One of the first directives I learned through Phill Grove’s REvolution online learning product was to avoid condominiums at all cost. This was followed by so many others warning people away from condominiums as a buy-rehab-sell business. Being someone that likes to find out for myself, I took their comments under advice and did my own research. This is what I’ve found…
Condominiums CAN be Profitable
Yes they can. I remember stumbling across my first foreclosed condo in Bakersfield. I happily purchased that property for $45,000, put in about $10,000 in upgrades and then sold it for $95,000. Not a bad little profit there for me, and I was thankful that I wasn’t plagued with investor competition, since so many investors don’t like condos.
Just like I have said in my field trips – if you can get a stable property for 40% of After Repair Costs (ARV), you can pretty much handle surprises that come up. And YES…there ARE surprises.
And the Risks?
There are PLENTY of risks. So many people just say “avoid condos” and don’t really say why. However, as a savvy real estate investor and business person, you learn how to assess risks in business and know when the risks are insurmountable and when they are minor, and how the profit potential compares with the risk.
- One thing you have NO control over is the Condominium Association.
- FHA has very strict rules on loaning to Condominiums based on their financial criteria
- Special Assessments can arise any time (SURPRISE!)
- Current litigation with the Association COULD be a deal killer when you resell.
- Oh, and they have to like you. (Often there is an approval process.)
- Each state has their own laws about collecting previous owner’s past due assessments. YES, you could be responsible for the arrears. Another surprise.
- And there are even more risks that I’m still not aware of – so don’t take this as a learning lesson in Condo investing, take it as I usually present myself, I share as I learn.
#2. The FHA has Very Strict Rules on Loaning to Condominiums based on their Financial Health
It’s been some time since my first blog post about condominiums and this whole thread may take some time as I am still learning, and still adding to the list.
When I bought my first condo (not the one I bought on a tax deed in Florida, but one in Bakersfield, CA), I was scared to death of the financial viability of the association. There were 2 things that really scared me, first the fact that it was a 55+ community. It’s really amazing how little fear one has investing in those if you’re over 55 yourself. I mean, there are a lot of people that are over 55 and are ready to downsize and not have to deal with kids leaving their skateboards on your driveway. But the BIG concern I had was that the condo association was approved for FHA lending. Of course my first purchase was a few years ago and FHA was about the only one approving mortgages, so maybe I should have been concerned – however I ended up selling the condominium unit to a cash buyer. All that worry for nothing.
I’ve never really worried about the FHA approved status since then because I realized I could invest in properties that cost me the same, involved less rehab expenses, and provided a higher standard of living compared to the working class neighborhoods I had invested in. So what does that mean? It means that the people that are buying these condos are not of the working class variety. They are educated professionals, for the most part, and at the same price point. So what? It means they have their credit and/or down payment requirements in order and can easily follow through with a conventional loan.
I have since bought and sold several condo units, and NOT ONE was an FHA buyer. Not one.
Note that each area and each price points are different. If you think you want to buy a condo for the purpose of selling it retail to an FHA buyer, you can check the FHA approval status HERE.
This is the second part of a series of blog posts on Condominium Investments. I appreciate any comments or experiences you’ve had. Please comment below.