Read the Transcript
Welcome to the Grow Real Estate Investing Podcast.
I’m Joe White and this podcast will be a guide on how to evaluate a condo property as an investment.
This how to is for real estate investors; but also for anyone buying a condo.
Even if the intention is to buy a condo as your live space, your own home, and you are not really interested in investing in real estate per say, you still will want to know what to look for when buying a condo.
Because there are good condos and there are bad condos.
Safe ones and unsafe ones and we’re going to try to keep you safe.
If you are researching condos as a type of investing, you should check out that companion podcast Condos As Investments, where I discuss condo investing as a whole, and compare them to other types of property investing.
It goes in depth on the pros and the cons of condo investing.
If you have already decided on condo investing, or if you have found a specific condo that you are considering buying then this is the podcast for you.
Here I am going to breakdown how to evaluate a condo and particularly its homeowners association.
But before I do:
I’m not a licensed attorney, I’m not a licensed accountant, or a financial advisor.
I’m a real estate investor. I own a property management company; but I’m not your property manager. I am a real estate broker; but I’m not your real estate broker.
Talk to those people. It's important. Particularly because every state is very different.
Okay, you want to buy a condo.
You found one you like and you want to put in an offer.
But before you do you have to understand that you aren’t just buying the space that you like that is between the four walls of the unit.
You are also buying into a community called the homeowners association.
And as a group you will own the common areas, like courtyards, foyers, front steps, front doors, amenities like pools, community rooms, gyms and as a group you will also own the roofs, the foundations, and the entire building and the grounds in general.
Since this group owns and is responsible for all these things, its paramount that you get to know how they have been running things in the past and get a very good sense on how well they are set up for the future.
Before you buy into it.
Fortunately, that’s easy to do; because when an offer is accepted by the seller of a condo, they are required to get you a collection of materials called the condo docs.
The condo docs are a series of documents intended to give you a snapshot of the association's financial situation, and full details of all the rules of the building.
As a buyer, if you don’t like what you see, you can walk away from the deal, unharmed and back to the condo hunting drawing board.
So what are you looking for when reviewing these condo docs?
What makes for a good homeowners association and what makes for a bad one?
Or more to the point, how can you feel this condo is a good investment and won’t end up as a financial loss for you?
- The Reserves.
Reserves are the money the homeowners association should be setting aside, from the HOA dues that the homeowners pay, typically monthly for anticipated eventual expenses.
Nothing lasts forever and it's foolish to think it will. Every item that comprises a building has a life expectancy. Be it a brick, a board, a screw or a nail or paint or tar.
In real estate investing we apply Capital Expenses or CapEx as a term that acknowledges and accounts for the life expectancy of mechanical like items.
For example we know many roofs have life expectancies of 20 years.
Meaning that in 20 years from when the roof was last installed, we expect a larger expense will be looming. It will be coming time to replace that roof.
In a well run condo association, a part of the monthly condo fee will be designated for these eventual repairs. As these amounts begin to collect, they are called the Reserves.
The first thing you will want to know; before you buy into this association is whether they are saving enough money to pay for these items.
And many times they are not.
For one It's not uncommon for a developer to build condominiums, sell the units designating themselves as the management company and they take your monthly HOA dues as their fee.
And they don’t apply much, or any of it towards eventual repairs.
As far as eventual repairs go, that may, or may not not be their concern…
After all, they aren't a unit owner, who is actually financially responsible for these repairs.
They are a supposed service, merely finding a clever way to continue profiting from a mandatory, unescapable fee.
Often they also control the HOA board placing themselves as the un-seatable HOA association. Or the controlling members.
The problem is that the condo buyers agree to all this when they buy into the building.
They see a beautiful, new condo and they are unaware what they are agreeing to until it is too late.
A flip side to that can be found with smaller condominium buildings where all the unit owners make up the association and they under charge themselves the monthly dues;
Basically because they each don’t want to have to pay the additional money each and every month; or they simply have no idea that things eventually break or how much things cost.
A properly run association should get a very good idea of how much an eventual expense will likely be, including factoring in for inflation. A new roof that costs $20,000 today will be much more 20 years from now.
They should be collecting and saving more HOA dues then they should ever need, while still keeping the fees as reasonable as possible.
The fees should be robust enough to handle the unexpected.
And if the collected fees build such a large reserve, that there is clearly more than enough then will ever be needed for repairs, the overages could be used to improve the property as a whole, thus increasing everyone’s equity and quality of life.
One thing worth mentioning is that some expenses are hard to plan for. So look out for them.
As the owner of a property management company I have seen a few buildings get surprised by elevator issues.
Elevators are very complicated animals and they might be beyond the board’s expertise. Mis-information from an elevator repair company, could result in a huge, unexpected repair.
It's hard dealing with a tenant that rented a condo unit from you, as a working elevator building only to have the elevator sit broken for months. I’ve seen it happen, and it's a hard thing to navigate.
I had a vacant unit that disabled potential tenants would inquire about. As a property manager I would have to warn them that the elevator had a chronic history of breaking down and not working for long periods of time. I obviously can’t put tenants at risk like that.
Or maybe the City might pass some new regulation for condominiums. Or a condo owner will declare bankruptcy and go a year with paying fees. There are recessions where multiple condo owners get foreclosed upon within a building.
So the reserves need to also expect the unexpected things that are hard to plan for.
Often buildings without the adequate reserves to cover expenses will put off repairs which tends to worsen problems that then become even more expensive to fix when they get too bad to ignore.
- Special Assessments:
You want to see that the association has reserves for eventual repairs; because if they aren’t saving enough money, then they will not have the money to make those necessary repairs as they come up.
At that point they will need to get the money from each unit owner for their percentage of the repair. This is called a special assessment.
Not only can that be a very large, unexpected expense; but some owners simply won’t have it, or will drag their feet, possibly refusing to pay their share.
At that point you, and the other owners would need to help cover their percentage since the repair still needs to be done.
- The By Laws and Rules & Regulations:
If this is to be a rental investment property the 1st thing you need to do is check the Bylaws to make sure you are allowed to rent the unit out.
Imagine buying a rental property as an investment, only to find out you’re not allowed to rent it out? It actually happens all the time!
Many buildings restrict rentals or have rental caps where the building only allows a percentage of the units to be rented out.
And that is the same with trying to make the unit into an AirBnB.
Now if the building allows rentals; but changes that after you buy it, you are probably grandfather in to be able to continue using it as a rental unit. But not always!
Read all the By Law and the Rules and Regulations carefully. Condo associations can be very peculiar.
The person who is willing to exert the most energy for the association is typically the person who gets the most power…The person who has the most control.
And that sometimes means that the best suited persons for the tasks aren’t the ones actually in charge, so really look through them.
Also make sure you are fine with any limitations on renovations.
It can be something like requiring you to reserve the service elevator, that you can only do renovations on certain days and times or you may need to pay a daily fee while renovating.
You might need to get approval for each alteration you do or it might dictate things like that the unit must remain carpeted. Or that it can’t be carpeted.
The association might have many rules and you might not like some of them.
Is the building currently being sued? Is it currently suing someone?
If a contractor didn’t get paid or a visitor got hurt, the building might be stepping into an expense. And you might be also if you go ahead with the sale.
This wouldn’t really bother me as typically insurance will cover these expenses; but insurance rates might then go up.
Things happen but make sure this isn’t a sign that the building isn’t being run correctly. Multiple lawsuits would certainly turn me away.
On a side note I know of a few buildings that fell into money. Back in the 90’s cell phone companies began renting space on several tall buildings for towers, paying the association thousands of dollars. I’ve also heard of a building here in Philadelphia that erected a billboard, that collects rent for the owners.
- See What is Included And What Might Be An Additional Fee:
A real estate agent trying to sell you the condo might not be forthcoming with all the details, or they might not even know themselves what is and isn’t included.
When you walked through the condo building if you saw parking and things like storage units, you need to check that these items are actually provided as part of your unit.
If not, there may be an additional fee or they might be available on a 1st come 1st serve basis. 1st come, first serve basis also applies to things with additional fees. You might be able to get an additional parking space for a fee; but only if one is available.
- Visual Inspection:
Unit owners tend to be shy of spending money and when they are the building begins to devalue from deferred maintenance.
Are you seeing $30 issues being ignored that will become $3,000 issues? Painting the exterior wood around a window saves replacing the entire window.
Deferred maintenance is when things aren’t fixed as they should be fixed.
This really lowers the value of the building and increases the eventual expenses.
Signs of deferred maintenance might be dated carpets and paint in the common areas.
I like to look at the mailbox center if a building has one.
Mail boxes surprisingly get more damage then you might think.
Postal carriers can over stuff them, which can bend them or break the locks and it's common to see two or three boxes broken.
Also building door locks, see a lot of interaction and can break.
It's easy to get a sense how long things have been broken and if the building isn’t fixing things as they should.
Don’t forget that this building is your equity and you want it protected.
You don’t want to watch your equity get lost, year after year from neglect.
- Do An Online Search:
Before you commit to an association search the building name and also the association name. You might be surprised to find reviews on sites and social media pages.
Even small buildings often have social media pages where the residents can communicate.
And larger buildings often have pages created by the residents, and not just the official association page where the residents coordinate events, vent about the association, vent about other unit owners about things like nuisance barking and where they share contractor referrals, ect.
If nothing else this helps fill in some of the gaps of the building’s vibe.
I’ll wrap this up here.
I’m a big fan of condos as a personal home and I also like them as real estate investments.
But condo ownership is only for certain people.
Do your research, make sure condo ownership is right for you.
Then do research on that particular condo and make sure that is the right condo building fit for you.
I’m Joe White, with the Grow Real Estate Investing Podcast.