First Time Investor: What could I be missing about this condo?

Question

What are some common things to look out for when purchasing a condo, especially noting I'm a first time investor?

I am soon to be afforded an opportunity to purchase 1 or 2 off-market condos in a prime location in a really hot vacation rental market. They're being sold because the owners (who are family friends) only travel to the location once or twice a year, and economically that doesn't make sense for them anymore when considering what they pay for HOA fees (they don't rent it out, only tenants are the owners, us, and our parents).

I personally have stayed in both of these condos, although it's been a decade since I was last in one of them. One is recently updated, and the other will require some updating. As far as I'm aware, the one requiring updating has no structural issues. The updated one is in great shape.

I've checked Airbnb's in the same building, and all the numbers seem to work out from my calculations under conservative assumptions.

Things of note:
- I'm unaware of the quality of the HOA in their duties
- The building is older, although is seems structurally ok from the outside

- I'll likely be able to acquire these off-market for under market price

- I'm a total noob, so I expect I'm not considering the whole situation

Kevin Manafi · Answer

Hi @Zachary Parrish, condos can be a solid, less daunting option for newer investors to get started and get their feet wet without being overwhelming. However, you definitely want to make sure to do your proper due diligence.

Here are things to check for if considering investing in a condo:

-Gather as much information about the association as you can. Inquire as to the status of the finances of the association, where they stand both currently and historically in terms of fees collection (this can show you whether they have adequate financial reserves in case of large future expenditures)

-Whether the association allows the units to be rented out either traditionally or as an AirBnb if that is your plan

-Make sure the current owner(s) are current on their HOA dues, otherwise you would be liable for the bill after closing

-Some buyers ask for the minutes (notes) from all board meetings from the past 6-18 months to see what kind of topics are being discussed. Usually this can be a good way to be alerted to anything pressing you might not have been aware of. However, the HOA may or may not be willing to provide you with this

While some people opt not to get inspections on condos/townhomes that are in good shape because of the nature of the HOA taking care of CapEx, getting an inspection is always a good idea so you can learn more about your property and to potentially discover things that may not meet the eye. Even the best of us miss things sometimes. Also, the inspection for a condo will be much cheaper and shorter than a single-family or multi, so it's worth the peace of mind.

Best of luck!

William Beck · Answer

Lenders!!!

You absolutely have to find out if the condo property is going to be okay with the bank you choose if you're getting a loan. As Kevin mentioned, the HOA is technically a 'party' of the transaction and they need to directly disclose things like, what's the HOA fee for this unit, are there any special assessments, is there anything that hasn't been paid by the seller, etc. They also need to  share documents they have for on the HOA's budget, financial situation, declarations, insurance info, etc. That way someone who's buying doesn't' get surprised  by some crazy special assessment, or find out the HOA doesn't have any money in their bank account and would need to increase fees or have a big assessment to pay for stuff. The biggest reason for bringing this up about banks is the term "Non-Warrantable". This is getting into the weeds but absolutely essential to know about.  If a condo is non-warrantable the bank won't be able to sell the loan off on the secondary market because of the requirements by FannieMae/Freddie Mac. If the bank isn't able to sell off on the secondary market, they're going to be stuck with it, and they're basically not going to commit to the loan terms they shared. In other words, they'll shut you down immediately on the spot and say, "sorry can't help you out" even if it's mid transaction.

From my experience, most banks that aren't local commercial lenders, who've already gotten this info because of the experience with deals in these difference communities, want to know this info as well and issue a condo questionnaire directly to the HOA for basically the same info. They'll ask a ton of questions regarding: If a certain percentage of the units aren't owner occupied; the HOA has a lawsuit against it; Operate as a hotel or motel (aka Condotel); or the HOA is underfunded ... and a bunch of other 'risk' factors that I won't list out. If certain answers to these elements trigger a red flag to Fannie Mae/Freddie Mac, they will not buy the loan on the secondary market because it's deemed too risky.

If you get a commercial loan you can pretty much avoid this since the banks will keep that as a portfolio loan and not sell off to a 3rd party with extra red-tape and requirements. It's a higher down payment (20% typically), but not going to BLOW UP YOUR DEAL a few days before closing. Thankfully I've not had it happen to me but there's been a few close calls!

Zachary Parrish · Answer

Thanks both of you for the heads up @Kevin Manafi @William Beck I'll go into negotiations with that information in mind.

Luckily it would be very easy for me to get this information from the current owners. Thanks for your intel

First Time Investor: What could I be missing about this condo?

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