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You would never hear a refrigerator salesman in Alaska tell Eskimos that buying an icebox is a bad idea, and you wouldn’t see a movie producer say his upcoming third or fourth installment of “Pastel Moments” sucks and you will never hear a car dealer say he has a lot full of lemons.

Laurie Manny is breaking the mold and what is probably the first tenet of sales. The Realtor for Main Street Realtors in Belmont Heights is warning people about the dangers of buying a condominium in Long Beach, or just about anywhere else. And Manny, who earns a chunk of her income from selling condos, knows this advice may cost her a few bucks and anger a few of her colleagues.

A few days ago Manny posted on her real estate blog, longbeachrealestatehome.com, a treaties of sorts warning condo buyers to beware before purchasing, and her posting has some alarming statements about new home owners association laws that she believes will make life even tougher on HOA’s and people living in condos—as well as those attempting to get a lending in order to purchase a condo.

“In my opinion the condo market in Long Beach, and nationwide, may be in for a few rather large shockers which could rattle more than a few cages,” the veteran Realtor writes. “We have already come across several HOA’s in, or very near, serious financial jeopardy. Many condo owners purchased using ARM’s through 2006 prior to the sub prime implosion. When those ARM’s adjusted some of these homeowners found themselves unable to pay the increased loan amount and the HOA fees. Rather than lose the condo (their home) some stopped paying the HOA fees in order to continue paying the mortgage. At this point the HOA should step in and take the action dictated in the CC&R’s [contractual agreements] but with so many homeowners in trouble and choosing this road they have had to examine their options as well. The HOA is supposed to foreclose on those units per most CC&R’ s. It is expensive to foreclose and when you are dealing with multiple owners in the same complex that cost can become exorbitant and unmanageable. The available funds to move forward with the foreclosures often just don't exist because the reserve fund has been driving the operating account and is depleted.”


This effect, argues Manny, has resulted in non-payment of monthly HOA Dues, which she believes will have a negative impact on the already ailing condo market. Condo prices continue to drop in certain areas of Long Beach, especially in downtown, according to a recent report from DataQuick. In the 90802 ZIP the median price of a condominium in December was down 27% from a year ago to $188,000. The worst decline was in the 90804 ZIP where the median price in December was more than 43% below levels a year earlier. However, some areas saw the median take a huge leap up. See the box for Long Beach ZIPs broken down. In fact, the trouble selling condos in Long Beach, particularly downtown, began a few years ago. I wrote an article for GlobeSt.com in the summer of 2008 about Citi Property Investors holding a real estate auction for more than 30 condos in West Ocean, a two-tower, $196 million, 246-unit luxury condominium development facing downtown’s shoreline. Condos at the auction went for discounts as much as 50% off original asking prices in the prolific development.

But it’s the coming months and years Manny is most concerned about.

“Monthly HOA fees are designed to cover the monthly expenses of the complex,” she writes. “When there is a shortage the HOA must put to a vote the decision to draw funds from the reserve account into the operating account in order to cover expenses. Many HOA’s have been depleting their reserves in this fashion for the last several years and are coming close to wiping out their reserves, or are there now.”
 
Compounding the problem are major expenses, rotting roofs, failing plumbing. “Even in a good market it is rare for any HOA to have ample funds to replace either of these or any other large repair without an assessment as these are high ticket items which require a vote of the HOA and the members,” Manny writes. “Condo owners who are in trouble or are in default on their HOA’s, have lost their jobs or are afraid they are about to lose them will not vote for any additional expenses. Assessments and/or increases in the monthly HOA dues will also be needed to replace badly depleted reserve funds, these are also subject to a vote. “

Such was the case in a well-publicized repair process at Downtown Long Beach landmark Villa Riviera. A several-year-long lawsuit and brouhaha resulted from the eventual $3.9 million renovation of the 1920s era Gothic tower on the Ocean Boulevard and Alamitos Avenue over a project that included removal of the building’s paint, and about 3,000 gallons of new paint. The resulting HOA increases left condo owners squabbling and touched off a long-lasting and bitter series within the confines of the condo board and in court that costs some of the infighters dearly.

And most new buyers in these condo complexes are first-time homebuyers stretching their financial limits to become a property owner, so there isn’t much room in their budgets for an increase in HOA dues, says Manny. Eventually work will have to be done on those condos, and assessments will be needed not only for repairs but to replenish HOA reserves. “The assessments that are coming down the pike in many condo complexes as the market turns around and tries to correct itself will be profound,” she writes. “This downturn will have to be paid for.”
 
This perfect storm in the condo market has set the area up for a rude awakening in the next five years as first-time buyers won’t likely have enough equity from which to borrow to cover assessments in the next few years, and some of these condo purchases fall to foreclosure, she states. “Five years from now my prediction is that about 80% of the owners in these complexes will be first time buyers that purchased through this downturn,” Manny writes. “This has the earmarks of a potential disaster.”

And add to all of that some new FHA requirements. FHA now requires a minimum of 10% of the amount of the annual budget be available in reserves, and FHA also now requires that no more than 15% of the homeowners are delinquent. “These requirements will make an already difficult condo search more difficult as less buildings qualify for FHA loans,” writes Manny.

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