This post discusses an important issue that anyone who wants to purchase a condominium unit in Florida must consider.  The downturn in the Florida real estate market has magnified this problem.

Condominium Association Solvency.

Under the Florida Condominium Law, a lender (under a first mortgage) that acquires title to a condominium unit as a result of foreclosure is only liable for the assessments accrued during the six months immediately preceding.  Keeping this in mind, let’s take a look at this scenario, one that exists in a lot of condominium projects in Florida.

A developer obtained a multi-million dollar development loan to build and sell his condominium project.  After much of the project was built, but before most of the units were sold, the real estate market crashed.   At this time unit purchasers had closed on 20% of the total units, leaving 80% unsold and unoccupied.   Because of his inability to sell the remaining units and to make the payments under the loan, the developer went bankrupt and abandoned the project.  The lender was in no hurry to begin foreclosure proceedings on the unsold units for 2 reasons: (1) If it acquired title to the units, it would have to start paying the condominium assessments for all of those units, (2)  Since there was no market for the units, it is likely that the lender would own the units for a substantial period of time, all the while being liable for the assessments.

It was easier and less expensive for the lender to hold off on the foreclosure until the market improved.  In the meantime, the association and the unit owners (remember only 20% of the units had sold) did not have enough income through assessments to pay the common expenses of the condominium.  This meant that common area utilities, maintenance, security and, most importantly, insurance could not be properly funded.  If the foreclosure sale did not occur for 2 years, then the association would not receive assessments from 80% of the units for 18 months.  This would put an incredible burden on the existing unit owners.

If you are looking to purchase a condominium, it is important that you find out the ownership and occupancy rate of the project.  Many of these problems are concentrated in the new projects.  Older, more established condominium communities generally have a more stable ownership structure, although there are defaults on mortgages for individual units out there also.

Even though you may be able to acquire a condominium unit at an exceptional bargain, you should investigate this situation and then assess the risk of your purchase.

Visit the link below for an article from the Palm Beach Post that illustrates this issue:

http://www.palmbeachpost.com/search/content/accent/epaper/2009/09/13/condo_0913.html

These days, there are some incredible bargains in Florida real estate . . . especially condominiums.  Just before the downturn in the real estate market, condominium development was at near-record levels.  Now, there is an abundance of new, unsold condominium units, many being sold for pennies on the dollar.  For investors and second-home buyers, this creates an opportunity that may not come around for decades.

However, a condominium is a completely different animal than what you’ve been used to. It all starts with the ownership concept. First of all, most people refer to the apartment in which they will be living as their “condominium.” Actually, the condominium is the entire project consisting of all of the apartments, the grounds, the parking areas and, in most cases, the recreational facilities. Your apartment is referred to as a “unit.” All the rest of the condominium is known as the “common elements.” You have exclusive ownership of your unit and you share in the ownership of the common elements with all of the other unit owners. The law says that all of you have an undivided ownership in the common elements. This means every unit owner has the right to enjoy the common elements and the obligation to maintain them.

As you may guess, this arrangement, without guidelines and management, could lead to utter chaos. Each unit owner would assert his or her own personal and selfish preferences as to the use of the common elements and many would not want to pay their fair share of the expenses.

Because of the close proximity to your neighbors, the need to regulate the use of the common elements and the necessity of insuring, maintaining and repairing the common elements, certain rules and restrictions must exist. These rules and restrictions are found in the condominium documents. A brief list of the documents is as follows:

1. Declaration of Condominium. This is the main document of the condominium. The Declaration actually creates the condominium. It describes the units and common elements, defines certain unit owner rights, authorizes creation of the association and regulates the use and operation of the common elements.

2. Articles of Incorporation of the Association. This document creates the condominium association. It is filed with the Florida Department of State.

3. Bylaws of the Association. These are the guidelines for the operation of the association. The bylaws set forth the number of directors, prescribes the procedures of unit owner and board of directors meetings and defines the financial and budget matters of the association.

4. Operating Budget. This document describes the common expenses of the association, which are divided among the unit owners in the same proportion as the ownership interest in the common elements.

5. Rules and Regulations. These are enacted by the board of directors and generally consist of restrictions pertaining to the use of the common elements.

Purchasing a Condominium Unit

If you have decided that condominium life is right for you, you may wish to purchase a unit. The purchase of a condominium unit involves many of the same considerations as a single family home. However, because of the unique nature of condominiums, there are other factors to consider.

There are two circumstances in purchasing a condominium unit which are treated differently under the law. There are different requirements depending on whether you are purchasing from a developer or from the prior unit owner. This Guide will concentrate on purchasing from a Developer.

Purchasing from a Developer

If you are purchasing a unit in a new project from the developer, the Florida condominium law has provisions to make sure you are informed. Every developer of a residential condominium is required to submit the condominium documents to the Division of Florida Land Sales, Condominiums, and Mobile Homes for review. The developer may not enter into contracts for the purchase and sale of a unit until it has submitted these documents and the Division has acknowledged that the documents were property submitted.

Reservation Program

However, prior to the submission of these documents, the developer may enter into reservation agreements with prospective purchasers and accept reservation deposits. Many developers do this to create interest in a project and to test the marketability. By entering into a reservation agreement, you reserve your right to enter into a contract to purchase a certain unit in the condominium. You may cancel your reservation and receive a full refund of your deposit at any time and for any reason. The developer may also decide not the build the project, in which case it must promptly refund your deposit.

After the division has acknowledged that the condominium documents were properly submitted, the developer may enter into binding contracts for the sale of units. At this time the developer may ask you to enter into a contract to purchase your unit and transfer the reservation deposit into a sales deposit.

Buying the Unit

The developer will present you with a purchase contract and a set of disclosure documents. From the later of the date you sign the contract or from the date you receive the disclosure documents, you will have 15 days to rescind the contract. If for any reason during those 15 days you decide you do not wish to purchase the unit, you may inform the developer in writing and the contract will be cancelled and your deposit fully refunded. This period is designed to provide you with an opportunity to review the disclosure documents.

When you receive the disclosure documents, the developer will ask you to sign a receipt of condominium documents. This is a form required by the division to verify on which date you received the disclosure documents. You should make sure that you have actually received all of the documents indicated on the receipt. If so, then you should sign the receipt and write the date where indicated. It is very important that you accurately post the date, as it will likely mark the beginning of the 15 day rescission period.

My next post will discuss some of the factors you should be aware of when purchasing a condominium in this economic environment.