Explaining the dangers of a condominium

Condos have become the main habitat of urban centers throughout North America. Advertised as an alternative to carefree housing, they have become very popular, especially over the past 10 years or so. Singles, childless couples, and retirees seem to be especially attracted to them, mainly due to the comfy amenities in and around them.

However, for many buyers and apartment owners, condominium ownership can still be ambiguous and confusing. Since apartments do not have the same ownership structure as traditional street-level houses (freehold), comparing apartments to traditional houses is like comparing apples to oranges. Condominium ownership is based on a two-tier tenure system. One level refers to the unit itself, and the second refers to the proportional and undivided share of all the common elements of the condominium complex, including the land below the complex. Despite the fact that the owner of the apartment receives an individual document for his apartment, it always depends on the main document of the second level of ownership, represented by the common elements of the condominium complex. Conversely, a traditional home built on the basis of simple legal tenure for a fee gives its owner absolute and exclusive ownership of both the land and the dwelling built on it.

The main difference here is that the individual apartment owner is not the absolute owner of the condominium. Sharing the shared roof and the rest of the condominium complex with other apartment owners makes them an integral part of the co-owned community. Thus, the value and fate of any single unit depends on whether all its owners select competent executives (board members) to diligently manage their condominium complex, as well as their timely property tax payments, monthly maintenance fees and special appraisals as they go. the due date for their payment. …

These are two essential prerequisites for any condominium to operate professionally and remain financially healthy in order to maintain the value of its apartments in the future.

It is important to note that the loss of property by the home owner will not adversely affect any of his neighbors. Conversely, the loss of an apartment by an apartment owner automatically affects all their neighbors, other apartment owners in the same condominium complex, increasing their financial obligations to maintain the entire complex. The more losses of units, the heavier the financial burden on the remaining owners of units for the maintenance of the complex.

Condominium complexes are made up of apartment owners with different financial capabilities. Some buy their apartments for cash, and some with a significant down payment. Many others can afford to buy their apartments with only very small down payments, aided by high-share insured mortgages, also known as Monster mortgages, mostly guaranteed by taxpayers. Policymakers, through quasi-government insurance agencies such as Fannie May, Freddy Mac and CMHC in Canada, have long endorsed and encouraged such (subsidized) purchases to stimulate the economy.

In times of healthy economies and dynamic real estate markets, condominiums – provided they are not overpriced – can be a viable alternative to the traditional housing they were originally designed for since their inception in 1965. inflated prices, oversupply, unemployment and surges in interest rates.

As a rule, the financially weakest share holders are the first to fail in times of economic difficulty. Units are arrested and sold through forced sale. If unfavorable conditions persist, over time, the burden on the remaining apartment owners, who will bear the financial burden of maintaining the entire complex, could cause a domino effect. In this case, a larger number of unit holders may succumb to financial pressure, especially when there are no ready new buyers of units on the market.

To understand what can happen to condominiums as a last resort, one has to look at what happened to co-ops or “co-ops”, the concept is very similar to condominium-like property. The Great Depression of the 1930s resulted in scores of cooperative owners unable to cope with their financial troubles to defy their obligations to pay service fees and conventional cooperative mortgages. This led to the disastrous failure of cooperatives on a massive scale. If the economy crashes again, condominiums, many of which are fully funded, could eventually face demise, as co-ops did about eighty years ago.

To prevent such daunting scenarios, the public needs to know that buying a condominium is not a lighthearted ownership arrangement as many believe. In fact, it is fraught with dangers. The popular belief that buying an apartment in a condominium can get rid of the complex worries of ownership is completely wrong. The public needs a cautionary tale about condominium ownership.

Government regulators and policymakers should be aware that condominiums are the most volatile commodity in real estate due to the financial diversity of their residents. Financially weak apartment owners with little or no equity in their apartments need to understand that failing to meet service fees and mortgage obligations will cause them to lose their apartments, leading to financial obligations that can haunt them for years. Policymakers and responsible regulators need to understand that in the next major market correction, the trade-off between stimulating the economy by encouraging financially weak buyers to buy apartments with little or no down payment can backfire, leaving taxpayers paying bills for defaulted insured. mortgage. Even worse, vacancies due to the fallout of unincorporated share holders can lead to disastrous consequences for the remaining share holders and their complexes.

To prevent such opportunities and to ensure that condominiums remain a viable and sustainable form of housing, certain guarantees, one of which were previously used by financial institutions, must be reinstated in the interests of the future of the condominium.

Mandatory minimum down payment of at least 35%

Before government insurers stepped in to insure high-yield apartment mortgages, financial institutions pushed for a minimum down payment of 35%. Knowing that condominiums were exceptionally risky, they did not provide mortgages for more than 65% of their unit value. Later, their risk was minimized – in fact, almost eliminated – after the state insured agencies began to provide them with guarantees in the event of a possible default.

Thus, a car was formed with which a traditional tenant with very little cash could buy an apartment in a condominium without investing most of his own money (capital). These state-subsidized policies have prompted many traditional tenants, many of whom have turned into speculators, to buy as many apartments as possible so that the housing sector remains 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 in the early 1990s, when an oversupply dried out the number of legally available buyers, leading to dramatic declines in condominium prices and massive defaults. – owners of shares. The hardest hit were taxpayers, who paid banks billions of dollars in defaulting on mortgages through state insurance agencies.

The second test of the imperfection of the system occurred in the United States in 2008, where again house prices and especially condominiums in many large urban areas depreciated by up to 50%. Again, it was the taxpayers who had to pay the unpaid mortgage bill.

It looks like there was not much to learn from such failures. In a recent MarketWatch article entitled “Opinion: It Will Be Easier to Buy a Home Soon, But Don’t Do It” dated October 24, 2014, the FHFA director quotes the FHFA director as saying that Fannie Mae and Freddie Mac are planning to guarantee some reduced price loans. payments are only 3%.

Given that most economists agree that we are currently living in an inflated real estate bubble, we must ask ourselves if we can afford to sit and wait for the next market crash that will lead to yet another major devaluation of condominiums. … The next such disaster could affect not only taxpayers, but also the number of owners who will lose their apartments. Condo complexes left with many vacant apartments could very well be liquidated as a result of bankruptcy proceedings, eventually turning into ordinary apartment buildings. The damage to the economy – indeed to society as a whole – can be severe.

To preserve the condominium industry and minimize the risk of taxpayer liability in the event of potential massive defaults, condominiums should be excluded from high-ratio insured mortgages. Buyers of condominiums must again be required to pay at least a 35% down payment of their own money if they want to buy a condominium. With their mortgages no longer eligible for government-guaranteed insurance and condominium prices remain inflated, banks may push for even higher down payments. This sounds intimidating, but it will actually take us back to the free market politics on which our society was founded. Condominium complexes that are well managed and made up of apartment owners who are able to afford their particular lifestyle will be in much better financial condition as their individual owners invest their (substantial) capital in the units, which will leave them in a much better position. to cope with increasing maintenance costs in the future. Their individual and collective financial power will ensure the preservation and even strengthening of their units and complexes in the future.

Disqualification of apartments for insured mortgages with a high ratio will not weaken the real estate sector. In fact, it would encourage developers to build more affordable apartment buildings for populations that cannot afford to buy real estate, and would make it easier for taxpayers to pay off insured mortgages with a high proportion of insured condominium units.

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