstated — at a cost to new members.

Is the association actually functioning? In my experience, many insolvent developers have ignored the association's existence. They have failed to hold required meetings and elections. They have failed to collect assessments, and maintain association records and a separate bank account. As a new member, you may find yourself helping clean up the developer's mess.

Is association governance up to date? Many times a distressed developer will transfer its units to its mortgage lender, but will fail to transfer control of the association. When the developer leaves, action must be taken to replace the developer's representatives serving as association board members and officers, transfer records and bank accounts, and hire a new condo management company not affiliated with the developer.

Is the association solvent? I also find that many distressed developers have not paid assessments on their own units to the association. Consequently, the association is running at a deficit and/or has failed to maintain the 10 percent replacement reserve for future capital expenses, as required by law. This means other members may end up funding the shortfalls.

Is the association doing its job? Often, a developer's insolvency carries over to the association, and the association's developer-affiliated management company. Necessary maintenance is of the "make-do" variety, or deferred entirely. Potholes aren't filled, insurance lapses and lawns aren't mowed. You and other members will pay the price, in damage to your property and future increased repair and replacement costs.

What can you do to check the association out before you decide to make a purchase?

Use the state’s online Corporation Division Business Entity Search function to check the good standing of the association and verify the names of its board members and officers.

Ask for, and review, a copy of the association's latest financial statement, which is a document each association must prepare annually, as required by law.

Carefully inspect not only your unit, but also take a hard look at the common areas of the project.

Insist on evidence of valid casualty insurance and a certificate at closing naming you and your lender as insureds.

Finally, evaluate whether the great price you are getting might not be so great, given the potential costs of helping put the condominium association back on its feet.

Bill Hall is a partner at Warner Norcross & Judd LLP with more than 30 years of experience as a condominium and commercial real estate attorney helping sellers, buyers, developers, landlords and tenants fulfill their real estate needs. He can be reached at whall@wnj.com

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