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Investing in Condos

Condos for Real People

When you buy an apartment, it is likely to be in a condominium, that is, a building in which the apartments or units are separately owned, with joint ownership of shared building areas and the grounds. The apartments in a condominium are usually called condominiums or condos. In some Eastern and Midwestern cities, you can buy a cooperative apartment. Members occupy a specific apartment and hold shares in the cooperative that owns or controls the apartment building. The co-op board has a veto on buyers and other matters, which sometimes results in power falling into the hands of a few individuals. In a condo, the board exists only to run the building on a day-to-day basis and has little control over the apartment owners. From an investor’s point of view, condo ownership provides far more freedom to buy or sell as you please than a co-op.

While single-family homes remain, by far, the most popular real estate investment, condos are fast gaining in widespread acceptance. About one in every ten homes sold today is a condo. Two separate population groups invest in condos heavily. Empty nesters—couples whose children have grown and left home—are one group. They sell their relatively large homes at high prices and move to smaller condos. The other group is composed of young couples who, as firsttime homebuyers, choose a condo over a single-family home. These two diverse and growing groups would seem to insure a lively market in condos for some years to come.

Almost a million condos are sold each year, and their yearly price appreciation is about twice that of single-family homes. Because condos need much less hands-on attention than houses, they are attractive investments to owners who do not occupy them or who live elsewhere. In buying a condo as a rental property, however, do not expect that the rent will always cover the monthly mortgage payment and maintenance fee, as you often can with a house. With a condo, your payoff comes with the increase in its value when you sell.

As we will see, some people trade their condos before they even physically exist. One danger in expecting a fast property turnover is paying too high a purchase price and having to wait some time before prices rise again. It is possible for prices to peak at one location and continue rising at others. Knowledge of the locality you are buying in can protect you from such an eventuality. If your main source of knowledge is a glossy pamphlet with pretty photos, you have not done your homework. However, if you purchase at a good price, you are likely to be among the fortunate who have to tolerate pleading agents’ generous offers to buy.

Condos for High Rollers

Many people who know little or nothing about real estate have heard about the vast sums you can make by flipping condos. They may have heard about the guy on his way to the airport in Miami who got a call from his real estate agent and stopped by her office to put down a deposit on two condos, without even seeing the floor plans. Not long afterward, he heard from her again. This time she had a buyer for his two condos at a price that gave him a big profit. The point of the story is that the builder hadn’t even broken ground yet to start construction of the building.

There’s also the story of an unbuilt condo changing hands twice in a single morning, and of a real estate speculator having to delay the resale of another unbuilt condo until he had closed on its purchase. Notice that I said real estate speculator rather than investor. I think of speculators as putting large sums into what appear to be high-risk ventures. However, I know that skill, timing, experience and knowledge can tip the scales in their favor. To move at the speed required in such deals, they need open lines of credit from banks. In addition to buying and closing costs, and agent commissions, they face a big tax bite on selling. Their federal short-term capital gains taxes can be up to thirty-five percent if they sell within a year of purchasing, and fifteen percent if they wait a year. No doubt there’s often luck involved in large overnight profits, but I suspect that most wheelers and dealers in real estate know exactly what they are doing. If they don’t, they may end up flipping burgers instead of condos.

While requirements differ from state to state and place to place, here’s how things work on Alabama’s Gulf Coast. Developers, who expect to construct thousands of condos priced at $500,000 to $1 million over the next two years, often have to “pre-sell” at least sixty percent of the units before getting construction financing. The developer lets each buyer reserve one or more units with a small cash down payment. The buyer then has thirty to sixty days to obtain a letter of credit from a bank to cover the down payment of twenty percent of the purchase price. The reservation becomes a sale on the buyer’s delivery of the letter of credit to the seller, and the buyer’s cash deposit is returned. Construction time is estimated at two years, and the bank charges the buyer a fee of one to three percent of the letter of credit value per year. In effect, the investor buys without tying up any cash.

Brokers in New York City recommend that anyone wanting to sell a condo at a choice Manhattan location should consult with adjoining neighbors and those on floors immediately above and below. Condos that can be joined together horizontally, or made into duplexes or triplexes, sell together for much more per unit than they do singly. A broker told the New York Times that more families are staying in the city and not moving to suburbia, so they need more space. However, it’s harder to find this space or it is very expensive. Another broker said he had a glut of Wall Streeters with bonus money and nothing to offer them. A broker said that if too many personalities get involved, it can get complicated. Clashes happen, especially when the neighbors don’t particularly like each other. When the price is right, however, closing tends to be a very smooth transaction.

This entry was posted on Friday, May 26th, 2006 at 8:52 am and is filed under Home Buying, Condos. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.