Should I stay the heck out of this one?

Question

I've been looking for a buy-and-hold in the local area (Seacoast of NH), and I have trouble finding places in decent neighborhoods that offer a decent cap rate.

I've just looked at a foreclosed condo in what used to be a big apartment complex, which apparently converted to condos. It's in decent shape (mostly needs paint, some water damage in the kitchen ceiling, time for new appliances), listed at ~ $100k. I actually think I might be able to get the place at ~$75-$80k. Other (updated) apartments in this complex are advertised for $1200/month, so that's looking good.

But there are a bunch of red flags:

- condo fee has kept going up every year: $180 -> $225 -> $275 -> $325 (2016)

- the place was apparently poorly managed / not maintained, they're now doing major work (new siding, new parking lot, ...) I just learned there is a $2500 special assessment for the parking lot coming up. There's already been some special assessments (< $1k) in recent years, and with the siding etc coming up, I expect another one to come next year.

- It seems some investor has been buying up almost all units (most of them were owned by the original apartment complex, anyway, only a few seem to be owned by individual owners). Obviously, they control the condo association (I think they own like 90% of the units), but I suppose they still have an interested to make this place survive.

- I suppose it's not possible to get conventional financing because of the investor concentration above, which means it'd be probably hard to get out of this deal.

- I think the place has been nearly (or actually) bankrupt, and the association has no reserves.

- The only recent "comps" I can find is the large investor buying up two units which had been previously foreclosed, then owned by another party for a couple of years. Those were sold at $75k each. The investors bought the majority of the units in 2013/2014 for <= $45k (in package deals from the original complex, I believe).

Should I run from this? Most signs seem to point that way. On the other hand, the rents seem decent, and if that complex managed to pull out of the bad times, I could see a lot of potential upside, in particular if the condo fees get back under control. The unit I looked at last sold in 2006 for $140k.

Account Closed · Answer

There is something not right here, trust your gut. My feeling is the large investor will drive everyone else out until he gets majority control. You won't have much power and he'll charge whatever he wants to operate the property his way. I'd stay away and look for my own 4plex.

Matt Lefebvre · Answer

This is definitely not a good time to invest in it.  It is going down, and down, and will keep going down until the association goes bankrupt, the entire complex goes into foreclosure, and then you're looking at a good deal.

Even if you're making a reasonable cash flow on the unit you own, take a look at your available options for an exit strategy.  Any buyer that needed financing would send their lender running away from this condo association as fast as they could.  That dramatically cuts down your available buyer pool if you ever need to sell the property in the next couple years.  On another note, special assessment after special assessment hitting you up for money is not a good thing.  If there's one investor who owns a good chunk of the units already, imagine how much he must be paying in special assessment fees every year.  What if he goes bankrupt and can't afford to continue with the complex?  Now you're looking at a total breakdown of the association.

Overall, there's a huge amount of risk in this investment for what doesn't seem like a whole lot of upside.  I'd stay away from this one unless you had deep pockets and wanted to invest in the entire complex, compared to just a unit or two.

Luis Roel · Answer

I would not recommend this property

Stephen E. · Answer

A weak condo building without reserves, with special assessments and rapidly rising condo fees? No thanks. I invest in condos and there are all bright red flags. Repair work and new appliances does not help either. You will likely be on the hook for more than you bargain for as deferred maintenance comes up and owners are hit up again for more cash. There have to be better deals than this and I would suggest that you go and find one. Good luck.