By Andrew Syrios
Nationwide, according to the National Association of Realtors, condos and co-ops have a slightly longer number of months of inventory than houses (4.5 to 4.3), and that has been slightly higher for the last few years. (“Months of inventory” denotes how many months it would take for all the currently listed properties to sell given the number of sales there were that month.)
While that discrepancy is much smaller than Kansas City, it must again be stressed that this depends on the market you are in. In a densely populated city with a large number of condos, there shouldn’t be much of a problem with liquidity. But in a city that is more spread out (like Kansas City), it can present a bit of a challenge.
The reason for this is rather simple: Most people looking to buy a home are looking to buy a house. A survey from Zillow, for example, showed that 83 percent of those surveyed preferred to buy a single-family home. Part of this is because some condos don’t allow pets, and Americans love their pets. In addition, Americans love barbecues. (Although the lack of lawn maintenance that condos provide is nice.)
The other problem with flipping condos is related to the first; the HOA (Homeowner’s Association) fee. Each condo or co-op has an HOA, and each HOA charges a monthly fee. While these HOAs do provide some services (to be discussed below), what they mean for the flipper is primarily that your holding costs will be higher.
Each month you fail to sell that condo is another month you rack up HOA fees. These may be relatively minor on a more expensive flip, but they may eat into your precious profit margins on a cheaper one. Again, I am by no means saying that flipping a condo doesn’t work. You just need to know what kind of market you are in and build in a bigger margin for higher holding costs.
Holding a Condo
Far and away, the biggest problem with holding a condo or co-op is the HOA fee. Now, HOAs do valuable things, so they are by no means useless. They will usually do all exterior maintenance and repairs, as well as pool maintenance if there is a pool.
They will almost always pay for trash removal as well. HOAs provide insurance on the exterior of the building (you will need insurance on the interior of your unit, of course). Sometimes, they provide maintenance and replacement of the HVAC and electrical systems. Sometimes they pay for water and sewer. Sometimes they pay for a doorman. It all depends on the HOA in question. But these services are usually things you could have done cheaper or don’t need in the first place.
Most of the time, I’ve found that the HOA eats up any profit margin I was hoping to have when analyzing a condo. For example, here’s a condo with a $300/month HOA and a market rent of $895 (something I’ve seen quite a bit in Kansas City):
OK, so you make $270/month, which isn’t bad. But what if you want to finance this condo? A condo with these types of numbers could go for about $100,000 in many parts of Kansas City. So, if you got a 75 percent loan at 5 percent interest with a 30-year amortization (which is very hard to get on a condo bought as an investment in the Midwest), the monthly payment would be $402.62 ($4,831.44 annually). In other words, you would be losing about $132/month or just shy of $1,600/year.
But if these numbers were for a house and you could get rid of that pesky $250/month HOA, all of a sudden you would be making $118/month. (Of course, your maintenance and recurring CapEx would go up some, so it would be more like $50-$75/month).
That being said, we’ve found condos that work, but even the ones that work are tighter on the cash flow. In Kansas City, at least, condos that make sense as investments almost always have an HOA of $200/month or less. (This is for condos whose prices range from $50,000-$150,000.)
Another thing you have to be very careful about is the bylaws. Always request a copy while doing your due diligence and review them carefully. We had one condo we almost had to back out of (or flip) because the bylaws said we couldn’t rent the unit until we had owned it for three years. Luckily, the HOA had relaxed that rule.
In one of my less brilliant moments (of which, admittedly, there have been a few), I got a condo in Overland Park under contract. We requested the HOA bylaws, but never received them, and then I just forgot about it. Once we started to try and rent the unit, though, we realized that condo owners in this complex were prohibited from renting out their units. So we decided to sell.
This wasn’t the end of the world because we had equity, right? Well, unfortunately we ran into the problem noted above, and it took a good long while to get the unit under contract. Then, the buyer had to lower their offer because of something to do with the loan they were getting (long story), and I decided to accept it because that HOA fee just kept eating away at our equity. In the end, our profit came to $2,498. Not a disaster by any means. But also not the typical real estate success story you’ll hear from whatever guru on a late night infomercial.
Regardless, though, you need to carefully read these bylaws and make sure they don’t contain anything objectionable. In some areas (particularly those expensive, dense cities that are usually the best place to buy condos and co-ops), the bylaws give the HOA a lot of power over who an owner can rent or even sell to.
Indeed, these boards can reject leases. I’ve even heard of them rejecting refinances! But there are other questions you need answered as well. Are pets allowed? What does the HOA pay for? Do you have a parking spot attached to your unit? Etc., etc., etc.