1st buy and hold as a condo

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1st buy and hold as a condo

Ken NyczajPro Member
Investor · Grasonville, MD · Member since 2017 · 453 posts · 415 votes

Hello everyone,

I joined the bigger pockets community a few weeks ago and already have gotten great responses and knowledge from members. I'm looking to invest in the state of Maryland - Annapolis, Baltimore to Kent Island.

Some of the first deals that hit my criteria have been condo's. The latest is a complicated scenario and I wanted to ask the advice if it's wise to buy and hold or not.

Just spoke with a lender that deals in that community- there's are a large number of foreclosures (around 2008) that put the previous homeowners in default with the HOA, about half the money has been recouped and half still outstanding. To make matters more interesting, two people own over half the of properties in this community and this has made prospective buyers hesitant. The $90 monthly HOA goes toward common area/yard maintenance and the communities master flood policy.

I'm aprehensive about the future of the community. Does anyone have a similar example to talk about or knowledge on what an educated next move would be? Are new homeowners/ existing homeowners liable for the debt the HOA is in? If the HOA defaults what happens to the community?

Thank you

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Beth H.
Real Estate Investor · Catonsville, MD · Member since 2016 · 90 posts · 49 votes
8y

If the condo is not FHA approved or in default I would buy only in cash at a very deep discount like 20 to 30 cents on the dollar as long as I am able to rent it out. Check the condo rules. Also check for special assessments. That could really be expensive if only a small portion of the homeowners are paying. You will most likely be responsible for the past dues as part of the association.

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  • Beth H.
    Real Estate Investor · Catonsville, MD · Member since 2016 · 90 posts · 49 votes
    8y

    If the condo is not FHA approved or in default I would buy only in cash at a very deep discount like 20 to 30 cents on the dollar as long as I am able to rent it out. Check the condo rules. Also check for special assessments. That could really be expensive if only a small portion of the homeowners are paying. You will most likely be responsible for the past dues as part of the association.

    4Reply
  • Ken NyczajPro Member
    OP
    Investor · Grasonville, MD · Member since 2017 · 453 posts · 415 votes
    8y

    @Beth H. thank you for the response

    This specific condo is not FHA/ VA approved but it is not in default. One reason that it is not approved for VA/FHA is because the balance of investment/rental properties to owner-occupied properties is over half.

    Will look more into the special assessments history.

    As far as rentals, from the comps I’ve seen these units stay on the market for a week and are then rented at a price that would bring it an impressive cash flow.

    0Reply
  • Beth H.
    Real Estate Investor · Catonsville, MD · Member since 2016 · 90 posts · 49 votes
    8y

    @Ken Nyczaj if they are not FHA approved then the prices are going to be lower. When the funding is limited to conventional or cash the pool of buyers will be limited. Either way you should look into getting a deep discount for the increased risk.

    2Reply
  • Steve Racicot
    Investor · Manchester, NH · Member since 2016 · 164 posts · 83 votes
    8y

    @Ken Nyczaj If the HOA is 50%+ owned by just a few owners and there are financial troubles as you have indicated, then the place is no bargain. You should definitely not invest in the HOA.

    Sounds like the Fox is in charge of the hen house. I would look to see if those 2 owners, sit on the board, and what control they have over the HOA.

    1Reply
  • Ken NyczajPro Member
    OP
    Investor · Grasonville, MD · Member since 2017 · 453 posts · 415 votes
    8y

    @Beth H. again Beth, thank you for your response. At a deep discount it may make the property viable. Considering how quickly these become rented at a monthly rate that is attractive to even a non heavily discounted asking price. Definitely going to do some homework to see who sits on the board and find the exact status of the association before I get too deep into this.

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  • Ken NyczajPro Member
    OP
    Investor · Grasonville, MD · Member since 2017 · 453 posts · 415 votes
    8y

    @Steve Racicot good advice. Thank you Steve. I’ll look further into this and see who sits on the board and write back to ask your advice, if you don’t mind? Appreciate it!

    0Reply
  • Andrew Hemminger
    Investor · Annapolis, MD · Member since 2016 · 33 posts · 22 votes
    8y

    Ken,

    Where exactly is this community?  I've lived in Annapolis for over 30 years and might be able to provide some specific advice on the area.  I do own a condo as part of my rental portfolio and would offer the following warnings:

    1) HOA fees can be increased, especially in cases where the Board is looking to raise additional capital for deferred maintenance (or if there large groups of occupants not paying their dues). Alternately, they might charge one time "special assessments" to cover large capital improvements. For example, every homeowner might be required to pay a one-time expense (e.g., $1000) to fix the roof. Good HOAs budget for these types of maintenance/capital expenses and ensure that their members are paying their dues. That way they don't have to resort to HOA fee hikes or special assessments. You really need to dig into the financials of the association to understand the whole picture. How much do they have in "reserves"? Do their available reserves cover upcoming maintenance/capital expenses? You should also walk the property and assess if their is a lot of deferred maintenance, which would offer more evidence that the association is not healthy.

    2) You need to review the HOA bylaws in their entirety. Often times HOAs will only allow a certain percentage of the homes in the community to be rented. Additionally, they often will require minimum terms such that you can't market the property to short term tenants (not always a big deal but it limits your pool of tenants). Don't trust what the agent or HOA tells you...look at the bylaws.

    3) Most banks won't offer financing on a condo if the HOA is in bad shape. Most banks get concerned when their are high delinquency rates on HOA dues and/or low owner-occupied percentages within a condo community. Disclaimer: I'm not a lender, so others can probably provide more accurate advice here.

    Bottom line, you really lose a lot of control investing in condos...mainly because the HOA has so much influence on whether or not your property is a successful investment.

    I love my condo...but I consider myself lucky. It was my first investment and I probably should have done more homework in hindsight. With that said, the HOA's financial standing is excellent and they keep the property in amazing shape. The condo is also in an excellent area that has appreciated nicely. BUT like I said, I got lucky.

    Best of luck,

    Andrew

    3Reply
  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    8y

    So you divide the total debt by the # of units + projected expense that will be the new HOA dues. $90 per month is reasonable.

    1Reply
  • Ken NyczajPro Member
    OP
    Investor · Grasonville, MD · Member since 2017 · 453 posts · 415 votes
    8y

    @Andrew Hemminger Hey Andrew, thank you for the information. The community is in Grasonville, MD on the Eastern Shore. 

    1) It does look like deferred maintenance on exterior window shutters, siding and roofs. I know the HOA is behind on dues but have not dug deep enough yet to find out exactly where it stands.

    2) Will look further into HOA bylaws. Didn't think about this, glad you responded.

    3) Makes sense, special financing is all that is being accepted, no FHA/VA.

    After your input and others, this is something that definitely needs more research into. Appreciate your help, happy holidays.

    0Reply
  • Jon Johnson
    Real Estate Investor · Atlanta, GA · Member since 2017 · 29 posts · 15 votes
    8y

    $90 seems pretty cheap for an HOA. My biggest concern would be the other owners trying to squeeze you out i.e. if they have the control over the votes they could vote for some huge capital investment and force you to pay say a $40,000 assessment which you might not have the money for thus allowing them to purchase your unit at a low price since you may not be able to sell it or pay the assessment. Not saying that would happen but it could. I would talk to the 2 people and see what plans they have and what they want to happen in the community. If you can start collecting the dues and putting the HOA into good standing it could benefit everyone.

    2Reply
  • Ken NyczajPro Member
    OP
    Investor · Grasonville, MD · Member since 2017 · 453 posts · 415 votes
    8y

    @Sam Shueh $90 per month is reasonable unless the HOA hits the homeowners with a costly special assessment.

    0Reply
  • Ken NyczajPro Member
    OP
    Investor · Grasonville, MD · Member since 2017 · 453 posts · 415 votes
    8y

    @Jon Johnson that is definitely a worse case scenario I, unlikely but you have to look at it from all angles. The more I look into this, the riskier it gets. I may just wait until after the new year until I invest in my first property, it will be easier to rent after the holidays. From what I’ve read on BP some of the hardest months to rent is from Nov 1 to Jan 1st. Thanks for the reply

    0Reply
  • Ryan Scott Isacksen
    Property Manager · Castro Valley, CA · Member since 2016 · 212 posts · 110 votes
    8y

    @Ken Nyczaj I would be very hesitant to dive into that.

    The politics of 2 people having a lot of sway in the community (ie votes to change rules etc) adds on even more of a challenge beyond the foreclosures.  The reluctance of people to buy also means that the exit strategy if things don't go well could be difficult.

    Here are some due diligence things I would suggest doing on the association if you are really interested in pursuing this:

    1. Talk to the 2 people that own the large amount of inventory.  You will need to look at them as partners in your investment in that community since your investment will be affected by their actions.  The lender you know may need to put you in touch with them.

    2. See if there has been a reserve study done that tells where things are at in the replacement cycle and how well things are funded.

    3. Look at the CC&Rs for rules about renting / tenants.

    4. Look at what the CC&Rs show the HOA responsible for as well. A unit that shares walls and a roof with another unit will also be paying towards items such as the roof.

    5. Find out the history of special assessments and if there is one planned for the near future.

    (I have worked with an HOA that did the maximum allowable special assessment without a vote required every year as part of their tactic to keep from raising the dues. They thought that 5 years of no increase in dues showed some kind of grand fiscal management.)

    Banks that foreclose on condos seldom pay the monthly dues.  They hold the place until a sale and at that point dues that were due from the point the bank took  over may be collected in escrow.  The large number of foreclosures means that the needed money probably isn't being collected.

    2Reply
  • Ken NyczajPro Member
    OP
    Investor · Grasonville, MD · Member since 2017 · 453 posts · 415 votes
    8y

    @Ryan Scott Isacksen Great advice Ryan. I’ll be sending a letter to the 2 property owners next week to schedule a meeting. Luckily they do live nearby. Thank you

    0Reply
  • Ken NyczajPro Member
    OP
    Investor · Grasonville, MD · Member since 2017 · 453 posts · 415 votes
    8y

    Going to see the property tomorrow and start digging into the financials. Will update anyone who is interested.

    Thank you

    1Reply
  • Ken NyczajPro Member
    OP
    Investor · Grasonville, MD · Member since 2017 · 453 posts · 415 votes
    8y

    @Beth H. @Steve Racicot @Andrew Hemminger @Sam Shueh @Jon Johnson @Ryan Scott Isacksen

    Reaching out to everyone who gave a response on my post.

    The lender and listing agent are saying that an offer must be made before I get additional info on the Condo. Such as: CC&R's, Rules and Regulations, Bylaws, financials, reserve study, history of special assessments and planned future special assessments.

    Is this typical? If I do make an offer, and there is a discrepancy or something I don't like, I think I can get my earnest money deposit back and get out of the purchase...? To my knowledge, I have five to seven days to review.

    Thank you

    0Reply
  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    8y

    During inspection you can walk away.  Key is hoa finance. 

    1Reply
  • Beth H.
    Real Estate Investor · Catonsville, MD · Member since 2016 · 90 posts · 49 votes
    8y

    Typically the seller pays for the resale package and you get a chance to review it. In Maryland the contract has an HOA addendum that gives you a chance to review and back out if not acceptable.

    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    8y
    Originally posted by @Ken Nyczaj:

    @Sam Shueh $90 per month is reasonable unless the HOA hits the homeowners with a costly special assessment.

     $90 per month is way too LOW a fee for a condo in the mid atlantic. That is a red flag to me. 

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  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    8y

    coverage.  We have hoa over $760 a month   Down the block another for $100    

    0Reply
  • Ken NyczajPro Member
    OP
    Investor · Grasonville, MD · Member since 2017 · 453 posts · 415 votes
    8y

    @Beth H. @Sam Shueh @Russell Brazil

    Thanks for the advice. Financials were sent over, but it was not a formal copy, just something that the HOA manager put together. The HOA has an income of $26,000 ($25,000 in expenses, net income around $1,000) per year with 20% owed in collections (around $5,000), two homeowners are delinquent on dues. In all cases of delinquent dues, the court has ruled in the association's favor, so it is anticipated that any future legal fees will be recovered in the collections process. There is $8,000 in reserves.

    Few days away from putting my offer in if all checks out, offer will be .50 cents on the dollar, just waiting to hear back from one of the main investment holders in the neighborhood. Will review resale package and update the thread.

    0Reply
  • Steve Racicot
    Investor · Manchester, NH · Member since 2016 · 164 posts · 83 votes
    8y

    @Ken Nyczaj With the small Reserves, high Delinquency Rate, $90 Monthly HOA Fee, Unit owners are due for very high special assessments. This HOA is woefully underfunded.

    0Reply
  • Ken NyczajPro Member
    OP
    Investor · Grasonville, MD · Member since 2017 · 453 posts · 415 votes
    8y

    Decided to not pursue the deal. Talked to one of the majority investors in the neighborhood and his answers conflicted with what the financials said.

    Thanks to all those who offered advice. Saved me time and money.

    1Reply
  • Steve Racicot
    Investor · Manchester, NH · Member since 2016 · 164 posts · 83 votes
    8y

    @Ken Nyczaj  Sounds like he either didn't know,  didn't want to share, or was looking to miss lead you so you would back out and could make an offer himself.  

    Good luck on the next deal. 

    1Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    8y

    @Ken Nyczaj good decision. I view condos as a bad investment risk because of all the issues mentioned above.

    1Reply
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