Considering 7 Condo unit purchase

18 Replies

Hello BP! My name is Mark and I live in beautiful Oklahoma City (GO Thunder!). Primarily a commercial property investor, but recently got into residential properties with 2 sfh rentals.

I'm negotiating with an owner of 7 condos, part of a 30 unit complex. Each 2br/1.5 ba, 1K sqft and renting avg $700/mo with $250/mo HOA fee each (mostly Sec. 8). Cost is $30K each (no agent), but want to beg for your wisdom and experience. I toured one empty unit he's redone, and it is very nice. I'm sure the rest are not as nice, as they have long term renters in place. Sale "as is" so what information should I request prior to closing (he wants to close in 2 wks)? I'm thinking copies of leases, proof of rental payments, info on tenants, etc. Should I also have inspection done on all units? HOA owns hot water tanks, but not the HVAC. I don't think he's trying to pull anything, but this is unfamiliar territory to me. I don't want to buy a "pig in a poke" (do they only say that in OK? haha).

Thank you in advance for sharing any advice!

@Mark Waldrip Why does the HOA own the water heaters? It sounds like a condo-conversion (Where the units were once apartments.). Doesn't sound like a good arrangement. $250 sounds like a lot for HOA fees. Inspecting each unit would be wise.

really depends on the part of town and how the hoa is run.  there may be a reason he is getting out besides just wanting to move on.  also this puts you close if not at the 1% rule on these.  750 rent minus 250 hoa is 500 per month plus any other repairs, insurance etc and vacancy rates.  you are going to be getting close to 300 per month per unit for a 30k investment.  

Be sure to check on the HOA; what is their account balance, are there any major/capital projects that are planned/needed. Condo HOAs consume a lot of money, owners can be assessed

Originally posted by Account Closed:

@Mark Waldrip Why does the HOA own the water heaters? It sounds like a condo-conversion (Where the units were once apartments.). Doesn't sound like a good arrangement. $250 sounds like a lot for HOA fees. Inspecting each unit would be wise.

Hi David, Thanks for your response! I should have mentioned everything the HOA covers: Water, Trash, Pool, Grounds, Insurance (sheetrock out), and natural gas. The hot water tanks are gas (2 units share one tank), as is the furnace. So a tenant only pays electric, and their hot water and heat is included in the rent. The complex has always been owned condos. Mark

Originally posted by @Rhett Tullis :

really depends on the part of town and how the hoa is run.  there may be a reason he is getting out besides just wanting to move on.  also this puts you close if not at the 1% rule on these.  750 rent minus 250 hoa is 500 per month plus any other repairs, insurance etc and vacancy rates.  you are going to be getting close to 300 per month per unit for a 30k investment.  

Hi Rhett, the units are in NW OKC, near Deaconess Hospital if that helps. It is a decent area, and the complex is very well maintained. The HOA rules are strict, and as an owner of 7 units I would be part of the HOA board which makes decisions concerning repairs/upgrades/expenditures. The complex uses a prop mgmt co for the grounds, maintenance & repairs. Taxes approx $30/mo, insurance part of the HOA, and so far the tenants are long term so low vacancy rates. The previous owner has already replaced the furnaces in all the units over the 7 years he's owned them, so that's a major expense that wouldn't be needed for awhile (I hope!).

Mark

@Mark Waldrip With the HOA owning the water heaters and with them being shared, would be a concern for me. I'm not a big fan of condos already. This is one reason. You get less control of your investment. As @Rhett Tullis mentioned, you really aren't left with a whole lot of margin on the deal either. I think you'll find that condos don't give you the freedom you have with detached homes. Just some thoughts to think about.

@Mark Waldrip

Have you looked into what other units in the complex are renting for? If these units have had long term tenants there's a chance the rents haven't been raised to correct with the market. I have had bad experiences with HOAs but raising rents could help off set their costs, or if you are able to put the burden of the HOA on the renters if the units support the price. Being on the board of the HOA will give you some extra work but also more control of your investment.

Best of luck!

Originally posted by @Matthew Brill :

@Mark Waldrip

Have you looked into what other units in the complex are renting for? If these units have had long term tenants there's a chance the rents haven't been raised to correct with the market. I have had bad experiences with HOAs but raising rents could help off set their costs, or if you are able to put the burden of the HOA on the renters if the units support the price. Being on the board of the HOA will give you some extra work but also more control of your investment.

Best of luck!

 Thanks Matthew! The rents should be increased to $750, and will be as leases come due. This will bring them in line with the other units in the complex, and will increase cash flow.

@Mark Waldrip

This deal is interesting to consider in this light... $210,000 for 7 condos. $4900 in rents minus $1750 in HOA fees. $3150 after HOA fees.

Alternative is to look for 1 detached single family home for $210,000 that will make 1750 in rent + insurance and tax costs. 

The difference, is the latter you only have 1 kitchen and a few bathrooms to maintain and one a/c, etc. 

With the condos you're looking at 7 units to maintain (7 a/cs, 7 kitchens, 14 bathrooms) etc.

I do some condo rentals (goes against conventional wisdom some with HOA, assessments, etc). So you have to be very careful. Maybe check:

1) Owner/rental ratio (what loan programs is the association approved for; this is so you can easily market and sell if needs be).

2) Section 8 and condos just does not line up for me fyi, so could you get market rate paying renters? The condo concept works best with owners and some renters (having section 8 is interesting to say the least)

3) Major capital expenses pending? This would be assessed to you x 7 here ...Do they have reserves?

4) Read all the minutes, rules, policies, financials, etc. The politics may be peaceful or even openly hostile with legal actions. Also, see if you can get a sense of the stance towards renters (problems, fees, limits, etc).

5) Can you exit, even if owner financing them?

Be thorough in DD and inspect them all, find out more about the association. It can be an extra layer to work with. Again, condos don't always make ideal rentals, but people make it work. There can even be ways to add value, for example, by eventually turning these into owner occupied units by selling (owner financing, then passing dues and management on to someone else). I would like it if I though I could owner finance them one by one for 50 K in the next ten years. Then you also get in good with the association with a long term plan to make these rentals (which many condo associations may not like) into vested owner occupied units. Also, with that many you may even want to get on the board if you end up buying as everything, (fees, dues increase, assessment, rule) applied to you in a multiple of 7!

Originally posted by @Michael Boyer :

I do some condo rentals (goes against conventional wisdom some with HOA, assessments, etc). So you have to be very careful. Maybe check:

1) Owner/rental ratio (what loan programs is the association approved for; this is so you can easily market and sell if needs be).

2) Section 8 and condos just does not line up for me fyi, so could you get market rate paying renters? The condo concept works best with owners and some renters (having section 8 is interesting to say the least)

3) Major capital expenses pending? This would be assessed to you x 7 here ...Do they have reserves?

4) Read all the minutes, rules, policies, financials, etc. The politics may be peaceful or even openly hostile with legal actions. Also, see if you can get a sense of the stance towards renters (problems, fees, limits, etc).

5) Can you exit, even if owner financing them?

Be thorough in DD and inspect them all, find out more about the association. It can be an extra layer to work with. Again, condos don't always make ideal rentals, but people make it work. There can even be ways to add value, for example, by eventually turning these into owner occupied units by selling (owner financing, then passing dues and management on to someone else). I would like it if I though I could owner finance them one by one for 50 K in the next ten years. Then you also get in good with the association with a long term plan to make these rentals (which many condo associations may not like) into vested owner occupied units. Also, with that many you may even want to get on the board if you end up buying as everything, (fees, dues increase, assessment, rule) applied to you in a multiple of 7!

Thank you for your detailed response Michael! It is very helpful and gives me a lot to research and consider for sure. This complex was built in the late 70's as individually owned units. Over time, the original owners have died/sold off, and the majority are now rentals. I think I would be the largest single owner of units, but there are other investors with multiple units. The HOA has a good reserve at this time, and plans capital expenditures based on the ability to pay whenever possible. There is nothing pending at this time.

At $30K per unit @ $6K gross rents, it's a 20% gross return. A $210K single family home would have to rent for $3,500 per month to provide this same return. Also, while having all my eggs in one basket would limit some costs, it would also mean a larger loss if the property is vacant. So lots to think about; I appreciate the information!

I definitely like the idea of transitioning the units to owner-financed sales down the road, and judging by recent individual unit sales, there is potential for bigger profits from those  type of deals.  Mark

i personally will not buy a duplex/townhome etc unless i can buy them all.  i want to control the whole structure (unless it is truly a steal) the area you are looking at is pretty good overall just be aware of construction issues in that part of town

-sewer mains are a bit problem around there

-old electrical panels

-also the issue with number of owner occupied units can bite you and most likely has him when trying to sell them on the mls etc as fha financing would be out the window.  

@Mark Waldrip

I agree with @Michael Boyer and would add that you need to know who owns the other units in the complex. 

If the majority are owner occupied, the board could change the bylaws to prevent or reduce future rentals. If the majority are investor-owned that is unlikely to be an issue.

Retail sales will always be an issue since one investor owns more than 10% of the units. So the building cannot be GSE-certified. 

Lots of good feedback from other members. 7 low income condos will translate into a lot of property management challenges. Not to mention all the time you will spend dealing with the HOA board. It can be painful fighting with some long time owner that has nothing better to do than be on the HOA board. 4 hour long meetings can get old fast. Be sure you have the time and energy for that.

Sounds like the owner wants out pretty bad.  Will he consider owner financing?  

You have to check out the other units. If the other 6 all need $2,00 of new appliances and HVAC improvements then that will not be very fun.  

Would also be a good idea to get a good handle on the condition of the roof and pool.  You will take on over 23% of that complexes long term maintenance liabilities!

On the positive side, it is not out of the question that you could be the majority owner in a few years if you really want to go all in with the complex. 

Originally posted by @Mark Spidell :

Lots of good feedback from other members. 7 low income condos will translate into a lot of property management challenges. Not to mention all the time you will spend dealing with the HOA board. It can be painful fighting with some long time owner that has nothing better to do than be on the HOA board. 4 hour long meetings can get old fast. Be sure you have the time and energy for that.

Sounds like the owner wants out pretty bad.  Will he consider owner financing?  

You have to check out the other units. If the other 6 all need $2,00 of new appliances and HVAC improvements then that will not be very fun.  

Would also be a good idea to get a good handle on the condition of the roof and pool.  You will take on over 23% of that complexes long term maintenance liabilities!

On the positive side, it is not out of the question that you could be the majority owner in a few years if you really want to go all in with the complex. 

Thanks Mark! You're right, that can be a challenge. From what I understand, the HOA has the opposite problem, and the current owner of these condos is serving as the President and spearheading most decisions. But I agree further inspections of the other units and overall condition of the complex is warranted! And I would be open to purchasing more units as they may come available in the future!

Good points all around, and I have to say, I would heed Rhett's warning.  You are right at the 1% mark, which in my opinion, requires an upside to settle on.  I'm not seeing an upside to this deal.  They are mostly section 8 units and if the association ever imposes a special assessment (which they probably will at some point) your cash flow is toast.  I just saw this happen to a team of new investors with condos around the Penn Square area.  

But, to answer your question, I would absolutely require copies of leases and inspect the other units, at a minimum.  The unit you saw was the best one without a doubt.  

Best of luck on it

@Mark Waldrip

Hello Mark,

I actually did look at these condos and made an offer on them. My offer was lower than 30K per unit. I really liked the area. however, this deal did not make any sense to me at 30 K per. The HOA fee is a cash flow killer. I also did not like the fact that the HOA fee was recently lowered from $300 ish to $250. I felt that the owner and HOA president might have done that to get the units sold. There were special assessments done in the past, I would check on those as well. Feel free to reach out to me for more info. I want to be fair to the seller and not disclose more info here.

Thanks

Thanks to all the BP community for their responses to my situation. Just wanted to update that I elected not to purchase these condos and looking for other deals. Based on the advice of many here, I am looking to avoid condos as a rental property, especially if only a few units in a larger complex.