Aging Florida condos, insurance and maintenance costs driving owners to sell

As condos come up for recertifications, investors are finding opportunities to buy properties

Aging Florida condos, insurance and maintenance costs driving owners to sell

Many condominiums in South Florida are beginning to show their age and with plenty approaching 40-year recertification, and insurance costs soaring, a growing number of owners are looking to sell. That's allowing investors to find an opportunity to pick up properties.

David Druey (pictured top), Florida regional president of Centennial Bank, said that the first issue with these condominiums is that many of them are getting very old, and owners haven’t maintained them adequately.

“Some of those units that were built in the '60s and '70s, you're going to have to go through a 40-year certification,” Druey told Mortgage Professional America. “They have to go and verify, make sure that the roof, the foundation, and the elevators are in good condition. There's just a checklist of things, and if they're not in compliance, they can be fined, or they can have an issue with the state.”

Because so many of these condos need considerable maintenance to pass the 40-year certifications, some owners want to sell rather than invest in upgrading the property.

“There is a concern there that you're going to have a lot of condo properties that have what we call a deferred maintenance,” Druey said. “They're going to have to pay. They've got to pay the piper, right? You need to pay now or pay later. So, they're going to have some special assessments, and they’re going to be tied to these condos.

“Based on that information, you have people who don't want to spend money on the special assessment, and so they may be trying to dump their condo before they have to pay these assessments. And that's one reason why the condo market is a little fragile.”

Insurance costs have soared as well

Another factor dragging down the Florida condo market is soaring insurance costs.

“The second reason the condo market is a little fragile and it’s been basically all commercial properties that have some age on them, is the insurance,” he said. “The insurance cost has gone up 50% and sometimes more than that in some properties, because maybe their roofs aren't to the Miami code.

“For us, you have to verify how healthy the association is, what the reserves are. If something were to happen like a hurricane, what do their reserves look like? What does their insurance look like to make sure that condo is a viable condo in the worst-case scenario?"

Druey notes that one of the biggest challenges is that much of the required upkeep costs for the condos have been deferred. Associations reduced costs for owners, which he notes was good at the time but is now coming due.

“When somebody goes and looks at a condo, we say, ‘Okay, we need to get all the information for the condos,’” Druey said. “Most of those associations just didn’t do assessments. They just did the bare minimum, because that’s what people wanted to do. If I lived in a condo that was worth $500,000, I don’t want to pay $500 a month for association dues. I may think that’s too much money.

“So, since I’m an association owner, I might say, ‘Let’s make that $300, which sounds better for me, monthly.’ But I’m still going to have to pay at some point in time. “

While Druey doesn’t believe it is a full-on crisis, he does believe major changes are coming to the condo market in South Florida.

“I think you’re going to see a lot of migration with elderly people out of those units and maybe moving to North Florida or out of the state of Florida because of the costs,” he said. “Because there are so many people on fixed incomes.”

These challenges are in addition to lending obstacles facing borrowers in the condo market, as many condos require non-QM lending due to the Florida Building Safety Act. Also, many foreign buyers have departed the state due to geopolitical tensions.

Another concern about these aging condos is the threat of tropical storms and hurricanes, which could pose a risk, especially in coastal areas.

Possibly a win-win scenario

With so many condos needing significant repairs, investors are seeing an opportunity to purchase them, fix them up and rent them out.

“What we are already seeing happening is you're going to end up with a fractional condo, which means you have somebody go in there and identify a building, and they start actively buying units in that condo association,” Druey said. “They buy enough to gain control over the board. And then they say, ‘We're going to buy your unit, and you stay here, or we're going to buy it and you can move.’

“They're going to end up turning those condos into apartments. We're already seeing that in some of our markets. People with money for investments will take one of those properties with 30% of their units for sale. They'll start buying them and get control over the units.”

Druey said the situation becomes a win-win when investors can buy the property from the owners for significantly more than the owners paid for it. Investors then turn around and rent the property to the previous owner.

“When we're involved in those transactions, we typically see where our client goes to the owner and says, ‘If you'll sell me your property for $150,000, I'll still let you live in that unit, and you can just pay me rent,’” he said. “‘I'm going to give you the money. I'm going to end up turning this thing into an apartment complex anyway. I’ll give you $150,000 to $200,000, put it in your pocket, and then you pay me back $2,000 a month.’”

This allows the former owner to remain in their home, gives them cash out for the sale, and gives the investor someone who is invested in the care and upkeep of the property.

“And usually that's a win-win for those condo owners,” Druey said. “They get cash out, and they want to stay there. It’s their home. That's the best kind of new client I can get to rent from me, because they don't want to move and they've lived there for 15 to 20 years. They’d much rather have that person than try to put another renter in there that may or may not stay for the next five years.”

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