Turning Condo Confusion into Clarity 

If you own a condo in South Florida or have been in the market to purchase one, there has undoubtedly been a lot of information coming your way over the past 18 months. If you have been confused, concerned or both, you have had good reason. There have been insurance challenges, a slew of new laws and an uptick in enforcement of new and existing laws and regulations. With that said, all of the new laws and regulations have finally taken effect, and the condo market, broadly speaking, has held up just fine, with a few key exceptions. Below, I will give a brief update on the condo market and give a recap of the new regulations and their effect on the market. 

First off, there is no longer a singular condo market in South Florida. There is the market for newer condos, built after the year 2000, a secondary market for older condos, built prior to 2000, and that have been well maintained and then a tertiary market for older condos, built prior to 2000, and that have deferred maintenance and/or financial issues. 

The market for newer condos has continued to perform well, with median closed sales prices increasing 3.79% year over year to $656,000. Additionally, properties have closed at a strong 96% of asking price, down just 1% year over year. It is worth noting that HOA fees have steadily increased even in the newer buildings as new regulations and insurance issues affect them as well. To date, the market has largely digested these higher HOA fees. The market for older condos has not fared as well. Median closed sale prices have dropped by nearly 4% year over year. Some older condos that have been well maintained over time and been fiscally responsible are still seeing price increases but the majority are experiencing slight decreases. There is a smaller subset of older condos that are in major trouble, experiencing sales price drops of upwards of 40% and accumulating more than a year’s worth of inventory available for sale. While these scenarios are much less common, they have been getting the bulk of the attention in the media, leading to some scintillating headlines.  

There are four major drivers of the above mentioned diversion in the condo market. First, there is a new requirement that all condos must be fully contributing to their reserve fund (generally a contribution of about 10% of the annual budget), second, all condos must undergo a structural integrity reserve study outlining the current condition of the building, third, stiffer recertification requirements and rule enforcement and fourth, tighter insurance requirements and higher premiums. 

1. MANDATORY RESERVE CONTRIBUTION
   In the past, condo associations could choose to bypass a reserve fund and simply opt to fund major maintenance projects with special assessments. Unfortunately, this led to many condos perpetually deferring expensive repairs for years or even decades which ultimately lead to unsafe structures. The new condo law, which went into effect January 1st, requires that all condo associations begin to fully contribute to their reserve fund. 
2. STRUCTURAL INTEGRITY RESERVE STUDY
   The structural integrity reserve study is also mandated in the new set of laws and gives some structure to the reserve funds required by condo associations. This inspection is a visual checkup of the building’s systems and structure and may identify any immediate action items. It also assigns a life expectancy to those systems which will help guide the reserve budget for the building. If there are obvious signs of system or structural issues, the association may have to take immediate action to remedy the situation. This process will also identify if there is a variance in the actual reserve funds of the building versus the required reserve funds, Either of these situations could lead to a special assessment being levied on the members of the association. 
3. REDUCED TIMELINE FOR BUILDING RECERTIFICATION
   There was a change to the recertification timeline and now all buildings within 3 miles of the coast must have a full recertification completed after 25 years of being built and every 10 years thereafter. This is a big change from the previous rule that required this recertification to be performed after 40 years. The recertification is a more in depth review of all the buildings systems and structural components by engineers. Any issues identified in the recertification process would have to be remedied in accordance with the timeline laid out by the engineers. While this sounds daunting, and may be for some buildings who have a lot of deferred maintenance, if an association has been properly maintaining the premises and practicing fiscal responsibility, these recertifications can be performed with minimal impact. 
4. TIGHT INSURANCE MARKET
   The last thing that continues to drive a wedge in this market is the tightening of the insurance market. While insurance rates have increased for all property types, older condos are getting hit incredibly hard. For older buildings with deferred maintenance such as an old roof, leaks in the pool deck or units without impact windows, the insurance premium increases can be higher than 100% or more versus previous years. The increased rates have driven many condo associations to obtain policies with reduced coverage or higher deductibles which can render the buildings difficult to finance. 

Condos are still a great option as an investment, second home or primary residence for all of the traditional reasons that we love, shared maintenance costs, security, great amenities etc.; however, now more than ever, it is important to understand where your current, or prospective, condo association sits on the scale of preparedness in each category. Even if there is a bit of a shortfall in one of the areas noted above, a property still may be a great option. But if they are experiencing issues across the board, it is probably best to steer clear. 

As always, all things with real estate are hyper local. Every condo building is like its own little neighborhood with its own market and its own comparables. The statements above refer to the broader market as a whole. 

If you have any questions on the current condo environment, feel free to reach out at any time!