A client recently brought to me a situation where his nephew’s new wife had purchased a condominium unit prior to their wedding. She financed the entire price with two mortgages and now it’s under water.

When advising owners of distressed properties it’s easy to begin with a discussion of the owner’s financial situation. Is this the only problem or are they bankruptcy candidates? Will the owner need credit in the near future for a job transfer or to finance a business?

With condos, my first questions go to the marketability of the unit:

• What’s the owner occupancy ratio? Are we looking for a landlord or someone who wants to live there? Owner occupancy rates affect the availability and cost of financing as well as the type and number of willing buyers.
• How healthy is the homeowners association? If owners have stopped paying their assessments the HOA could be under funded. This would discourage almost all buyers.
• How well has the HOA planned for major repairs and capital improvements? Is there a reserve study? Will there be large special assessments in the coming years for roofing, painting, deck replacement, etc.?
• Has the owner been paying their assessments? If not, will they be able to bring the assessments current at closing?

Many owners are unable to answer these questions because they stopped reading newsletters and minutes from the Board or going to owners meetings.

There are opportunities for investors and others in distressed properties. But, to help an owner, much of the craft is in knowing the questions that will quickly tell you what you’re dealing with. When it comes to condos, I want to know about the marketability of the unit before spending much time on the owner’s financial situation.