Financing pitfall of a Condo

[Mark De sagun]

Hi Everyone, I live in California and am considering buying a condo in Indianapolis with a cash offer as my first investment property. Should I anticipate any difficulty refinancing the house or getting a HELOC to take money out for my next investment property? I know a condo is different from a SFH, so is there anything I should be wary of in regards to using my equity in the condo to finance my next property?

[Stephanie P.]

Originally posted by @Mark De sagun:

Hi @Stephanie P. thank you for your response. I'm aware condos come with their own specific set of risks, but it seems like a deal that can be profitable for me.

I am a little wary for the HOA. the HOA fee is only $80 so not sure if that's good or bad, but there is no pool or major common areas to maintain so I think that's ok. If my offer is accepted, I'll definitely be digging through the HOA documents for any red flags.

I'm doing my own research and plan to talk to a lender, but maybe you can explain what makes a condo warrantable vs non-warrantable?

This deal was brought to me by a broker. The seller is going through a divorce and I believe only taking cash offers for an under market value price. The seller actually owns 13 units that he's selling and I heard another investor owns 10 units. I was told that the investor who owns 10 units wanted to buy more units but didn't have the money right now. What kind of issues can arise when a complex is owned by mainly investors and used as rental property?

My main concern is that I won't be able to pull my money out of the condo to purchase another property.

 There are lots of reasons why condos are or become non-warrantable

1. Projects where a single entity owns more than 10% of the total units (for projects with 21 or more units).
2. Project has inadequate insurance coverage.
3. Condo project has similar characteristics and is managed as a hotel (condotel)
4. Project (HOA, sponsor, developer) is in litigation that relates to safety, structural soundness, functional use or habitability of the project.
5. New construction condos.
6. Established condos that have additional phases in need of completion.
7. High percentage of non-owner occupied units.
8. High number of units being delinquent on association dues for more than 60 days.
9. Project budget is not appropriately structured.
10. Does the condo budget doesn't have at least 10% in reserves
11. Does one owner own more than 10% of the units
12. Is the investor ratio of the units greater than 50%

and many more.  I've attached an information sheet from Freddie Mac regarding condos.  You could buy it today and next month change your mind and decide to sell and the game has changed because of something that's totally out of your control.  If you have one person that owns 13 and another that owns 10, I would say it will end up being non-warrantable.

https://sf.freddiemac.com/content/_assets/resources/pdf/requirements/condo.pdf