Investing in a Condo: Good Cash Flow but Poor HOA

[Kevin Br]

Hey BiggerPockets! What an awesome community you've built up here. Newbie at real estate investing, but I'm hoping to close on my first rental property soon. In search of some advice. I recently went under contract for a condo unit (in a 4-unit brick bldg) in an "A" neighborhood of Chicago that would cash flow handsomely (20.34% CoC ROI). Got a solid deal on the unit ($3k less than appraised), and budgeting about $5k for cosmetic refreshes.

Today I got the HOA "records" and I was taken aback by what I saw. The HOA was registered in 1994, yet they have a whopping $2,900 in reserves! There are no pending special assessments, however the self-managed HOA was unable to produce any meeting minutes to my attorney (as in, none, since apparently they don't have a Secretary or regular HOA meetings). My inspection report revealed a small water leak at the building's basement main water line (which is made of lead)--so eventually that will have to be replaced with a copper line. Roof appears to be OK though I wasn't able to get a complete roof inspection.

Considering the strong cash flow vs. HOA reserves, I'm curious what others thoughts are on whether or not I should bail on this deal?

[Lynnette E.]

You need to provide more information. What is the condo HOA fee per month or year? What is happening with that fee? It could be that with 4 units they decided to not charge a monthly fee and just split the costs when they come due. It could be that one of the condo units is in charge of the fees and takes a salary out of it so none is left. Or maybe they just repaved the parking lot other had some other major expense.

Before making a decision ask to see the financial documents for the past 2 years.  If nothing else exists a copy of the bank statements.  It will let you see if they are spending more than they taking in or had a major expense or just cost share when there is a major expense.

Also, have the realtor get information about the 3 other units.  Are they owned by the same person, are they investors?  Investors often want low cash on hand and will sell when major expenses come up, so maintenance may be more deferred.  If 2 are owned by one person, you may have an issue getting any changes.