Multiple Condo Deal - Opportunity or Trap?

Question

My direct marketing campaign yielded a motivated seller of some condos local to me that I'm interested in acquiring for buy-and-hold rentals.

The complex is a single 15 unit building in pretty good shape physically, but the association is dead in the water. Nobody has been paying condo fees for several years. There are only 4 owners living there (3 with running water), the rest of the units are vacant.

The seller and his brother represent 6 units, and they have agreed to sell them to me owner-financed. There are 2 other owners that want to sell, but I don't know if we can come to an agreement on a price, considering the discount I need to make this work.

My plan is to get 8 of the units under contract at once or with contracts contingent on getting 8 units. With 8, I'll own the majority of the units and control the HOA. I'll then restart the condo association, begin collecting fees, and as units become available, I'll purchase more of them.  Currently none of the other owners want to sell, I assume because they're happy not paying condo fees, lowered tax assessments due to the condition of the association, and ignorance of the risk of not having an association.

I've run the numbers and I'm comfortable this will be a profitable deal even assuming high startup costs and high vacancies while we revamp and also assuming non-compliant owners not paying their portion of the fees.

My biggest questions are:

1. Assuming I stabilize this building and association, will I be able to refi out of my 8-10 units 3-5 years from now?

2. What is my recourse with owners who don't pay HOA fees or follow HOA rules?  I intend to get legal consultation on this as well.

3. I'd like to eventually own all 15 units.  Assuming I don't want to sell them, would it be more advantageous to dissolve the association?

Any experience with this type of situation would be much appreciated.  I don't know what I don't know and what I'm not asking.

Stephen Polizzi · Answer

@Thomas S. @Andrew Johnson

The mitigating circumstance here would be that those types of buildings aren't readily available for purchase anywhere near me.  Since I will be self-managing, this is significant.

Also, I'm able to purchase these units at a very significant discount with good owner-financed terms. The most recent arms-length sales in this building were 55-60k in 05-06, I'm considering buying at ~15k.  I think a more realistic value for them is 35-40k.

This is a very good quality building (relative to other MF in my area) that is plagued by admin problems.

I'm in for the very long time-line, as I'm hoping to turn this building into part of the foundation of my family's business; I'm curious about the never-ending battles with other owners...can you elaborate?

Stephen Polizzi · Answer

@Andrew Johnson  We are contractors. I've viewed the units I'm intending to purchase and there are various amounts of deferred maintenance, nothing insurmountable.  The common areas require cleaning, touchup, and paint.  Landscaping required as well, but all stuff we handle daily.

These guys are motivated by the bulk purchase, distance, no end in sight for them, and frankly have a level of sophistication that allowed the situation to degrade to this point. Realistically the only chance at making something of this failed investment for them is to sell to an investor like me who can take on the building as a whole.  There isn't a viable future here for individual owners in its current state.

The guy selling me the 6 units was the treasurer and admin for the association. He was bad at filing liens and chasing fees. Again, that's how the building got here.  As far as I can tell (prior to title search) there are no outstanding liens.  I spoke with an attorney briefly and he indicated that part of the process for restarting the association would be to blanket forgive all outstanding fees (no records anyway) and start fresh. Since I would own a majority of the units, I think this is preferable to me as well.

@Thomas S. I tend to agree with you, and that would be my primary topic of conversation with legal.  How much can I raise fees and what can I do to enforce them?  I don't want to be an asshole and I'm certainly not trying to force people from their homes, but either this needs to be a viable condo association or people will need to sell, there can't and shouldn't be an in-between. At present, the value and assessment of the units is driven down by condition. That will start to climb as I improve the building/association.  However, I'll be setting comps low by buying these on the cheap and making the rest of the units non-warrantable, so I don't think they can ever achieve full value as condos without perhaps dissolving and recreating it or whatever takes place in an initial condo-conversion that allows them to be warrantable.  I'm hoping to hear from someone who has successfully executed a similar plan or a better plan in a similar situation.

Thomas S. · Answer

In reality your plan is to turn a condo building into an apartment building. It would be less expensive/more cost effective to invest in purchasing a apartment building from the get go.

Your plan will involve a very long time line and never ending battles with other owners.

Kim Meredith Hampton · Answer

@Stephen Polizzi I really would seek legal council from an attorney that specializes in HOA/condo mngt issues. I think its worth the money to figure that out first b4 jumping the gun. If the association has folded, I'm sure there is some sort convoluted process that ensues.

On the other hand, I work for a lot of associations that file for liens on people that don't pay their association dues; in turn we rent out and manage for the HOA so they can get back their dues to make the Assocation whole.

Andrew Johnson · Answer

@Stephen Polizzi 👍🏻

Kay Khan · Answer

@Stephen Polizzi

2006 being peak of the housing boom the price should be 1/3 now. If it is a nice area that is a good price but definitely get legal help. Good luck.

Andrew Johnson · Answer

@Stephen Polizzi So given the occupancy issues are there leins on the property for owed condo fees?  How much deferred maintenance is (or isn't) there?  I know it's a little bit of a guess right now but I'd definitely walk the complex with a contractor.  Usually (not to over generalize) you pay a premium for owner financing.  If they're willing to sell for $15K they might think that's including their "premium" or it's fair market as the owner financing is offset by the ease of a bulk purchase.  You probably hit on these things in our diligence already but I'll just throw it out there.

Thomas S. · Answer

For the right price it is worth proceeding. Since there will be few owners left you take control then make the HOA rules such that you can quickly drive out the remaining owners. Pushing up the HOA fees to a level necessary to secure the property finances then forcing payment should work. You will have to pay higher price for the remaining units to avoid legal complications but it will still likely be worth the costs. $40K would not be unreasonable to take full ownership.

You will need a good lawyer qualified to be a p**ck.

Multiple Condo Deal - Opportunity or Trap?

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