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One Reason Why Condo Buyers Pay More to Get their Mortgages

I helped some clients sell their condo apartment yesterday. As we sat at the closing table, the topic of conversation turned to the recent pricing increases and still tighter lending standards that were recently implemented for condo purchase money mortgage loans. The loan officer, real estate agents, and buyer were all commiserating & railing against the higher cost as being pointless and painful.

Then, on my return to the office, I saw an email from Kathleen Robson, a loan officer at Wintrust, that helped remind me why the lenders are still being so cautious.

She described 2 recent files she had worked on: The one involved a developer apparently had been collecting money from unit owners but then suddenly left town (presumably to a country with no extradition) and no one was left to run the condo association. The other involved a developer that simply was not collecting assessments from the owners of sold units (or paying assessments on the unsold units) but may have lied on paperwork submitted to the lender to say that he was.

No lender wants to loan money against a Condominium that is not operating honestly (or not at all). No Buyer wants to own in this scenario either. If the association does not have funds on hand, it cannot pay for say... water, electricity, insurance, property taxes or any of the other common expenses. If there is no management, there is no forum to address problems or manage the property.

Kathleen asked if there is any way to verify, independently, whether or not a developer - controlled condo is operational. There is none. The developers handling of assessments is just one of many risks involved in a purchase transaction. Lenders see the risks the same way as I do, (and we both charge clients more because of those risks)

A large part of any Chicago area real estate lawyer's practice involves the purchase and sale of condominiums, at least mine does. A large portion of my condominium practice involves purchases and sales of newly-built or newly converted condominiums.

I've been seeing these scenarios too for the last couple of years. Of all the condo purchase opportunities out there in the world right now the riskiest (to me, anyway) are:
  • conversion projects built since 2006,
  • by small and medium sized developers,
  • with fewer than 70-75% of the units sold
I routinely URGE clients to steer clear of these. New construction condos of similar provenance to be nearly as dangerous.

In Illinois, a developer is required to turn over control within 60 days of (the earlier of) closing 75% of the project or within 3 years of recording the Declaration. Once they turn-over, the unit owners run the show themselves, and there is much less risk of financial malfeasance. But until the turn-over? There's the danger zone.

When the markets are hot, turnovers happen pretty quickly. In the doldrums, Developers have been holding on to many unsold units and are retaining control of associations for much, much longer. Very few of them have the sort of financial "transparency" that allows for owners - or prospective buyers - to get much comfort.

We simply can't stop unscrupulous developers form lying on questionnaires or financial statements, but we can be more exacting in our due diligence as we review contracts prior to closing. I for one have begun asking developer-attorneys to prove that assessments will be paid into a segregated, single-purpose bank account established for the association's funds alone - as an additional provision in the purchase contract. I am also asking for photo-copies of bank statements to support the existence (and use) of the account.

Even then, no one can force the developer who is collecting assessments checks to actually deposit them after a closing.

The good news here is that, at this point, the "bad guys" are doing this more out of
desperation than greed. they are not making sales so they are not making any money. if this is all that is left to them, they must be pretty desperate. the small-time, under-capitalized developers are dying off. before too long we will be rid of them.

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