Concerns about 1st Deal

[Timothy Hood]

Hello Everyone,

I'm going to write an offer on a Fannie Mae REO condo marketed by HomePath.

The property is 2bed/1bath unit listed at 45K.  Another unit in the same building sold for 35K earlier this year so that's what I'll offer.  If purchased at this price it should cash flow pretty good.  Rent should be $650-$700/month with tenant paying utilities.  I would pay the $125/month COA fee plus property tax and insurance.

So far I have seen the Association's executive summary and regulations.  I will see the financials when I write the offer and the agent says I can back out of the deal if I don't like what I find in the first seven days.

I'm concerned about special assessments or other unforeseen cost as I have yet to see the financials.

Anybody, especially Wisconsin investors, have any advice about what to look out for?

Thanks in advance,

Tim

[Tyler Herman]

Hi Tim,

I used to work for a large mortgage bank where I handled HOA and Condo association dues and fees for the bank's REO portfolios with FNMA and FHLMC. After seeing thousands of statements from associations all around the country, a few things stood out.

First, every association is different. Depending on when the condo association organized, they have a lot of authority on when you as the owner may be on the hook for large amounts either through special assessments or from back expenses (which FNMA should deal with prior to sale, but be careful).

Second, associations use their dues in different ways - @ $125 per month, I would guess that most large projects are funded through special assessments rather than tapping into a reserve that has built up collecting $125/mo from each tenant.  I'd take a look at the last several years for frequency and size of the special assessments and update your figures accordingly.  Absence of SAs may indicate some are on the way, frequent SAs may suggest the board will want to re-budget and a monthly assessment increase is likely on the way - both eating into your returns significantly.  Also look at how much monthly dues grew annually in recent years, you may not like the pattern.

Lastly, see if you can determine how many other properties in the association are REO or active foreclosure. Wisconsin laws (generally, but subject to the condo's CCRs) limit the amount of back charges that an association can collect from a foreclosing entity, resulting in a loss to the association. If they have a lot of these properties, the only way to bring in funds to offset the losses to the association will be to hit the current owners with SAs or monthly increases.

Be careful with associations, the cash flow can be eaten up very quickly.

Tyler