Why Never To Buy Real Estate In Associations
Why is buying a property in a condominium or homeowners association such a bad idea?
Condos, townhomes, and single family homes in associations can seem cheaper than their comparable counterparts that are not subject to associations. There is a good reason for that. They are at least riskier investments at best. They can also be financial traps that really wreck your plans, portfolio, flow, and cash flow.
This is just one of the nuances of investing in real estate which many don’t understand is an issue until they’ve made the expensive mistake, and have gone through the immense pain associated with it.
If you are tempted to invest in these properties anyway, here are five things you need to be prepared for.
Financing Challenges
Many loan programs require condos and HOA projects to be specifically approved in order to qualify for financing. Which includes evaluating the association’s make up of owners and investor ratios, how much the association has in financial reserves, and any legal issues they are involved in.
This means your pool of end buyers can be far smaller than on a similar single family residence in the same area. So, it can take longer to sell as well.
Deed Restrictions
Condo associations have especially become more of a nuisance with a wide variety of creative deed restrictions on units in their communities.
They can make up just about any rule they want, and apply it to governing your unit.
That includes restricting how many years you must own it before you can rent it out, minimum and maximum lease periods, and even how soon you can resell your property.
If you can’t rent it out or resell it for a year, that is a problem for most buyers. At a minimum it puts a serious hole in your returns, and means you are bleeding negative cash flow through that period.
Approval Of Buyers & Tenants
You don’t just get to decide who you can sell or rent your property to either. Even if they are paying all cash, and have perfect credit.
Virtually all associations retain the right to approve tenants and buyers. Sometimes this is a multiple step process, with various master and sub-associations involved.
Those handling these approvals are rarely motivated to move quickly. Their criteria can be very murky and often seems ambiguous.
This again slows you down, and shrinks your end buyer pool.
Constant Headaches
From rogue members, to greedy lawyers, and corrupt board members manipulating budgets and rules for their own personal interests, associations can be non-stop headaches.
If you don’t show up to meetings and vote, then who knows what they will do in your absence. If you do, you can still be drowned out in the vote.
Special Assessments
This is one of the biggest risks of associations. They may apply special assessments to units at any time. This can be to fix urgent damage, such as after a storm. Or it could just be for improvements a few board members want everyone to pay for, for their own personal benefit.
These can be thousands and tens of thousands of dollars. Which becomes a debt on your unit. If you don’t pay it, your new buyer must agree to take on this additional debt at closing. Meaning it is a lot more expensive for them, or you’ll have to discount your asking price.
If You Do…
Of course, you can make money buying and selling these properties. If you do, make sure you read through all of the rules and know them. Read through the financials of the association, have a good lawyer on retainer, and price in this extra risk to your purchase offers, and financial projections.
