Fractured Condo Deals: Investors' Delight or Disaster?

With the downturn in the residential real estate market, some investors are exploring fracture condo deals. Fracture condos describes a condominium complex where some units have sold, but the bulk of the remaining units remain unsold or are being rented out as rental units. Investors may try to strike a deal with the developer (or lender/owner as the case may be) to purchase at a discount a bulk or the remainder of the unsold units. The deeper the discount, the greater the delight, but, as is true with most things that are too good to be true, these transactions can be fraught with disaster. A thorough due diligence is not just prudent, but mandatory before closing one of these transactions. Structuring the deal properly is important. Often the developer is in trouble with the project, in which case the investors do not want to step into the shoes of the developer, thus taking on the developer's liability. The Declaration and By Laws of the Condominium Association need to be thoroughly analyzed to assure that the investor buyers can do what they intend to do with the units. If the investors intend to rent the units, there may be restrictions or prohibitions on renting. Owning only a portion of the project, the investors will not have total control of their destiny. They will be marrying into the family of the other unit owners, and therefore, the economic feasibility of the project must be analyzed. Often developers have kept the initial homeowners association dues artificially low. The true future expenditures and burden of the project need to be studied. With an understanding of the risks, and care and discerning selection, there is fertile ground for investors in the fractured condo market.