There is a certain highrise condominium in this city that, due
to panic selling, has lost over ½ of its value in the last three
years. It could get worse!
Indeed, three years ago, people were lining up to pay over $100,000
for an apartment in this building. As the story goes, there has been
an ongoing battle with the property management to repair the building.
The degree of the repairs is the focal point of the squabble. Certain
people on the board of directors wanted to change the flavour of the building
into a fancy "reserved for the rich" type building. Through scare
tactics, the figure of $6 million has ben bantered around as being needed
for repairs. That meant that each unit owner would have to come up
with $30000. The Board of Directors were ready to legislate the amount
under what is termed a "special assessment" under the Condominium Act of
Ontario. This would have forced the unit owners to chip in their
share. When these rumours started to circulate, a whole bunch of
unit owners sold their respective apartments, before this special assessment
came to be. As a result of this panic selling, unit values plummeted
to less than half of their worth. Since market value is determined
by the proven comparative sales in the building, the value of the remaining
units has also declined. Some present unit owners are helping to
fuel the continued drop by buying other units at a discount prices.
In other words, if one apartment sells for $40,000, one could assume that
sale could have been an aberration, if two units sell for $40,000, maybe
someone got a real good deal, but when three, four or five units sell for
the same low price, that now becomes the new market value for that type
of unit. It does not matter that the unit has undergone panic selling.
In actual fact, in this building, cooler heads have determined that
the necessary repairs is more than likely going to cost $2,000,000, not
six million. The special assessment will be far less than anticipated.
However.....
Due to proven sales in the building, the true value of these units
have been established as being less than ½ of their initial value.
The cause for this dramatic decline was totally artificial, yet it
-2-
happened. You even had some near-sighted people in the building
feeding the frenzy by buying
up other people's units at a "great price" (meaning low). Little
do they realize that when their present mortgages come due, the next fatal
stage of the game will be played out.
The present mortgage lenders may feel that their money is in jeopardy
so, instead of renewing the mortgage at the maturity date, some unit owners
may get was is termed a "demand letter." In other words, ABC Bank
(our hypothetical lender) is owed $50,000, the value of the unit is only
$40,000, so the Bank wants out. No mortgage lender is forced to renew
a mortgage at maturity date. Even if all payments were made on time,
the lender theoretically could call the mortgage. If the demand letter
is sent to the unit owner, it will be very difficult to secure replacement
financing because:
(a) the present lender did not offer a renewal, so a subsequent lender
would have to ask why,
(b) the unit values have deteriorated (any new lender would require
an appraisal, which would reflect the latest sales in the building).
This situation may force the unit owner to sell, or even worse, the
unit owner may walk away leaving the lender to sell the unit. In
either case, the continued low price selling would have a more negative
impact on the rest of the units.
The Condominium Corporation should hire themselves a representative
to:
(a) negotiate with the various lenders to explain the artificial circumstances
which caused this temporary problem, and
(b) discuss the impact of low price selling to existing unit owners
who want to get out. The same tactics that caused the deterioration
of value can be utilized in reverse to now artificially enhance the values
of the units. It is not in my mandate to spell out the remedies,
however, unless something is done rather quickly, the building may end
up being a "white elephant".
The Board of Directors wanted to change the status of the building
for the better, and ended up perhaps ruining the financial lives of its
residents.