How to handle buying a possible $70k special assessment condo flip?

Question

Hi everyone,

I’m looking at a condo in Honolulu for a fix-and-flip project.

The building is currently talking about a possible $70k special assessment for each unit. However, the assessment has not been approved or implemented yet.

I’m trying to figure out how experienced investors would handle this.

Would you:

• Lower your offer because of the possible assessment?
• Ask the seller to pay the assessment?

Lower your offer because of the possible assessment?

Ask the seller to pay the assessment?

• Add special language to the purchase contract?

Add special language to the purchase contract?

Also, if the assessment has not been approved yet, how would you include this risk in your numbers?

I’d really appreciate hearing from anyone who has dealt with a condo where a large special assessment was being discussed but had not been approved yet.

Thanks!

Richard F. · Answer

This is an easy one. Turn around and walk away. The Board has failed to fulfill their fiduciary duty to all owners. There is no reason to believe that even with the assessment, they will not continue down the same road of deferring maintenance to try and keep fees "affordable", which will lead to another Special Assessment as soon as the next major project reaches a point of "must do now". Walk the project, and look for multiple signs of deferred maintenance.

What is the age of the project, and how many units total? $70K per unit adds up to real money, real quick. The fact that it has not yet been assessed, does not matter much. That is a huge number, and evidence of years of failed management.

Look at the reserve funding plan for the current year. Most are "percentage funded" plans, and will clearly show a total "shortage". That figure is just telling you how short they are in total for the current year. That total needs to be "made up" on top of increasing the monthly reserve contribution to a level that is over 70% funded, assuming the schedule does not show another major element due within 2 - 3 years or so. This all assumes their estimated "replacement" costs are accurate within 5%. If they are based on old estimates, or pure guesses (not unheard of), you are in an even worse position.

If you can get a copy of the reserve funding and annual budget I would be happy to look them over with you.

Michael Borger · Answer

I probably know the unit you're looking at and spoke with the owners recently. I just chose to walk away. I have to be really convinced to consider condos these days. I'd suggest just looking for deals elsewhere.

Divin Kanyama · Answer

@Kwok Wong A potential $70,000 special assessment should be treated as a real project risk even if it has not been formally approved. Before setting the offer price, request the association’s recent board and owner-meeting minutes, reserve study, financial statements, insurance information, engineering reports, proposed project scope, bids, and any notices discussing the assessment. It is also important to understand whether the amount is preliminary, how likely approval is, when responsibility attaches, and whether lenders or future buyers may have concerns about the building.

For underwriting, the conservative approach is to include the full assessment in the deal unless reliable documentation supports a lower probability or amount, then add a contingency for uncertainty and delay. That may mean reducing the offer, requiring a seller credit or escrow, or walking away if the margin no longer works. The purchase contract should clearly allocate responsibility for any assessment proposed, approved, levied, or due before and after closing, with rights to review updated association records and terminate or renegotiate if the facts change. A Hawaii real estate attorney should tailor that language because timing and wording can materially affect who pays. On a flip, the deal should still make sense if the assessment becomes payable and the resale takes longer than planned; if it only works when the assessment disappears, the risk is probably too high.

G. Brian Davis · Answer

I’d definitely account for the $70K in the numbers, even though it hasn’t been approved yet. It may never happen, but I wouldn’t bet the deal on that.

I’d want to find out what’s behind the proposed assessment, how strong the HOA reserves are, and how likely it is that the owners will approve it.

Then I’d adjust my offer accordingly. If the deal still works after accounting for the assessment, great. If it doesn’t, I’d move on.

On a flip, I’d be especially careful because $70K can eat up a lot of your profit pretty quickly.

How to handle buying a possible $70k special assessment condo flip?

How to handle buying a possible $70k special assessment condo flip?

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