Most investors who acquire distressed properties focus on residential pools, apartment buildings or other whole assets. Those who venture into the distressed condominiums space usually buy single units or a small number of units.  However, as the availability of the above types of distressed property decline more investors are considering fractured condos. The fractured condos class includes multiple condo units that remain unsold after a condo conversion or the unsold units in a new condo development.

Since early 2006 there has been a few investors who focused on fractured condos; however,  recently many more investors have began to consider this asset class.  Many fractured condo transactions have closed in the South Florida market in the past months. And in most of these transactions the purchase prices have been very attractive.  In today’s distressed asset market there has been a shift towards a more acceptable view of fractured projects. This is clearly supported by the recent closed sales in residential, hotel and commercial fractured condos.

In the past investors had concerns with fractured condos projects because of out-of-control association fees and possible transfer of builder’s liability if an investor became the majority owner of units.  These concerns have been mitigated somewhat by improved due diligence and proper legal advice.

Based on interviews of investors who are involved with fractured projects, several believe that proper due diligence can help to adequately address condo association cost overruns.  A review of all current and forecasted expenses for the condo association will ensure that past due items are addressed and reasonable budgets are in place to address future expenditures. This solution is not complex and usually takes place in the course of normal due diligence.

Regarding the issue of an investor assuming a builder’s liability, most investors have addressed this issue by seeking appropriate legal advice.  With good legal support, they can then determine in what cases this issue applies and take steps to address it, if applicable.  In our interviews of investors, most were confident that they had a good handle on this problem.

Investing in the fractured condo segment of the distressed market, offer some clear advantages.

1. Price points are often more favorable than those of other distressed assets. 
2. Often vacant units can be rented for immediate cash flow and sold when demand is adequate.
3. Investment in a fractured projected is generally easier because some administrative and building management   functions are already handled by the condo association.
4. All other things being equal, an investor will be able to exit a fractured condo investment with more ease because he has the flexibility of selling parts of the investment as soon as the market is receptive.

Increasingly investors have started to acquire fractured condo projects. The advantages as shown above are significant. As the supply of other distressed assets continue to decline, we need to include new options as we seek to deploy funds in the distressed asset market. In the past year or so we have heard numerous promises of new distresses asset supplies ready to hit the market. Almost none of these promises have materialized. Furthermore, the suppliers of REO’s and non-performing notes are not the ones promising more supply. The promises are being made by potential buyers and by brokers.  Clearly we need to stop focusing on expected new supplies and turn our attention to the available inventory in the distressed asset market.

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