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  • Lies, Damn Lies, and Assessments

    Posted by Carl from Chicago on October 5th, 2009 (All posts by )

    I recently was walking down LaSalle avenue in River North and saw some new construction. Aside from the usual accoutrements such as more bathrooms than bedrooms and everything made of granite, one item REALLY caught my eye:

    Low assessments – $200 / 2009

    When you purchase a condominium, you need to consider the price, financing, property taxes, and assessments. I went out to the web to get a definition of assessment:

    What’s an assessment?
    A condo assessment, sometimes called an association fee, is a dollar amount paid each month by the condominium owner to cover a proportional share of the common expenses of the property. These expenses can typically include, but are not limited to: gas; sewer; water, electricity for common areas; scavenger; lawn cutting; snow removal; hallway cleaning; insurance for common areas; professional management, parking lot maintenance; legal and audit fees; as well as short- and long-term replacement reserve. Be sure to consult the budget for any particular property to learn what is covered in the assessment for that property.

    The dirty secret is that assessments are typically very low when you purchase the property new from the developer; but they seem to rise significantly after all the units have been turned over to owners. While my experience may be unusual, our assessments have roughly doubled since the owners took over the building from the developer.

    Why is this? When the building starts out, there typically isn’t much of a reserve fund. Without a reserve fund, any type of major expense that comes up requires a special assessment, which becomes very painful since they are usually unexpected and can’t be planned for in advance. Everyday expenses tend to rise, too, as well as utilities and property taxes.

    I laughed out loud when I saw $200 / month for a 4 unit luxury building. As your building becomes fancier and higher-end, everything costs more. You don’t want to spend $1M or more for your unit (I’m only speculating, since I wouldn’t pay anything near that to live in a condo) and then cheap-out on the little things, like the tile in the common entry way, the concrete on the driveway, and flowers in the entry. I can’t even imagine what the assessments of $800 / month would buy (4 units) in a building like this… could that even pay the scavenger fee for refuse removal, and the common utility bills? I’d be surprised if it did.

    I did live in a building once with assessments nearly this low. We took turns shoveling the parking area (this is a BIG job, because you need to clear a lot of snow and move all the cars around, too), mowing the lawn, and one of the owners even shoveled the roof every time we had a big snowstorm. If something broke, someone in the building tried to fix it, or at least took a day off work while someone came in to fix it (ever try to fix a common alarm system or a door strike… what a pain).

    I’m not for or against a condo, and assessments are a necessary evil, but I’d bet a large sum of money that the assessments for this “luxury” real estate will NOT be $200 / month come 1-2 years from now. And if you are buying new construction, I’d advise to plan for increases in your assessments far beyond what the developer is telling you.

    Cross posted at LITGM

     

    14 Responses to “Lies, Damn Lies, and Assessments”

    1. Jonathan Says:

      Good points. There is also a risk (maybe this depends on the laws of your state) in buying into a new building that has < 100% ownership. You can be in a situation where the owners become responsible for maintenance once 50% of the units are sold, and the units sell slowly, and the early buyers get stuck with the entire bill.

      One quibble is that a reserve fund isn't necessarily a good thing. It amounts to forced saving, and for financially responsible people during good economic times that's often not a good use of money. OTOH, the alternative may be that the association spends a lot of time and money collecting special assessments from deadbeats and people who underestimated their ownership costs.

    2. Kirk Parker Says:

      On a somewhat related note, we’ve got a condo project where the developer is about to go bankrupt and/or enter foreclosure on the property. And at this point only 10 of the 162 units in the building have sold. Given the difficult residential market currently, what kind of fees are those few pioneering purchasers looking at?

    3. Kirk Parker Says:

      Hmmm, something got left out of that last sentence; let me try again:

      Given the difficult residential market currently, those remaining 152 units are likely to remain empty for quite a while. In a mostly-vacant condo, what kind of fees are those few pioneering purchasers looking at?

    4. Jonathan Says:

      The ten owners are in a difficult spot. Things might work out OK if the other units are sold quickly, but that implies a substantial reduction in the market value of each unit. Worst case, the other units are off the market or don’t sell for a long period and the building deteriorates. Either way, the ten owners have no control over events that could destroy the value of their property.

      The market solution for this kind of situation is for investors to buy blocks of units. This has happened in my area (I don’t know if it’s happened with foreclosed buildings). Of course such investors probably have to pay cash.

    5. ElamBend Says:

      According to Illinois Law (The Condo Act) the developer is responsible for the assessments for all developer owned units (i.e. all the empty ones).

      However, given the circumstances the single entity LLC that owns the building for the developer is likely to be effectively broke. Watch out for skimping on major maintenance issues being ignored or treated cheaply.

      Block investor sales and auctions have been, so far rare, partially because banks have been reluctant to mark down to true value their dumb loan. In this situation I wouldn’t be surprised if the bank allowed the developer to rent the remaining units while giving a loan extension (i.e. kicking the loan due date down the road).

      This last scenario is what happened at “The Roosevelt Collection” in Chicago. That building couldn’t close any units because once the time to close arrived, none of the contracts could appraise to the purchase price (among those actually sold).

    6. Carl from Chicago Says:

      I am not a legal expert but unfortunately have a lot of experience with condo assessments.

      The dynamics of a small building like this one (4 units) are VERY different than the dynamics of a large building like you guys are talking about. I had a miserable experience in a 5 unit building.

      For one thing, the instances where a small building like this has TOO much in the way of reserves is likely zero. There always is some cheap person among the units who doesn’t want to pay hardly anything and they just keep complaining until everyone gives up. Buildings this size constantly move from doing everything themselves to getting (semi) professional help. Frankly I think that condos of less than 10-15 units are an abysmal idea because of the small group dynamics. Someone ought to write a paper on that.

      As far as the big units, it is WAY different. They always have “professional” management, even if it is ineffective. And they generally play by some set of rules, even if unevenly enforced. I live in a big building now and even though my assessments are literally 5x higher a month I am WAY happier because I don’t have to do everything myself.

      As far as these buildings being half occupied, that is something I know nothing about, but it must be grim. I will let the sun belt people speak on that, although I am sure it is happening more and more here in Chicago.

    7. Kirk Parker Says:

      Elambend,

      I should have linked to the followup article: the lender itself bought the property at the foreclosure auction, paying $7 million to become the owner of what it had already loaned $46 million to build.

    8. Marty Says:

      Jonathon, Kirk,

      The developer still owns those unsold units and has to fork over. Of course, he controls the Association until over half are sold, so he may want to defer any expenses he can until he figures he can sell his units.

      I was treasurer and/or president of a 9-unit condo in Hyde Park for about 10 years, most of the 1990s.

      the downside to a reserve fund isn’t as bad as suggested… it’s forced saving but your unit’s proportionate share is, in fact, your unit’s and if you sell it has value. the alternative is that the individual owners have to keep their own savings up or otherwise be prepared to deal with a big special assessmant that can come up without warning.

      Yes, it’s possible to go too far, but the only condos I ever heard of that tried to go naked either came to regret it or everyone was so well-off they could write a $5K check on a week’s notice and hardly feel it. The reserve fund avoids the situation where some pay and some don’t, and you’re establishing credit and penalties and hounding people, which can become incredibly bitter when you’re all living in the same building.

    9. Tatyana Says:

      I’ve never lived in a condo as one of the owners, but was present at condo board’s meetings for quite a while (for about 10 months).
      Carl is right – there is always someone who doesn’t want to pay for anything, and then if he/she is made to pay, constantly complains and blocks the “legislation” in every way possible, until everyone is just too tired and gives up. And that was not a 10-15 units building; it had 46 8-apartment’ floors and 2 with 2 penthouses each (don’t I know it…I’ve surveyed them all…).

      The fee (it’s called here “maintenance fee”, as I understand; ‘assessment fee” is for unplanned, bigger expenses – like new set of entry doors, f.ex, or new equipment for a janitors/porter’s closet) of $200 per month sounds about right – but I imagine it’d only work if there are 200+ owners to share the pain.

    10. Whitehall Says:

      The low initial assessment makes it easier to finance a unit, does it not?

      That reduces the income required to qualify for the loan based on the housing costs required.

    11. Marty Says:

      Whitehall,

      You’re correct, tho a competent loan officer will question an assessment that just seems ridiculous.

      Another instance of where the interests of the developer and the early owners will diverge.

    12. Kirk Parker Says:

      Another instance of where the interests of the developer and the early owners will diverge.

      Uh, don’t they always diverge? That’s why one wants to sell, and the other to buy.

    13. HMI Says:

      Used to live in Chicago, but now live in NYC, where I own a coop in a 4-family building. Contrary to what some here suggest, we’ve been financially stable and well-maintained since the coop formed in 1987. We do handle little stuff on our own—lightbulbs, putting out trash, vacuuming hallways, even the snow (sometimes we pay someone). For the rest, we generally bring in licensed professionals. Frankly, we find it much easier to work together as a small set of owners than many much larger coops do, what with room for factions and divergent interests. We choose owners carefully and generally make decisions by consensus. No one has ever balked at a necessary assessment. Maybe we’ve just been lucky, but I’d rather this setup than a 50-unit one.

    14. Shannon Love Says:

      HMI,

      Maybe we’ve just been lucky, but I’d rather this setup than a 50-unit one

      One of the problems with direct democracy is that it doesn’t scale well, especially if you have a minority veto. What works for a small number of constantly interacting people doesn’t work for larger groups because the flow of information between any two members of the groups breaks down and consequences of pissing off any other particular individual become less and less. There’s a lot of game theory research into this phenomena.

      It’s like having a group deciding where to go for lunch. One person can do it easily, three or four takes a few minutes, two dozen takes a committee, and a hundred takes a committee planning weeks in advance and you end up eating in the blandest place possible.

      When you start talking about dozens of individual actors, it usually better to create a hierarchy of subunit. Each subunit makes a decision and then sends a representative to a meeting of the same. Repeat as needed for the size of the organization.