Monday, April 03, 2006

Soon to be Disastrous

I live in a high rise. This is the second condominium building I have lived in. One thing that anyone who has ever lived in a condo building will tell you up front is that assessments are controversial and inevitably go up.

Assessments are meant to cover the common areas, parking, and amenities like a 24 hour doorman. They also include cutting the grass, shoveling snow, and could include items like cable or internet access depending on your building.

Developers inevitably understate what the assessments are going to be after they sell out the building and the board takes over. A good rule of thumb would be to increase what they tell you by 25% - 40% if you want to do some decent financial planning.

Assessments become even more painful because they are in addition to your mortgage and property taxes. If you live in an expensive building that you can barely afford, there are creative (and dangerous) ways to "fix" this problem such as interest - only mortgages. And unlike interest on your mortgage and property taxes, assessments are not deductible for tax purposes (unless you are in the AMT, in which case even your property taxes are not deductible).

In this ad, the developer promises 2 years of free assessments. What this means is that the developer is probably increasing the cost of the unit (which can be financed, including the creative ways mentioned above) and eliminating the recurring, non-financable monthly payment.

This means that a whole raft of people who probably can't afford the "whole package" are able to move into a building such as this and get along for 2 years. Many of these people are probably also counting on the condo market to keep rising (the "bubble" to continue) which will bail them out when they either sell or cash out equity.

In 2 years, two nasty trends will then emerge. Very likely, the developer told everyone assessments that were too low (i.e. $500 / month becomes $750 / month, and something probably needs a 1 time special assessment) AND many of these same people now have to pay the assessments out of their own pocket for the first time. Given that not everything goes up indefinitely, odds are that their unit hasn't gone up in value and they can't just cash out some equity to pay these monthly, reoccurring costs.

A typical board in this situation will likely have some contentious meetings as they need to get the building's finances back in order while many of the cash-strapped, over-their-heads-in-debt condo owners are staring a bad reality in the face of non-deductible out-of-pocket cash payments.

Mind you, I don't know anything about this building in particular. It could all go great for them.

But amongst the sea of ways that people can buy houses they can't afford this is another way to pile on the risk - not pay assessments for 2 years and effectively "roll" these costs into a higher base payment (which can be financed). The "bubble" will likely have many casualties when it pops... Posted by Picasa

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