It's a buyer's market, but prices could fall even more. February 29, 2008 Over the past several years, condos -- both newly built towers and converted apartments -- sprang up like mushrooms after a spring rain. Now, the market is glutted and buyers are scarce. RELATED LINKS Home Prices in Your Area Open Door for First Time Home Buyers Search for New Homes The National Association of Realtors reports that in November (the most recent data available), a 13-month supply of condos clogged the market. That's the biggest backlog since the NAR began keeping condo statistics in 1999, and it's reminiscent of the glut in the early 1980s. Although builders have pulled back, there's still plenty in the works. The National Association of Home Builders expects this "heavy oversupply" to last through 2009. Meanwhile, bad news -- credit-tightening, foreclosures, falling home prices -- has scared off buyers. Sales of condos have fallen since the peak in 2005. In November, they were down 21% nationwide from the year before. Ironically, the median condo price in the U.S. increased 2% in the third quarter of 2007, to $226,900. But that figure reflects a large number of upscale units in the sales mix. In most markets, sellers are cutting prices and offering incentives for midrange condos, which have been largely abandoned by move-up and downsizing buyers who must sell their current homes first. Suburban condo prices are soft because fewer buyers want to commute, and resale units go begging as buyers turn to newly built condos. Advertisement Opportunity knocks. In a number of cities, bargains abound. For example, Minneapolis real estate agent Cotty Lowry says that until it slowed down in 2006 and ground to a halt in 2007, the Twin Cities market was infected by what he terms a herd mentality, and "everybody and his brother" owned at least one rental unit. But as happened elsewhere, the market turned and investors bailed. In November, according to the Minneapolis Area Association of Realtors, the backlog of unsold condos rose 25% over the previous year, sales fell 20%, and the average selling price dropped 5%. Fear of the unknown pervades his market, says Lowry, driving qualified buyers into high-end rentals -- "what they think is the safe route," he says. Suburban empty-nesters who had planned to move downtown have decided to sit tight for now. But where many suffer paralysis, others pursue opportunity. Newlyweds Kevin Verzal, 27, a mechanical engineer, and Michelle Dillon, 24, a teacher, relocated to Minneapolis from Chicago. The couple rented when they first arrived in town but knew that they wanted to buy something, preferably downtown. They expected to stay put for at least five years, long enough to ride out the market's rough spot. With Susan Hofflander, an exclusive buyer's agent, the couple shopped hard. They chose the Bridgewater, a new building whose developer has local roots and a reputation for underpricing the market by 5% to 10%. The building is in the historic Mill District on the Mississippi riverfront, home to the new Guthrie Theater and close to the Metrodome, where the Twins and the Vikings play. Advertisement The couple chose an 1,100-square foot, two-bedroom, one-and-a-half bath unit with a balcony and a city view. The $299,000 price included such amenities as stainless-steel appliances, granite countertops, hardwood floors and a master bath with a whirlpool tub and separate shower. Kevin and Michelle also spent $15,000 for a second parking spot and $10,000 in upgrades. Their condo-association fees run about $300 a month and include utilities, cable TV and use of a fitness center. How to get a deal. In a slow market, you can't count on quick appreciation. If you need to move but can't afford to sell, the condo association's rules may prohibit you from renting your unit. You're most likely to recoup your money if you don't move for at least five years. You'll also get a better deal if you follow these steps: Market Snapshot Prices where you live Although the national median condo price rose 2% over the past year, to $226,900, most of that appreciation occurred in the Northeast and Midwest (up 4% apiece) and was skewed by luxury-condo sales. Prices flatlined in the South and fell in the West (Ð2.3%). In cities struck by speculative fever, cheap financing and overbuilding, prices have fallen significantly. In Cape Coral and Fort Myers, Fla., the National Association of Realtors reports, the median condo price fell by 17% in the third quarter over the year before; in Sacramento, Cal., the price fell 10%; and in Las Vegas, it was down 8%. Advertisement Between now and the end of 2009, Fiserv Lending Solutions, in Cambridge, Mass., forecasts that the worst-hit cities will include Miami (down 27%), Fort Lauderdale (Ð20%) and West Palm Beach, Fla. (Ð13%). Also on the list: Los Angeles, Orange County and Riverside-San Bernardino, Cal., and Las Vegas, all slated to drop by 10%. Among cities with positive results, the big winner, Bismarck, N.D. (up 22.3%), has a tiny market. Portland, Ore. (up 15%), and Salt Lake City (12%) may just be slow to correct. Austin, Tex. (19%), Dallas (15%) and Knoxville, Tenn. (10%) reflect the general health of their local economies and housing markets. See Condo Prices Where You Live The couple chose an 1,100-square foot, two-bedroom, one-and-a-half bath unit with a bal-cony and a city view. The $299,000 price included such amenities as stainless-steel appliances, granite countertops, hardwood floors and a master bath with a whirlpool tub and separate shower. Kevin and Michelle also spent $15,000 for a second parking spot and $10,000 in upgrades. Their condo-association fees run about $300 a month and include utilities, cable TV and use of a fitness center. How to get a deal. In a slow market, you can't count on quick appreciation. If you need to move but can't afford to sell, the condo association's rules may prohibit you from renting your unit. You're most likely to recoup your money if you don't move for at least five years. You'll also get a better deal if you follow these steps: Advertisement Look for highly motivated sellers. If you've ruled out older buildings, look for builders' closeout deals -- especially from nonlocal builders ready to move on to greener pastures. It costs them less to cut deals than to keep their sales offices open. Or check out newer resales, where you might find a seller who bought fairly recently but must move. Be wary of unfinished projects. As developers adjust to the market, some have delayed construction, downsized units, reduced amenities or pulled the plug altogether. Most developers return deposits, but in Florida, some buyers are suing to get their money back because of a builder's failed promises. Educate yourself about your market. Check the Web sites of your area's multiple listing service, office of economic development, real estate agents and condo developments. Ads on Craigslist (www.craigslist.org) offer an overview of what's available and insights into seller motivation. Attend open houses and developer tours. Think twice about amenities and upgrades. The more amenities in the building, the higher the condo fees. Do you really want to pay for an Olympic-size swimming pool you'll never use? Upgrades will raise your cost but not necessarily your return when you sell. Be choosy with incentives. Renei Schmitz, an agent in Minneapolis, says that motivated sellers may offer to pay a year's worth of condo-association fees. But if they will do that, they'd probably cut the price -- a longer-term win. If you accept incentives, be sure that they add value to your deal. Developers may offer a cruise or a cash bonus in exchange for working with affiliated lenders and paying an extra one-fourth to one-half percentage point on your rate. Cash might help with your closing or move-in costs, but it's not worth paying for a cruise over the life of the loan. Look at the comparables. Schmitz provides buyers with a list of all the units that have sold since the building was constructed, including the listing and sales prices. And in Boston, agent Gary Dwyer discourages his clients from making low-ball offers that might alienate sellers. Instead, Dwyer encourages them to negotiate for a fair-market price. Avoid investor-dominated addresses. You want fellow owners who, like you, must live with the consequences of shared decision-making. Plus, speculators are more likely to end up in foreclosure -- a nightmare for owner-occupants, who must make up any shortfall in funds to pay the building's bills. In Miami, real estate lawyer Eric Glazer says that's the case among many newer buildings. He urges buyers there to stick with older, more established buildings. Or ask a building's condo board or management company how many units are currently in foreclosure, then decide how much risk you can live with. Advice for sellers. Don't panic, but get real. If you must sell, you'll be at a disadvantage from the get-go. For starters, buyers typically prefer new units, and right now, they have abundant choices from builders who are offering the latest and greatest features and whose pockets are deeper than yours. Plus, unless your unit is on the top floor (with less noise), has the best view or has a custom interior design, you're basically selling a commodity indistinguishable from others for sale in your development. In Phoenix, where condo (and townhouse) sales in the third quarter fell by 20% over the previous year, agent Holly Lewis-Roberts urges sellers not to waste time "chasing the price down." Instead, she says, be serious, assess your local market and competition, and price accordingly.