Condo values on the Main Line
If you own or are in the market to purchase a condo in the Philadelphia suburbs, you’ve probably noticed that the values are not keeping pace with single family housing. Why? While there may be factors that reduce interest in condo living (noise/smells from neighboring units, no private outdoor space, high monthly fees, limited in-unit storage space, no direct pet access to outside, etc., those characteristics haven’t changed. There have always been people who have shied away from buying a condo for those reasons. I don’t know of any evidence suggesting there are more people now than there were 10 or 20 years ago who would fall into that category. So, again, why have values softened for condos? Primarily for two reasons: assessments (current and future) and being able to obtain mortgage financing.
Assessments
Assessments are fees that are levied against all owners in a condo building when there is a repair/improvement that needs to be done and there is not enough money in the coffers to cover the cost. On the Main Line, most of the condo buildings that exist were built in the 1960s. As a result, the physical structures as well as the heating, air conditioning, plumbing, windows and other systems are often in very poor condition. While some things may have been updated, many of these buildings are finding that they have significant required repairs or replacements for major systems. In order to fund these projects, the board of directors approves an assessment. Each unit is usually charged according to size (the larger units paying a higher fee) and the assessments are usually due over a time span (it could be a year or up to about five years). Rarely is a lump sum due.
However, regardless of how the payments are spread out, the money is still due. Buyers, understandably, are concerned about existing assessments (which must be disclosed when the property is marketed). They are, though, usually even more worried about potential future assessments because there is no way to predict how much they will be or when the board will approve a new one. Part of the reason some people choose to buy a condo is specifically to have a predictable monthly outlay. Major repairs like replacing a roof or dealing with a wet basement don’t apply to condos. If there becomes a fairly high chance that there will be a new assessment in the next several years, many buyers would consider that possibility a deal breaker–especially since a large portion of the condo market is older people who are downsizing and don’t want the responsibility of taking care of a property. That population tends to be on more of a fixed income, so “surprise” fees are particularly unwelcome to them.
Mortgages
The same “aging building syndrome” that has given rise to assessments has also affected lenders’ willingness to write mortgages for these condos. A lender’s concern is that, if the physical structure is failing, their asset may be in danger of losing value. If they write a mortgage for a condo unit and the buyer defaults, leaving the lender to sell the asset, the lender wants to feel confident that it is worth at least what they are owed. With crumbling concrete and ancient plumbing systems that leak, several lenders are not prepared to take the risk and will not write mortgages for a long list of “blacklisted” buildings. This wariness not only affect buyers at the time of purchase (they can’t buy the unit if they can’t get a mortgage), but it affects resale ability down the line. If the buyer pool for a property is expected to decrease, the value of that property to the current buyer is lower.
Make sense now?
Between assessments that may already be in place (which a seller can offer to pay off at settlement or which the buyer may incur once settlement occurs) as well as those which might be looming in the future, buyers are leery of older condo buildings. On the Main Line, the majority of them are at least 60 years old and needing repairs, so upcoming assessments are likely. When you add in the fact that buyers who would need mortgages to purchase may not be able to make an offer on a condo, the current buyer pool is reduced. Even a buyer who can pay cash will be worried about that reduced buyer pool for future sales. In summary, when you notice that condo prices don’t seem to be matching appreciation in other kinds of house, it’s because condo prices are reflecting the current assessment and mortgage conditions.
If you are relocating to the Philadelphia/Main Line area, please go to my blog page and search for posts using the relocation tag. Contact me to discuss your Philadelphia area relocation! jen@jenniferlebow.com/610 308-5973
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