7 Condo Remodel - Fail into Success

[Joseph Koury]

The deal was a 7-unit condo investment in the heart of Kansas City. The units and buildings were out-dated and neglected, but the location was unbeatable. There was one caveat...we could only purchase 7 out of the 18 total units.

Quick Hit Lessons

1. Talk to the neighboring owners of your condo.

2. Have plumber, inspector, and contractor test all possible water sources from units above and the exterior of the building.

3. Understand your responsibilities when things go wrong vs. the HOA's responsibilities.

4. Make sure the HOA manager has keys to every unit and an emergency plan in place.

5. Be humble in your approach to owning condos

6. Purchasing lower-level units without owning the units above can cause major issues

What Happened? 

Our unit mix consisted of two top floor units and five garden level units. Being a 2.5 story building, this means that there was a unit above each of our five garden level units for which we did not own. You can see where this is going... We remodeled the two top floor units and one of the lower-level units without much of a hitch(except for contractor issues which II will discuss in a later post). The issues started to arise in the 4th - 7th units.

We were finishing up the drywall in the 4th unit, which was garden level, and got the dreaded call from the contractor that there had been a leak from above. All the new drywall in the bathroom had to be replaced. Furious and concerned, we called the HOA manager to try and get immediate service to stop the leak from the unit above for which we didn't own. One hour went by with no response and the resident in the unit above ours was not home. 1.5 hours went by and there was still a small leak coming through. At this point, our new baseboards were drenched and we were considering breaking down the door to the unit above in order to stop the leak. Finally, we got ahold of the HOA Manager who, to our surprise, had no one available for emergency service, worked in an office 35 minutes from the complex and had NO KEYS to the other units in the building. We finally got access to the two upper units via the owners and were able to turn the water off. The issue stemmed from a leaking toilet and we had our contractor break through the ceiling of the unit in level two and make the repair. After we inquired about compensation from HOA for the repair of the toilet plumbing and the drywall/baseboards, we were informed that they would not compensate for anything that was not in the walls or outside of the unit. The insurance deductible was too high to claim as well. I know..we look like amateurs!

This issue or a variation of this issue didn't happen just once, not twice, not three times, but four times through the remaining remodel. (AC Leaks, Toilet Leaks, Faucet Leaks, Main Stack Breaks, Laundry Leaks) Etc. The total estimated damage came out to be $15,000. Some of you may think these problems are obvious and I am not posting this to get some sympathy, but rather to help others possibly avoid one or all of these mistakes. 

Lessons Learned

1. Talk to as many owners as possible that neighbor your unit - discuss their experience. Have them run their water, flush their toilets, run their laundry and turn on their air-conditioners during the due diligence process.

2. Hire a qualified plumber to send a camera through the stacks and main drains before purchasing the property. Avoid cast-iron plumbing or budget for a replacement. Have your inspector run water tests from the roof to test gutter systems if you have lower-level units.

3. Understand your responsibilities in the HOA by-laws when something goes wrong outside of your unit that negatively affects your property. Have your attorney read it as a second set of eyes.

4. Interview the HOA manager like you would a property manager. Understand their response time and process for maintenance requests. If they don't have keys to every unit or a smart system to access the unit remotely, turn away.

5. Purchasing many or even a majority of units in a condo building does not give you more power(depending on your by-law's voting rights) to get things done. Your ownership is relative. All owners are in this together and they are relatively as much at stake as you. Start with kindness and win over the other owners. They will be more receptive to helping you when things go wrong. 

6. Do not purchase lower-level units if you are not willing to do 1-5 above as well as be prepared to be the recipient of the above unit waste.

The project ending up completing and we are now fully occupied. My business partner became president of the HOA, and we just refinanced into a 10-year note for which the property appraised for 2x our purchase price. We are cash flowing nicely at a 10% cap rate and would do it all over again, taking into account these learnings.

I think sharing failures, as well as success in real estate, is a healthy practice and if anyone wants to share a story of how you failed into success, let's talk!