Condo Conundrum : Structural, Financial Problems Keep Post-Quake Market on Shaky Ground
In the midst of the best buyers’ real estate market in years, a condominium didn’t seem like too tall an order when Sandy Studner began checking out townhouses in the west San Fernando Valley last December.
“It was almost a year after the earthquake, and I figured it was the right time,” said Studner, 32, who works as a manager at a Tarzana medical office.
But five months later, Studner gave up in disgust. Every condo she viewed seemed to have a nagging problem--sometimes structural, sometimes financial, but almost always stemming from last year’s Northridge earthquake. “I thought it would be as simple as 1-2-3,” she said. “I did not think it would become this quest.”
Studner’s experience is not uncommon in a condo market that, 16 months after the quake, remains largely unsettled. From unfinished quake repair work to looming changes in requirements by a giant mortgage buyer, the condo market is cluttered with thorny troubles that sometimes snag and unravel potential deals.
Studner encountered one of the most common problems in March, when she made a $160,000 offer on a three-bedroom condo in Calabasas. The unit looked clean, but after she and her agent did some research, they discovered that if she were to buy it, she could move in right away but would have to move out in the fall for five months when the condo owners association had scheduled repairs on hidden structural damage to the building.
After that, Studner forgot about condos and started looking for houses. Three weeks ago, she bought a tidy, three-bedroom house in Reseda for $141,000. Her monthly mortgage payments will be about $750, she said. That is several hundred dollars less than what she expected to pay in mortgage payments and owners association fees in a condominium.
Studner’s decision to buy a house mirrors a broader trend in the Valley housing market. The median price of a condo was $105,500 last month, an eight-year low for the month of April. But median prices on single-family houses have fallen just as far, landing at $170,000 last month, also an eight-year low. As a result, houses are no longer out of reach for many buyers who could only afford condos not so long ago.
With prices of houses falling, condos “have just become more difficult to sell,” said Bruce Mosk, director of the condo resale division at Fred Sands Realtors in Encino. He said condos typically accounted for 80% of his sales in the late 1980s, but now represent just 50%. Meanwhile, the number of condos he sells has fallen from 17 a month to four.
There are also forces at work in the condo market that don’t exist in the market for single-family houses. For example, buyers today often face special assessments--or fees--levied by condo owners associations to help pay for quake repair work, or to cover the deductible for quake insurance.
These assessments can range from a few hundred dollars to tens of thousands of dollars. And though the payments can be spread over many years, they represent another monthly expense on top of mortgage payments and condo owners association fees.
Lois Landau, a real estate agent in Calabasas, said one of her clients recently backed out of a condo purchase because the amount of the assessment hadn’t been determined. “How could somebody buy with this hidden fee that could run into the thousands of dollars?” Landau said.
In another wrinkle unique to the condo market, many mortgage lenders will not make loans on condos in complexes where more than 30% of the occupants are renters. These owner-occupancy ratio requirements have become more troublesome in recent years because the steep drop in prices has made many owners reluctant to sell their condos at a loss. As a result, when owners move, they are more likely to rent their units.
Debbie Daly, 27, an agent at Fred Sands Realtors in Woodland Hills, said she has lived in a condo for four years, but that she and her husband recently bought a house. She paid $153,000 for her condo in 1991, but figures she could only get $135,000 for it now. “Why would we take that hit?” she said. “We can cover our mortgage with the rent, get a great tax deduction, and still own the condo [until] prices turn around.”
That strategy has taken a toll on owner-occupancy ratios across the Valley. At Malibu Canyon Villas in Calabasas, 28 of the 84 condos--or 33%--are occupied by renters, said Ellie Bracken, president of the owners association. “A lot of people can’t sell so they rent their units out,” Bracken said. “It’s unnerving.”
Another potential financing problem looms on the horizon. The Federal Home Loan Mortgage Corp., known as Freddie Mac, will soon require earthquake insurance on many California condominium complexes before it will purchase mortgages on the units. Freddie Mac, which holds one in six U.S. mortgages, buys mortgages from direct lenders, effectively freeing up money for lenders to make more loans.
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Two years ago, when quake insurance was still widely available, Freddie Mac’s requirement wouldn’t have been much of a problem. But since last year’s quake, the region’s largest insurance underwriters have imposed a moratorium on new quake insurance policies. Freddie Mac’s requirement takes effect July 1, and its impact on the Valley condo market remains uncertain.
Joffrey Long, president of a Granada Hills mortgage lending company, said just 15% of the loans his office handles end up being purchased by Freddie Mac. There are so many other investors competing to buy mortgages that Freddie Mac’s policy will have “an almost negligible effect,” he said.
But Jim Link, executive vice president of the Valley Assn. of Realtors, said he believes the policy might choke an already gasping market, especially if it is adopted by other mortgage buyers. “It will be almost impossible for a seller to sell a condo and a buyer to buy,” he said.
