June 12, 2008
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With a few new condo buildings in the
Bethesda area either selling or in construction; one of the most popular questions we get (from our condo buyers) has to do with being “first”. By “first” they mean being part of the initial round of purchasers to settle on their new condominiums. They want to know if they should expect any problems or complications to stem from being in this group. I believe there is one potential problem, and thankfully, it occurs rarely.
If you are in the initial round of purchasers to settle on your new condominium, you will have received budget documents and notification of the condominium fee structure for the entire association. The assumption in these documents is that all of the units will eventually settle and everyone will pay their fair share and the budget is an actual fair representation of the cost of operation, maintenance and reserves required. If any one of these three assumptions is wrong, there can be trouble ahead.
For example, if the units are slow to sell, the developer is still responsible for making the condominium payments for the unsold units. Failure on the part of the developer to meet this obligation will clearly place the budget of the association in jeopardy. Regardless of the number of units sold, the building will still need to meet the costs of utilities, security, maintenance, trash removal, and so on. The burden of any shortfall will fall on the association members who settled on their units. The same is true if 20% of the owners failed to pay their dues.
This is why it’s common to see authority in the condominium documents to file suit and attach liens and sell the units of owners that are not paying their fees. However, in the meantime, the building and the association need an influx of capital to make things run smoothly. So now you may face a special assessment to make up the shortfall. This may occur over multiple years.
This situation can get really out of hand if the developer goes bankrupt because of the delay in the legal process, and the difficulty to get the remaining units sold.
So in addition to inspecting your potential purchase and reading all those condominium documents, spend some time learning about the developer, his past projects, his current financial situation, existing lender financing for the developer, project timeframes for completion, sales to date, market conditions, and determine the likelihood of the project being unable to sell out.
As always, due diligence in the early phase of a purchase can be worth its weight in gold. A well informed and experienced buyer’s agent can also be of great help.
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