What about Condo Flips?

Question

Hello BP Community -

There is a lot of talk on BP about single family home rehabs but I am curious to know if people have had success in the condo arena.

Pros and cons? Strategies? etc.

Adrian Chu · Answer

See responses in bold above.

Good luck.

Connor Bell · Answer

@Adrian Chu & @Aaron Mazzrillo

Thanks for your responses!

A few more questions:

What is the best methodology for understanding whether HOA fees are high or low for a given market? Is there a general rule of thumb PSF? I have been told (in DC) it's 35-45 cents PSF.

What type of research do I need to conduct on condo building facilities (other than a kick the tire review)? Is it appropriate to ask the property manager for a list of CapEx expenditures over the last few years or ask for a list of annual expenses?

While determining the value of a unit (pre-rehab) might be easy (using recent sales comps within the building), what is the process of determining your ARV if none of the units have undergone updates?

Sorry for the flood of questions! Don't feel obligated to answer them all, any guidance on any of the questions is much appreciated!

Thanks,

Connor Bell

Aaron Mazzrillo · Answer

You estimate of 40 cents / sq/ft sounds pretty high, but I guess it depends on insurance rates in your market. I don't know if there is a formula per se, but all mine are over $200. Some properties have streams and ponds which tend to have higher fees (probably due to the liability and cost of maintenance). I don't really care what the fees are. I mainly look to see if other units have sold recently and what type of financing was used. If I see buyers using FHA financing, I'm all in. Some communities don't qualify and that may severely limit your market.

As for determining ARV, I try to only look at the complex and not complexes nearby. Perfect example is one complex I own in has w/d hook ups in unit. The complex right across the street has laundry rooms. There's definitely a big difference in values. Now, if you can use comps from across the street to justify your offer on the other complex - well, good one on you! LOL

I always ask about parking, w/d hook ups, amenities (pool, club house, exercise room, tennis courts, etc.). As far as financials go, I get any info I need from the property management company. I've not had any problems getting the financial info I need. It is important to know how they are looking on reserves. Some communities get way behind and then send out special assessments.

Aaron Mazzrillo · Answer

Some of my best deals have been condo flips and my townhouse rentals are just excellent properties. If you decide to pursue this niche further, just be sure you check for pending litigation against the HOA. Also, you want to make sure there aren't a high number of rentals in the community. It is harder to resell a condo if more than 50% of them are rental units.

Best part - you only have to rehab the interior which means you can either save money or create amazing spaces. I've tended toward the amazing spaces niche and get my properties sold for top dollar very quickly.

Robyn R. · Answer

I need a binder for lender in addition to builders risk if one is needed...which since this flip is really just paint and carpet, I don't need. What I ended up doing today is just getting a vacancy policy just seems like insurers get all convoluted if you tell them you're doing anything to property even though it's just minor stuff. My lesson from this is to keep it simple:)

Todd Calvert · Answer

Hi @Robyn  R.

Have you tried getting a Builders Risk policy?  My partners and I are using that type of insurance while our current fix and flip is vacant and under construction.

Robyn R. · Answer

I'm about a week away from closing on a condo to rehab, the issue I'm having so far is finding Insurance coverage (vacancy policy). Has anyone else on here run into that issue?  I hope I'm not highjacking this thread too much, thought this issue might be something to be aware of. Other than that, I'm stoked to be rehabbing a condo, seriously easy stuff compared to SF.

Sonya Stovall · Answer

@Connor Bell I think the condo fees, a realtor can give you some insight as to wether or not the fee associated with a property you are interested in as in line. As for the capex that might be hard to get yourself because some of that info will be in the Condo Questionaire that your lender will get on your behalf for funding. Generally the Condo Managers are learnt o give out the info other than for the CQ due the fact how they answer may impact loan approvals for the condo.

Initially, if you are buying the condo as an investor (not owner occupied) your loan process will be more stringent and your lender with get the CQ to get the Condo Budget, the HOA delinquency rate (no more than 15% late), Master Insurance, Fidelity Insurance,  percent of units owned by investors, and percent of owners that own more that 1 unit.

Determining the ARV in DC shouldn't be too hard because the sales are plentiful at all phases.

Once you rehab or you are done with your holding period, you want your unit marketable to all buyers so you want to make sure your Condo is on the FHA & VA approved lists of Condos.  Right now for FHA condo limits are around 417k (I think) but VA limits are higher.

Food for thought and I actually met a Condo Loan Officer today (that is all she does) that I would recommend you talk to, she has a list of things to check-out and be aware of when it comes to Condos.

Adrian Chu · Answer

Hi Connor,

Condo flips are my favorite niche for getting started.  Prices are lower, so less money is involved, so it is more likely to be doable with cash, and without dealing with bank financing.  Typically the HOA takes care of the exteriors, so you typically only worry about rehabbing the interior of the units.  Condos are also generally smaller in size, so generally less rehab work is required.  Also, condos are easier to value, because you can simply compare to similar units in the same development.  Because of that, it is also easier to identify almost "arbitrage" opportunities within a condo development.

Downsides: since your investment is smaller, your total profit will be smaller, however you will still need to spend time to manage the project.  Also, you need to make sure the condition of the HOA is good.

But overall, the pros outweigh the cons.  Anybody else have thoughts about this?