Beaten-down condos: 'Deals of lifetime'

(Money Magazine) -- For the first time in years there is a glimmer of hope in the condo market. After falling 20% nationwide and 60% or more in the hardest-hit areas, median condo prices remained flat nationally in the first quarter vs. a year earlier.

And sales in March were up 40% from the previous year, hinting that prices might be heading back up soon too.

So is now the time to pounce?

On the side of yes: Prices and mortgage rates are low, and choices are plentiful. Plus, thanks to new, stricter financing rules on government-backed loans, qualified buyers face less competition.

But many condo hot spots were seriously overbuilt during the boom -- which sent prices falling at an even faster rate than those of single-family homes.

"There are deals of a lifetime out there -- if you can handle the risk," says Jack McCabe, a Florida housing analyst. (See latest condo prices in more than 60 markets.)

Answering these three questions can help you decide:

A condo that's fallen, say, 30% in price over the past few years still isn't a deal if it may fall another 15% or more before hitting bottom. Or at least, it's certainly not the best deal you can hope for.

So ask a realtor who specializes in condos in the area where you're looking to buy about the recent direction of prices and whether inventory is rising or falling -- even if sales have picked up, a glut of partially completed projects that might come to market soon could keep inventory high.

Firming prices combined with shrinking supply indicates the market is at or near a low and it's probably a smart time to make your move.

Don't be afraid to bargain hard. Your starting offer should be about 10% under the asking price for a re-sale, and you can be even more aggressive bidding on a new unit, says San Diego realtor Mark Mills.

Condo prices are a lot more volatile than those of single-family homes. That's led banks to impose tougher requirements on anyone looking to finance a condo deal. Almost all lenders want you to come in with at least a 20% down payment; some also require three to six months' maintenance fees in escrow.

And rules that took effect last year mean most condo buyers will also have to pay a financing fee equal to 0.75% of the loan amount.

Plus, second homes and investment properties will get dinged with higher mortgage rates -- up to a full point higher than on a primary residence.

You'll probably also need a thumbs-up from Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500), and the FHA on the condo complex. Any mortgage they back must conform to new rules created in the wake of the real estate crash: In general, at least 85% of the homeowners need to be current on dues, and the development must have more than 10% of its annual budget in a reserve fund.

In addition, no single person or company can own more than 10% of the units. Your lender should be able to tell you if a complex meets the new guidelines.

Buying into a financially shaky development can turn your dream digs into a money pit. Overbuilding and foreclosures have led to a lot of half-full complexes, which mean fewer homeowners paying dues. If the homeowners association ends up with a deficit, it will issue a special assessment on current owners to cover the shortfall or increase the monthly maintenance fee.

To avoid this outcome, try to confine your search to finished developments in which at least 80% of the units are occupied; avoid new construction in which the developer is still a major owner. Your realtor should be able to provide this information.

Before you place a bid, it's also a good idea to talk to residents or sit in on a board meeting to find out if the development is neglecting the grounds or cutting back amenities, says Jed Smith, an economist with the National Association of Realtors. And if you have any doubts about the financial health of the development, walk away.

After all, in this market, you have plenty of options to choose from.