Have you noticed that many condos are hard to sell right now? And have you wondered what changed, why it’s so difficult at the moment?
Nationwide, condominiums and townhouses are having a tough time selling. I keep reading that it has to do with rising HOA dues and affordability. That’s certainly true here, too, but we have extra complications.

A quick note about condominiums and townhouses: a condo is a type of ownership, while a townhouse is an architectural style. With condominium ownership, you’re buying the airspace within the unit plus a percentage of the common areas. A condo can be shaped like an apartment, a townhouse, a duplex, or even a house.

A townhouse is most often held in condo ownership, but not always. You cannot tell by looking at it what the ownership type is! Sometimes a townhome is a Planned Unit Development or PD, and in those cases you’re buying the outer walls, the dirt under the unit, and sometimes outside yard space.

For more on this topic, please see our article: What Is the Difference Between CID Ownership in a Condo, Townhouse or PUD?

Why many condos are hard to sell right now (in brief):

Here’s a quick list of major selling hurdles for condominiums right now. Many of these issues are particularly promienent with older construction.

• Insurance issues and insurance pricing are a big prat of why condos are hard to sell now.
  • Property location issues, such as the complex being in a Very High Fire Hazard Severity Zone, and the insurance company deciding it doesn’t want to insure such properties anymore.
  • Condition issues that cause insurance companies to cancel or threaten to cancel, and costly new policies. Sometimes these are older homes with obsolete electrical systems or panels, or possibly old wood shake roofs. .
    • We have heard of insurance cost going up by 350% in one case, and 800% in another!
  • Lack of reserve fundting to take care of repairs demanded by the insurance companies. Younger complexes often have smaller HOA dues, and after 10 or 20 years they are behind on funding.
    • Deferred maintenance costs that are now critical, such as wooden balconies, staircases, or walkways.
    • Dues that needed raising or special assessment that should have happened but didn’t – they kicked the can down the road and cannot do that anymore.
• Related to all of these: high HOA dues.
• Sometimes it’s something else, such as too many renters, that makes financing some units more expensive. Often this issue isn’t in isolation, but may be coupled with other problems.
• Many of the younger common interest developments are in less desirable areas, such as next to a freeway, train line, high voltage power lines, or in 100 year flood plains. Buyers are picky and they usually will gravitate to better locations.

That’s the short answer!

Some condos are hard to sell because of insurance and resale issues

With the large and devastating California fires over the last 10 years or so, many insurance companies are looking for ways to stop selling policies here in the Golden State. They want to limit risk, so things that may cause them to not be willing to insure include location risks (being in a natural hazard zone) or property condition risks.

Deferred maintenance and neede repairs may be cause for a policy to be canceled. HOAs with raised wooden elements needing replacement, such as wooden stairs, balconies, or walkways, may represent a financial liability to the insurer if left unfixed.

Wood shake roofs represent increased fire risk.

So does having certain electric panels, such as Zinsco and Federal Pacific Electric – and many older complexes have these.

All of these can be highly expensive to repair and are a major cause of why older condos are hard to sell in our area.

Low reserve accounts leave members vulnerable to newly discovered but required repairs or sky high insurance surprises that they cannot afford

We’ve been told by Jacquie Berry, who analyzes HOA documents for a living, that fewer than 25% of all HOAs have fully funded reserve accounts.  (See our article: Does your HOA have enough in reserves?) When underfunded HOAs are handed a large financial surprise, it will be passed along to the homeowners in the form of a special assessment, raised dues, or both.

In some cases, the HOA reserve account funding is under 10%, which means that home buyers cannot use either conventional or jumbo loans to purchase them. They can sell, but will require more expensive financing options for “non warrantable” complexes.

If the insurance company is concerned about the electric panels, the wooden stairs, a wooden shake roof, or repairs needed for health and safety, it may (or may not) give the common interest development time to fix it. I’ve known condo communities to meet and decide to run a one time special assessment to replace all of the electric panels – the main and subpanels (the sub panels are usually in the units). It might be $5,000 or $10,000 or more per unit, but if they fix it, they are told that they can keep their lower cost insurance.

If they don’t have the funds, the insurance may cancel their plan and then the homeowner’s association may find itself suddenly forced to use the California Fair Plan and a wrap around program for everything that the Fair Polan doesn’t cover. And it may have exclusions.

For instance, we recently heard of a complex with old electric panels that are deemed unsafe. That HOA is now on the Fair Plan and a wrap around policy, but if there’s a fire from any of these bad panels, there’s a 6 figure deductible! Insurance costs went up more than 300% and the problem is not fixed. That HOA had a special assessment to fix the higher insurance cost, but it did not address the electric panels.

With low reserves, there’s no buffer for surprises, whether it’s to fix repairs or to deal with a giant cost increase of insurance. Home buyers want peace of mind, but if reserve accounts are low they may be worried about special assessments and raised HOA dues. These financial concerns contribute to why some condos are hard to sell.

What can be done?

In some cases, the challenge is something out of anyone’s control, such as being in an area that is deemed more risky for fires.

Often, though, what’s wrong is fixable (if sometimes painful). Got old electric panels or a wood shake roof? Figure out a way to replace them so that the extra high insurance costs are temporary and don’t become the new normal.  What if the percent of rentals in the complex is too high? The HOA can vote to restrict it until it comes back into balance. We’ve seen HOAs that require new owners to live in the unit for a period of time before it can be rented, or that have a “rental waiting list” to keep the percent within whatever boundaries they set.

Reserves so low that buyers cannot get normal financing? That will hurt every unit owner’s resale value and equity.  Work with the board and other owners so that the community isn’t scraping by and running on empty.

I encourage people to get on to their HOA boards and encourage fiscal responsibility. In the long run, it will save everyone financially.

Condos are hard to sell right now: related reading

The Santa Clara County condo and townhouse market – our RE Report (can view stats by city, and in San Jose, by district)

Condominium and townhouse communities in Los Gatos –  articles on our Live in Los Gatos blog

Los Gatos  condo and townhome associations

• Bella Vista Village (townhomes)
• Pueblo de Los Gatos (condos)
• Ohlone Court (houses held in condo ownership)
• España Oaks (town
• Los Gatos Village (townhomes)
• Arroyo Rinconada (townhomes)
• Los Gatos Woods (popular townhouse community)
• Charter Oaks
• Courtstyle and Wimbledon Place (Courtside)