Question for the Real Estate investors out there

[harley]

DW and I are considering buying a condo to use as a rental. We'd be paying cash in order to create a positive cash flow, since we're cash rich and cash flow poor. We've run the numbers and are pretty sure of our decision, so this thread isn't intended for y'all to convince us pro or con about the concept.

However, in the process of working on an offer with our agent, we asked her to find out the sale price of a similar unit that just went under contract. She called that agent and got the price, but also discovered something else. The sale wasn't going to go through because the condo association is 23% delinquent in collecting the fees, and the gov't won't guarantee loans if the number is over 16%.

Now this is a nice development in Northern VA (Leesburg), just outside of DC, where jobs and money are created out of thin air. I've heard a bit about situations like this down in FL, where they built about a gazillion too many condos just before the bottom dropped out. But in NoVA, prices never really dropped that much, and the unemployment numbers are some of the lowest in the country. So I was very surprised to hear this. Our agent said she hadn't seen it before either.

So I'm wondering what the ramifications are for us. As cash buyers, we can probably get a great deal since nobody can buy or sell. However, I'm sure there are big negatives too. What pops into mind is maintenance being neglected, driving down the prices, rent, and desireability of the area. Also, maybe major condo fee increases to cover the difference. I'm sure y'all can think of others (pro or con), so that's why I'm asking here.

We really like the unit and the development. It's an upscale town center development, the homes are still selling quickly as they are built (or were until now, I guess). It's all fairly new, 4-5 years old. From our research rents seem to be pretty high, tenants stay in place for a good while, and there are lots of families and activities. But we've put the purchase on hold for now, while we try to educate ourselves and see if we should go forward, find a different community to buy in, put the money back into a 1.5% CD, or what. I assume if this development is having this problem, many others in this afflent appearing region might be having it too. Maybe a delayed reaction housing market crisis beginning to appear.

So, let me know what y'all think about this situation. Thanks.

 

[traineeinvestor]

While this is not an issue which I have encountered before, three questions come to mind:

1. what is the condo association doing to collect the arrears?

2. do they have a sinking fund which will allow maintenance to be carried out in spite of the arrears?

3. can you negotiate a better price because of this situation?

 

[jimnjana]

Personally, I'd stay away from condos especially in developments with a high delinquent rate. You'd be better off buying a single family home foreclosure/short sale. You outlined the negatives already. The "nice" development you see today, may not be so pleasant looking in a few years. You need to ask to see the financials for the condo association, look for an association that is run by the owners, not the developer. If financials cannot be presented I'd run away. If "reserves" are being used to cover operating shortfalls, I'd run away.

 

[Meadbh]

Ask to see the incorporation documents of the HOA. You probably won't be able to access the minutes, but ask to see the financial statements. Is there a reserve fund? Is there a reserve fund study? It is possible that the condo fees were increased in response to the reserve fund study, and that a bunch of homeowners or landlords, in financial difficulty, cannot afford to pay. Is the 23% delinquency rate just this month, or a longstanding issue?

As previously mentioned, what is being done to ensure that arrears are collected? e.g. lawyers' letters, liens or foreclosure. Is there a management company? How does the management company stack up with the Chamber of Commerce, Better Business Bureau, etc? How are complaints and infractions dealt with? Speak with the management company. An insufficient reserve fund with little cash coming in is a red flag for financial trouble down the road, with big special assessments, of which you, the honest landlord, may be stuck with more than your fair share.

If there is a problem with the HOA's cash flow, it is certainly a reason to bid low. That is, if you really want to go ahead with this. And remember, cash flow is king and the investment should be at least break even or better from Day 1.

 

[W2R]

I'm not a real estate investor, but my goodness! I wouldn't touch it with a ten foot pole because of the potential resale problems.

 

[clifp]

I was very nervous about the potential financial issues with HOA. I think step one is to have your realtor educate on the law regarding HOA in VA. I was pleasantly surprised to find that Nevada had really strengthen the priority of HOA in collecting money, right behind taxes. No sales can occur without HOA fees and penalties being paid in full.

If you do want to proceed you should make sure that you get a copy of all of CCR, the HOA annual report, reserve study as soon as possible. I had a devil of time getting all of the stuff for the condo before closing but I was persistent. Finally, make sure you get a copy of the most recent financial statement and then divide the balance by the HOA fees and number of units. To see how much dues they have per unit in the bank. I don't have a specific guideline to give you but I think you can do some research.

If your intention is to keep as a rental for many years, I wouldn't let the resale issues to deter you. But only if there is a clear plan to getting the situation fixed.

 

[MichaelB]

DW and I are considering buying a condo to use as a rental. We'd be paying cash in order to create a positive cash flow, since we're cash rich and cash flow poor. We've run the numbers and are pretty sure of our decision, so this thread isn't intended for y'all to convince us pro or con about the concept.

However, in the process of working on an offer with our agent, we asked her to find out the sale price of a similar unit that just went under contract. She called that agent and got the price, but also discovered something else. The sale wasn't going to go through because the condo association is 23% delinquent in collecting the fees, and the gov't won't guarantee loans if the number is over 16%.

Now this is a nice development in Northern VA (Leesburg), just outside of DC, where jobs and money are created out of thin air. I've heard a bit about situations like this down in FL, where they built about a gazillion too many condos just before the bottom dropped out. But in NoVA, prices never really dropped that much, and the unemployment numbers are some of the lowest in the country. So I was very surprised to hear this. Our agent said she hadn't seen it before either.

So I'm wondering what the ramifications are for us. As cash buyers, we can probably get a great deal since nobody can buy or sell. However, I'm sure there are big negatives too. What pops into mind is maintenance being neglected, driving down the prices, rent, and desireability of the area. Also, maybe major condo fee increases to cover the difference. I'm sure y'all can think of others (pro or con), so that's why I'm asking here.

We really like the unit and the development. It's an upscale town center development, the homes are still selling quickly as they are built (or were until now, I guess). It's all fairly new, 4-5 years old. From our research rents seem to be pretty high, tenants stay in place for a good while, and there are lots of families and activities. But we've put the purchase on hold for now, while we try to educate ourselves and see if we should go forward, find a different community to buy in, put the money back into a 1.5% CD, or what. I assume if this development is having this problem, many others in this afflent appearing region might be having it too. Maybe a delayed reaction housing market crisis beginning to appear.

So, let me know what y'all think about this situation. Thanks.

The question is not what can go wrong - it's what's has to happen to make it right. DC has the strongest housing market in the country. An association that is 23% in arrears in the only up market in the US is like a fresh turd on a hot day - best to not touch and just walk away.

 

[jimnjana]

.... An association that is 23% in arrears in the only up market in the US is like a fresh turd on a hot day - best to not touch and just walk away.

I'd like to nominate as quote of the day!

 

[HFWR]

I can't see myself being a landlord, but I want to know where I can get 1.5% on a CD...

 

[Aiming_4_55]

In addition to the good information already listed, I would do a little research on the association board. Are members investors or owner occupied? In the by-laws what does it say about rentals?

The trend in my area has been to limit the number of rental units or eliminate them completely, so keep in mind an exit strategy.

Another option is to have your realtor talk to the other realtor. You buy in cash, offer a lease to own to the other party that can't get a mortgage. You become a landlord for a period of time with an exit built-in. Ask for a decent down payment, so if they walk away, you have an emergency stash.

 

[JOHNNIE36]

I would stay from that condo association because it shows a weak board of directors and/or management company. Sure, the board can be changed but a lot of damage has been done already. I see the dreaded word "assessment" in your future. Personally, I prefer a single family home as an investment. It's something you can control personally and a lot easier to dispose of if you have to. Of course, nothing is easy today.

I see people readily interchange the terms HOA and condo associations. Very different entities as to what you can and cannot do relative to state laws.

 

[harley]

I appreciate all the responses so far. We're going to hold off on the purchase for now while I do more research. Johnnie36 is correct about the difference between the HOA and the condo association. There are both in this community. The HOA exists for both the condos and the townhouses, but the condo association is only for the condos. I'll check, but I think the HOA is in good shape. But I'm not sure that the situation reflects weakness or mismanagement on the part of the condo association. I think that with this being a relatively new community people bought in at fairly high prices and even in the best housing market in the country a lot of them are underwater. I'm thinking there might be a rash of foreclosures and short sales coming down the road, which would give us an opportunity to buy low assuming we decide the problem is salvageable. If we bought I wouldn't be concerned about the resale value because our intention would be to hold it for a very long time.

A couple of you have recommended single family homes instead of condos for an investment property. The problems I have with that is both the increased cost up front as well as being responsible for much more of the property.The attraction to the condo is having the association handle things like outside maintenance, roofs, things like that. Of course, if they can't pay to do it, that becomes a problem instead of a perk.

I'm going to check on the issues y'all have raised, including who is on the board (I think it's owners, not pros). I'll get the financials and check on the reserves. I don't think the fees have been raised recently, but I suspect they might be soon because of this problem.

Since so much of Loudoun County is new communities, in Ashburn, Lansdowne and Leesburg, I wonder if this problem is more widespread than I am aware. Just before the housing bust Loudoun was the fastest growing county in the nation. I am going to check on some of the other newer communities in the area to see what their delinquency rates are. If it's just this one community I'll know there's something specifically wrong. If it's county or region-wide I'm not sure what that will imply. I keep thinking "be greedy when others are fearful", but if I can't quantify the investment because of moving cost targets I won't be able to determine if it's a good one or not.

And HFWR, you're right. The CDs that recently matured were 1.5%. Now the best I could do is 1.19%. That's part of what is making this investment seem like a good idea. Sort of like an annuity with headaches. And a possibility of getting your money back someday.

 

[MichaelB]

So much depends on the law, what associations are allowed to do, and how long it takes to resolve foreclosures. The risk is not limited to an increase in fees to compensate for delinquent owners. The property itself may deteriorate due to lack of maintenance and this may make it less desirable to prospective renters. This is the problem in S Florida, and in some cases entire developments have gone down.

An in depth review of what the association is doing is key here. If they have a strategy to deal with this it might work out. Recent reports point to a bottom in condos sales (not the first time) and Case-Shiller data points to a bottoming in housing prices as well.

 

[JOHNNIE36]

It's been quite awhile since I was directly involved with our condo association. Unless things have changed in Florida condo law, the association is required to fund reserves for repairing/replacing roofs, repainting and repaving (such as parking lots). Also, reserves should be established for anything that costs more than $10k, such as rrigation systems, bulding sprinkler systems, elevators, etc. However, the association can vote to not fund these reserves.

That's where a lot of the problem comes in. People don't want to spend their money now for something from which they may never benefit. As president of our association I chaired a group that reviewed the reserves every two years to make sure the numbers were still accurate. Our treasurer was always on the lookout for better CD rates. We were an active board which is key to a successful association.

 

[SVHoper]

DW and I are considering buying a condo to use as a rental. We'd be paying cash in order to create a positive cash flow, ...

To an investor (admittedly v. small scale - only single family homes) this rings alarm bells. Ideally I like positive cash flow at 100% finance or at least mortgage and property taxes paid at 80% finance... of course you can still can pay cash.

Personally, I don't like the lack of control from condos... inadequate sinking funds, delinquent condo owners, or just irrational condo/HOA board decisions make me prefer to own the entire building and only management under my control. Also I think (but could be wrong) that the higher land content in a single family home should yield better appreciation as buildings depreciate.

I fully recognize that many smarter folks than me, have made very wise investments with condos and HOAs.

 

[Meadbh]

I think that with this being a relatively new community people bought in at fairly high prices and even in the best housing market in the country a lot of them are underwater. I'm thinking there might be a rash of foreclosures and short sales coming down the road, which would give us an opportunity to buy low assuming we decide the problem is salvageable. If we bought I wouldn't be concerned about the resale value because our intention would be to hold it for a very long time.

In my building, the developer went into bankruptcy. If I had waited another six months I could have purchased a condo for significantly less, although probably not my particular condo, which has a great view.

 

[wolf]

Harley:

Do not take this personally. Just by reading your comments, you have No clue as to how to buy rental real estate.

Whether you pay cash or borrow the money to purchase, it does not matter.

The "net return" is what you are looking at.

Why is their a 23% delinquency rate? Super RED FLAG....obvious answer, 23% of the owners cannot afford to pay. Probably underwater.

I'm surprised your real estate person did not tell you, (then again they represent the seller).....

Just my opinion, but if you really want to be a landlord, find a "mentor",
an old successful landlord, who has the time to explain how it works.....

You are headed for a big crash, forget about cash flow, until you know what you are doing, you are going to lose a lot of money......

Again, I don't mean to be harsh, but you just have no idea what you are doing.....

Oh, I've been a landlord for over 30 years.......

just my 2 cents......good luck

 

[HpRyder]

I came across this, authored by LL[AZ] on Nov 24, 2010. Which is applicable.


[FONT=&quot][/FONT]

Get the CCR's - see if the complex allows renters. Talk to nearby owners and tenants, see if there are any problems looming - like say an assessment for a new roof or something.

Also, my personal opinion, don't hold it, flip it quick with minimal fix up. If you get it at 40% below comps - your sale is going to depress prices - unless you can flip it fast for the comp price.


Go ask a few neighbors if you can look at their units - 1/2 will slam the door on you, the other half will invite you in.




[FONT=&quot][/FONT]
10 Problems with Condos

1) Most Boards and property managers are bad, the rest are worse.

2) Someone else (the Board) is in control of your property, money and financial future.

3) Condos are the first to fall and last to recover in a real estate cycle.

4) Your HOA fees will eat up your appreciation. Do the math, you will see that 9 times in 10 the annual HOA and taxes will outstrip appreciation. Most of this is non-recoverable.

5) If the complex passes 50% renter ratio you can't get FHA or most bank financing.

6) At any time the HOA can vote to deny new rentals, and many are.

7) If your tenant has a problem, he has to complain to you, you have to complain to the management/HOA - which sends a letter - which the offending owner or other tenant ignores. Then your tenant breaks his lease and moves out on you.

8) Plumbing and maintenance issues can become a nightmare.

9) Never buy a condo that is not top floor, corner unit. This reduces you to (usually) one adjoining wall.

10) Your HOA will increase about 10% per year and double about every 7-10 years.

Only buy and hold condos if you are in an appreciating market and your cash flow matches or is better that you would get from another investment, or if you plan to one day live in the property.

[FONT=&quot]Bottom line - if it makes financial sense, and be ruthless with your numbers, get in and get out quick and make some $$.[/FONT]

 

[harley]

Y'all are missing the point. I'm not trying to do the leverage investing thing, or flipping for a quick profit. This is very different from what people who want to build their wealth with real estate are trying to do. It does make a difference whether I pay cash or get a mortgage. If I get a mortgage it cuts down the income I make, which is the point of my idea. I'm basically trying to create the equivalent of an annuity that I put a certain amount into, and then I receive a certain amount of income every month. Then, in 10 or 15 or 20 years, if I want to, I can sell the unit and hopefully get all of my money back, adjusted for inflation. Or move into it ourselves, when we get tired of taking care of the big house we're currently in. This part is a little iffy, since I can't guarantee prices. But it definitely probably won't go to zero. I won't do it if the return on my investment isn't better than I can do with other non-equity holdings.

As far as the issues of it being a condo, I've read the books and understand the issues of dealing with an condo association. I see it as a trade off in regards to the additional control you get with a SFH, compared to the additional responsibility of dealing with the external portions of the building. Many of the issues HPRyder addresses don't apply. The renter ratio is low, as most of the people are owners. I'd have no problems getting the OK to rent the unit. The units are fairly new, so the maintenance issues are minimal. The list of 10 things that are wrong with condos may apply, but they sound awfully glib to me. Numbers 4 and 10 are the biggies, and I'll definitely take them into consideration before I do anything. This line

Only buy and hold condos if you are in an appreciating market and your cash flow matches or is better that you would get from another investment, or if you plan to one day live in the property.

describes the situation exactly, although nobody can guarantee a constantly appreciating market. But please list the names of the authors. LL[AZ] doesn't mean anything to me.

As far as Wolf's comments, I agree I'm not an experienced rental investor. I am working with someone who is. He's made a number of similar comments, but now that he understands what I'm trying to accomplish (which is not what a normal real estate investment accomplishes) he's agreeing with my reasons. The rest of your comments need some explanation. They may or may not be accurate, but I can't tell from the little information you supplied. They just sound like opinion, and I would appreciate hearing the thought processes behind them. I'm not saying you're wrong, by any stretch. Just that there's no meat behind the comments. Why do I need to forget about cash flow? Why am I heading for a big crash? Please elucidate.

Having said all that, I agree the delinquency rate is a huge red flag that will probably scuttle the whole deal. I'm waiting for more information from the condo association. I'm suspecting that there are a few owners seriously underwater that haven't paid for a while, driving the numbers up. This is a relatively small development, just 100 homes. They are stacked condos, four story buildings, a smaller (1500ish sf) on the bottom two floors, and bigger units (~2000 sf) upstairs. But until I get the financials in hand and have a chance to look over them, nothing will happen. If the situation can be remedied without major assessments or fee increases, this could be a good opportunity to get the unit we want cheap, since nobody who needs financing can buy. But if there's any appearance of insovency or ongoing problems, or if the investment doesn't look like it will return what I want, I have no problen with walking away.

 

[Delawaredave5]

Wolf's comments are rude.

The key issue is what recourse does the HOA have to recover owed fees and should this deficit influence the decision process. The OP isn't asking for a general debate of condo investing.

Either the board is weak, or the association agreement is weak, or laws in condo area are weak.

I know a guy that has condos in Myrtle Beach - apparently many units are foreclosed and bank owned - and the banks are not paying the HOA fees. However the back fees have to be paid for the condo to change ownership - so the HOA knows they'll get their money - just when.

In the meantime, they have a reserve fund which they are using but also trying to preserve.

 

[MichaelB]

Harley:

Do not take this personally. Just by reading your comments, you have No clue as to how to buy rental real estate.

Whether you pay cash or borrow the money to purchase, it does not matter.

The "net return" is what you are looking at.

Why is their a 23% delinquency rate? Super RED FLAG....obvious answer, 23% of the owners cannot afford to pay. Probably underwater.

I'm surprised your real estate person did not tell you, (then again they represent the seller).....

Just my opinion, but if you really want to be a landlord, find a "mentor",
an old successful landlord, who has the time to explain how it works.....

You are headed for a big crash, forget about cash flow, until you know what you are doing, you are going to lose a lot of money......

Again, I don't mean to be harsh, but you just have no idea what you are doing.....

Oh, I've been a landlord for over 30 years.......

just my 2 cents......good luck

Actually, you do mean to be harsh. And how do you expect him to take it?

If you want to help people on a public forum, you need a mentor to help you learn to express yourself in a more positive and friendly manner.

 

[JOHNNIE36]

HpRyder, is there a reason you are addressing condos and then mention HOA's? Two different things.

harley, you mentioned you would not have a problem renting your unit. I'd be interested in knowing how you can be so sure of that. Have you checked the current documents regarding the condo associations rules about renting? Would you rent it out on an annual basis? Weekly?
Monthly? Lot of associations have monthly minimums to keep the building from looking like a hotel. All of a sudden your vacation rental business is limited. Hope you have looked into this.

 

[MichaelB]

Harley, I'd also check the condo regulations to see if they get involved in matters involving rentals.

 

[Purron]

Just a couple of comments about the area where the condo is located. I have lived about 25 miles away from Leesburg, VA for decades so am familiar with it. Loudoun County is one of the fastest growing and most affluent counties in the country. Unemployment is low and home prices are stable. Leesburg is a very attractive community and is on many lists as a desirable place to live including this one:

Best Places to Live 2011 - from MONEY Magazine

My mother has lived in a condo nearby for about 12 years. Condos rent well in this area and demand is strong because the jobs are here and many folks can't afford to buy a home in Northern Virginia. The unit next door to her is a rental and the owner has never had problems finding high quality tenants.

Not saying I want to buy a condo for rental/investment purposes, but IMHO, this would be a good time and a good area to do so if I were so inclined. I've been a landlord on a single family home so know the hassles that come with that.

It's important to get to the bottom of the issues with the condo association and understand any restrictions on rentals. If I were to make such an investment, I'd want to consult with an expert regarding the legal issues and have them review the association's financial statements and other pertinent documents.

 

[chinaco]

Here are some considerations.

1. Feds are probably going to cut spending... maybe dramatically. Will that affect population trends in the DC area and home formations. IOW will it affect the growth in home values over the next 10 to 15 years?
2. The accrued debt for the condo fee deficit. Those fees generally increase over time as the property ages. What is the debt overhang right now for the condo association... including outstanding (put off) maint.
3. Localities are suffering from lack of money. Will property tax rates be higher in the near future?
4. Rent may be high right now (i.e., peaked). What happens if you cannot raise rent over the next 10 years but your expenses go up?
5. Are you an experienced with rental property? If not, expect oversights on your part... be conservative.
6. Likewise... it is a business investment not a passive investment... all of that territory comes with it. If you are going to manage it be prepared for the job (nothing is free)
7. Pull out your personal effort to manage it and support it and assign a wage to it. It would be unrealistic to compare that part as an investment (assuming you will track the investment and compare it to your alternative). The equivalent alternative may be (invest passively in something like a REIT and get a part-time job).
8. Does the investment represent more than 10% or 15% of your assets? Be careful of too much investment concentration.

Make sure you do best case (realistic), expected case, and worst case (realistic) scenarios in your projections. If you cannot tolerate the worst case (realistic) scenario... consider passing on it.

If you do it and experience an bad outcome, how will you know it? And what is your exit strategy?

For that matter how long do you intend to own it in the expected scenario?