Are banks culprits?

In a survey of 1,589 Florida condo owners and association representatives conducted early in 2009 by the Community Association Leadership Lobby, 70% of respondents from Southeast Florida said foreclosures are causing a revenue shortfall in their associations' funds. More than half of respondents, 53%, reported higher vacancy rates than 12 months earlier because of foreclosures.

Associations say mortgage lenders holding title to foreclosed units are failing to pay monthly condo fees and other charges for the property, and 90% of respondents want the Florida legislature to take action to ease the financial burden of delinquencies on associations.

Some banks refuse to proceed with foreclosures because of the costs they would incur, while others drag out the process as long as two years, leaving a trail of debts for the associations.

Some respondents made plaintive appeals for help, warning that the associations will fail, leaving staggering debts for owners. “Please help us! We are drowning,” said a Southeast Florida board member.

More than 42% of respondents from the Miami-Broward area said they have been forced to postpone major repairs or capital investments because of the foreclosure crisis.

The condo glut has led to a new, “fractured condo” market, says Rosendo Caveiro, senior director of apartment brokerage services with Cushman & Wakefield of South Florida. For example, when only 50 units of a 200-unit condo project are sold, the other 150 units will typically be offered for rent to generate cash flow for the owners. Condos also are being bundled for bulk sales in today's market.

The myriad vacancies can create an eerie situation for the small number of owners occupying a building, who may not see another human except the maintenance man or doorman in a week, says Rosendo. As prices sink, many buyers are losing their shirts on condo deals, as are developers and lenders.

If a lender issued a $300,000 loan on a condo valued at $500,000 two years ago, but the unit today is worth just $300,000, everybody loses, says Rosendo. Many owners are appealing high tax assessments that were based on sale prices at the peak of the market rather than current value, but a bottleneck of thousands of cases awaiting review by tax officials makes the process difficult.

Deal or no deal?

Are today's bargain-priced condos really a good deal? Not necessarily, says Rosen of Kendar Realty.

“If a unit was $1 million and they'll sell it now for $500,000, that doesn't mean it's a good buy.” If developers are failing to make their payments and banks are foreclosing, that could mean hidden costs and aggravating legal issues down the road for buyers.

If a developer fails to sell at least 50% of the condo units, he could lose prearranged financing and decide that he has no other option than to default. In turn, prospective buyers who made substantial deposits could walk away from the sales, forfeiting the deposits but reasoning that their losses might be even greater if they proceeded with the purchase.

In a number of cases, buyers who put down deposits but don't want to close are filing class-action suits against developers to get out of their contracts and recover deposits, says Rosen. Some buyers believe that if they can free themselves from transactions undertaken at the height of the market, they can later purchase similar condo units for half the price.

Developers take initiative

The way out of the impasse likely will not come from traditional lenders, since they are reluctant to make loans on condo buildings, says Richard Swerdlow, CEO of Miami-based Condo.com, which lists more than 800,000 condos for sale or rent valued at more than $200 billion.

“What's going to happen is that increasingly the developers are making their own loans to end users.”

Swerdlow is optimistic. Although there's still plenty of inventory in Miami, absorption rates have picked up, particularly downtown, he says. “Prices seem to be approaching bottom.” The number of sales has risen, he points out. “Hopefully the end is near as far as the oversupply in the Miami market.”