Investing in condominiums, townhouses, or single family homes with a Homeowner’s Association (an HOA) can prove very, very dangerous. There are many challenges that you’ll have to navigate in order to turn a profit of any kind. Anyone considering purchasing a single family home in an HOA, a townhouse, or a condominium, is in for a surprise. There are many pitfalls that you must be made aware of. This article is going to help you find out what those pitfalls and challenges are.
But why is renting a condominium so challenging?
Condominiums are a good choice for developers who want to build more units per area. For the average real estate investor, purchasing an individual condominium unit can end up in disaster. There are many extra and hidden expenses that go into the costs. Below are some of those hidden costs you can expect to incur:
Monthly Dues: The very first extra expense you’re going to occur are HOA dues. These dues are collected every month by the Homeowner’s association. Where do these costs go? These monthly costs go to the maintenance of the properties within that association. The association members can vote to increase those dues whenever need be. Say they want to re-build or improve specific things within the community. They can basically vote to do whatever they want. Say you find a great deal, and the monthly dues are only $100 a month. You think that this will be very appealing to a buyer. That, it may. But what happens when they increase the HOA costs to $250 because they want to build a brand new gate around the entire association? And, they might not even get to building that fence for two years.
Assessments: The next extra cost that you might incur is an assessment. Assessments are bills that the HOA gives that are more than the monthly dues cost. Examples? Water, community pool or gym repairs, a new roof. Don’t be surprised when you get a letter in the mail receiving an assessment of a few thousand dollars to cover something like a new water tank for the association. Also realize that the Homeowner’s association can foreclose on you and your house if you don’t pay it.
The Credit Bureaus: Homeowner’s associations report to the credit bureaus. This means that if you don’t pay your part of the gym equipment maintenance, it will go onto your credit report in the derogatory section. Do you really want a treadmill destroying your cash flow and credit score? Didn’t think so.
Rules When You Want to Sell: If you decide to sell your condo, the HOA has strict rules, and you’ve got to adhere to them. Did you know that that HOA actually has the right to refuse you to sell your house? The association is actually controlled by the developer of it. The HOA actually can approve or deny a buyer. By the way, not based on credit report. They can approve or deny simply by discrimination. Maybe they don’t want a certain race living in the area. You’re probably thinking, “that’s illegal!” Sure, it may be. But good luck trying to fight the homeowner’s association. They likely have far more money than you, and time. It’s completely pointless to bother. They will always find a loophole.
Contractor Approval: The homeowner’s association actually has rules regarding what materials you are allowed to use in renovations. They can forbid the use of certain materials. For example, if you discover mold on the ceiling and need to hire a contractor, the HOA may actually have to approve that contractor. You may not even be able to hire the person you want. What happens when the contractor they want you to use does a crappy job? Well, the short answer is, you don’t have many options. While fixing mold on the ceiling may seem like a simple process to you, you’re in for a real treat if you’re dealing with an HOA. You might have to give them a deposit, extra insurance, and possibly even some sort of absurd orientation requirement.
What’s more? Say you have to install an entirely new floor into the condo. Guess what? If the HOA doesn’t approve the specific thickness of the floor, you’re going to have to re-do it. Even if you have to take the whole thing apart after you’ve done it, they will not care.
They even have rules regarding how many people are allowed to move in or out each day, depending on the building and the association running it. Oh, and also be prepared for any renovations you do to run way over the time limit, as they’ve got even more rules regarding the times that you are allowed to perform them. They’ll also control which type of renovation can be performed and on what day. For instance, no drilling allowed on weekends. Sound fun yet?
You’ll find that there are so many rules your head will spin
Many of the rules are completely absurd. The HOA can make it very difficult to sell a property, and at times it seems that they are doing the best to make it impossible for you by making it seem undesirable to new buyers. They’ll probably have a nice little rule preventing you from ever turning it into a vacation rental as well. Usually, the ones creating the rules are the actual developer.
They like to make it hard to resell, because they’ve still got empty units, and they want to fill them. Basically, when you sell a property, they’re going to try their best to make it really difficult for you. And they’ll usually win. Many homeowner’s associations simply have nothing better to do other than stop you from selling your unit. These are the people that have all the time in the world to spend sitting in all of the board meetings to create new laws, and think up frivolous things that they can do with the association. This creates more activities for them to do, rather than watch television.
Lending Problems: You’re also going to encounter lending issues when trying to resell a condominium. Sometimes, if the HOA is having financial problems or simply not meeting their ratios, the traditional lenders won’t approve the loan to the person who wants to buy the property. This means, you’ll have to go with a non-conventional mortgage; in turn, the amount of the loan goes up. Usually significantly enough to where the buyer will walk. Many times, you’ll run into a ratio-of-owner to non-owner occupant. Homeowners like to have more owners than renters. Therefore, they can decide whether or not you can rent your property (and for how long).
Insurance: Many times, the HOA condo owner won’t be able to get the amount of insurance that he needs. This is because often, the association insurance level is not enough, so the traditional lenders simply won’t pay for extra insurance. You either will have to pay cash, or find a non-conventional insurance lender. Which, by the way, can be a real pain, if it’s even possible at all.
Fun fact: Never buy an HOA before getting the seller and the HOA to put into concrete writing that there are no upcoming assessments. You must have this in an estoppel letter. The homeowner’s association only has to list any current assessments, not any future ones. This means that they can have a $30,000 assessment coming in tomorrow, and they don’t have to tell either party about it. Shady, yes. Legal, unfortunately so.
Hidden agendas: Be very wary if there are other units for sale by the original developer. Sometimes, the homeowner’s association will offer a deal that sounds too good to pass up, such as free HOA dues for a certain number of months or years. Why? Because they might have a development coming up right next to it. They want to get all the units filled in the current development so that they can start filling the others. Usually, they’ll try to do this quickly with specials like this before they list the new development on the Multiple Listing Service (MLS). Be vary wary of homeowner’s associations. Again, they are generally run by the original developers which are companies. This means that they are constantly building new developments.
What are the challenges of owning a townhouse?
Undesirable: Townhouses are crappy investments. They’re undesirable. Why? Because they’re in the middle; they’re not quite a condominium, and not quite a house. Most buyers either want a condo or a single-family house. If, for some reason, they aren’t able to purchase either, a condo is a nice middle-ground. It’s also a recipe for disaster. There are, actually, many buyers that prefer to buy a townhouse, and only search specifically for one when househunting. However, for the most part, buyers want to purchase an actual condo or house. You’re going to find a lot more people trying to get out of their townhouse rather than trying to buy one.
You should know that most townhouses are built by developers that purchase land, but wouldn’t make enough money by building actual homes on that land. They then decide to build a bunch of townhouses, and offer you the world to make it seem desirable so that you purchase.
Many people fall into the trap of purchasing it because its shiny and brand new. They can have nicer appliances, and things of that nature, than they would in a single family home…while spending less money on the place. What people don’t realize when they purchase, is all the caveats.
Some townhouses have crazy rules that you wouldn’t even know about. Just the other day, the HOA at this specific development decided to re-seal the parking lots in the whole association. They decided to go building by building. What they didn’t do was tell anyone the date they planned on doing it. Instead, any cars that were in the parking lot were towed. Without any notice. Never did anybody get a letter or notice stating what time and day that they needed to move their cars.
What are the challenges of single-family houses?
Single family homes in associations can also run into many different problems as well. HOAs have the ability to decide if your house looks good on the exterior or not. They can forbid you to do certain things on the exterior of your house. They can approve or deny roofing materials, the paint color, the gate, and even what plants you are allowed or not allowed to have in your yard. If you find a potential buyer, they’ll hopefully be smart, and read the HOA rules and regulations. When they do, there are likely going to be a lot of things in there that make them stray from wanting to buy your unit.
Basically, purchasing a property in a homeowner’s association is a pretty risky and dangerous move. It is crucial to have a margin of safety when it comes to doing HOA deals, because of the expenses and potential delays. Always read every rule and regulation of the HOA you are looking at. More importantly, be aware that they can add to these rules at any time. Because of the uncertainty that comes with buying these properties, you can really damage your investing career.
When possible (and it almost always is), avoid purchasing a property that has a Homeowner’s Association. Many before you (and were already very successful real estate investors) have failed. Even the ones that didn’t quite fail will tell you to avoid them like the plague. Simply because they aren’t worth it. They seem like a great deal in the beginning, but they aren’t. Again, the deal might be great right now, but the Homeowners Association is always planning something new…something that will come right out of your pocket to build or fix. As mentioned above, the people on the association have plenty of time on their hands and need a way to kill it. You’ll have no control over what they decide to do, or the rules that they’ll impose on the association.