What to look for in Homeowner and Condo Associations
Some time the challenges with a property are not readily apparent to the naked eye and can provide for a "gotcha" later on after having invested in a property. Market conditions, past re-sale, and rental comps can all support a reasonable deal yet things can linger below the surface that you wouldn't think about asking about.
I am going to share a quick story regarding some condominiums we invested in a few years ago to provide some insight into unforeseen challenges and how they can impact values.
The purchase price made perfect sense, the re-hab budget was reasonable and the proposed ARV all seemed to fall well with in the margins that fit our model.
The buildings and amenities were well maintained, it had good access to employment bases, health care, shopping etc. We moved forward with the purchase.
After having completed the renovation we found a tenant at our asking price and they happily moved in. Summer soon arrived and the pool sat un-opened. We soon learned that because of the defaults in the building (which created the opportunity) the association was dramatically underfunded. Not only did the pool not open but when the A/C unit needed replacing the association was not able to pay for a replacement. So we have a new tenant in a fully renovated unit paying a premium rent with no amenities to enjoy and not having even A/C August. The associations solution was to dramatically increase everyone association fee. The increase was so great that most residents couldn't afford both a mortgage payment and an association fee. That led to further defaults which put the association further behind the eight ball.
We finally escaped with our shirts but we learned an important lesson... Before undertaking any acquisition you must know and understand the finances of the association. How may units are behind? Are the any major capital improvements planned? See if you can get bank statements and P&L's for the association. They should also have a monthly pro forma which shows projected income/expenses vs. actual income/expenses. Lastly, take the time to ask around, residents will be able to shed some light as to what is really going on...
Comments (2)
thanks for the post there are certainly differences in every scenario. Great info!
Tyler Chartrand, almost 8 years ago
You're absolutely right. We've bought several distressed units in condo associations and have found that a simple review of the most recent financials of the HOA are key. Plus, I'd add that it's worthwhile to review the association's insurance policy to understand what your financial impact will be if you have a fire, leak, or some other claim. If there's a deductible of, say, $5,000, that deductible will fall on the shoulders of the unit owner or owners, and if that's the case, make sure your own insurance covers the difference.
Example: I have a unit that had an insurance claim for a leak that my unit's insurer said was in part under the umbrella of the association, or "primary" insurance. My insurance company refused to pay that portion, but the association said that portion was still my responsibility because it was under their own deductible. Who pays? The court will figure it out, eventually. I'll make sure of that!
Nancy Conrad, almost 8 years ago