Beware of Investing in Condos, Townhomes & Single Family Houses in Associations

beware of investing in condos town homes or even single family homes in an association hopefully you're watching this video before buying one of those properties but even if you've already purchased one you're probably beginning to already experience some of the pitfalls hi I'm Phil psky with freedom mentor.com arguably one of the most experienced Real Estate Investors alive with over 2,000 deals under my belt I am a mentor and Coach to many of the most successful Real Estate Investors all across North America bestselling author have two books the first how to be a real estate investor and the second one is real estate investing gone bad and in fact in this book I actually talk about a deal that went bad that involved a condo this video I'll go into much greater detail uh this is the number one YouTube channel for real estate investing worldwide and part of the reason for that is because I share the signal what I call the truth and not all the noise that you see out there cuz there's a lot of garbage out there you know when you're watching my videos You Are watching the pure truth of what really goes on in this business beware of condo's town homes and single family homes and associations let's start with condos condos they might make sense for a developer who is trying to build more units per uh section or per area but for real estate investors buying individual condos it can be a massive problem there are all kinds of ways to go wrong let's get started with the extra costs so these would be costs above and beyond if you bought a normal single family home uh the first is going to be the monthly HOA dues or the monthly dues I call them HOAs homeowners associations or associations these monthly dues um you're going to know about it when you buy the property how much they are but this can really cut into your cash flow and it's also important to that they're always going to go up your monthly dues will never go down and in fact what some of these associations will do is they will in order to increase dues without making people upset they will promise things like they're going to rebuild this or they're going to fix that and then they get the extra dues increased and then they don't change anything I had one example of a property I had where the uh HOA dues were $75 a month which was really good it was actually a town home not a condo and uh that made it very uh appealing to buyers because it was so much less expensive than everybody else out there and uh they pushed to have it bumped up to $150 a month which was a huge jump uh but they got it passed because they were going they promised to put a huge fence a big wall around the property that never got built so monthly dues it's going to go up you don't know when but just expect it to it's going to cut into your cash flow the next thing and perhaps the most scary of it all is what's called an assessment or assessments what these are are above and beyond the monthly dues even even though the monthly dues are supposed to not only cover all the costs but also kind of build a little bit of a savings account the assessment pays for things like new roofs um I just got an assessment on one of my properties for $4,500 and it was to hook into the sewer system um as opposed to what currently was on which was on a septic so uh every single unit owner got to pay $4500 now what happens if you don't pay these bills oh I'll tell you what they do they foreclose that's right associations have incredible levels of power they can foreclose on you if you are a couple of months past due on your monthly or if you don't pay your assessment and another thing that they're doing these days is the credit bureaus so they're actually reporting to credit bureaus I just read about this with several different Association systems this is serious you are paying for whether it be the lawn care or the pool maintenance and if you don't pay it's as powerful as not paying your property taxes or not paying your mortgage it's serious okay so the extra cost can completely demolish any cash flow but we're just getting started so let's say you've bought this condo and through assessments and through monthly dues you're making no money now you're thinking I just want to get rid of this thing oh guess what's waiting for you rules rules and more rules I'll give you some examples of some rules first WR of refusal I had a great deal one time and the uh the deal was so good that the first writer refusal the developer took the deal ouch meaning the uh the association which was controlled by the developer the association had the first riter refusal to buy any property before a buyer bought it ouch okay um the next uh so there's that first R of refusal another one that I dealt with one time was that they had to approve the buyer and if the buyer was an investor or was not what they wanted they could just tell a buyer to hit the road now they couldn't uh break any of those rules such as race religion those kind of things but they find a way to stay within the rules and still uh discard buyers so uh they could they could discard buyers another one if you're trying to get rid of your property you may have to deal with are some of the rules related to materials like I had this condo one time where um the person I had bought it from he had a water leak and so some of the the flooring was messed up it was nice wood flooring and anyways he he sent a contractor in there to fix it well they had to approve the contractor and the way that the contractor gets approved was that a contractor had to go through a one-month orientation $2,000 deposit increased insurance it was Bonkers anyways the person this previous seller had hired was not approved and so they slapped this um assessment against him and basically had to um this was part of why I got the deal but I had to rip up all of the old flooring the brand new flooring he put in because it had the wrong underlay it because they wanted it to be a/4 inch thicker uh and again as a condo if you're you know on the upper level and you have uh the wrong underlay and it can make a lot of noise for the person below you so they can dictate what kind of materials you use can dictate what kind of contractors you use uh this particular uh condo I was I was referencing they also had a rule that only one person can move out per day 500 units in this high-rise condo and there's there's several elevators but uh one elevator had to be used strictly by the moving company to get everything moved back and forth and so you had to get on their schedule which in my case the deal it took three more extra weeks to get on the schedule to move out ouch and so these rules are absolutely Bonkers some of the time and they make it very difficult for you to sell a property and or they make it very um undesirable for a new buyer another example would be if you want to turn into a vacation rental they may have a rule that you can't do that so these associations have rules rules and more rules that are just absolutely out of this world ridiculous and typically the people who are creating the rules are number one the original developer they're going to set rules that make their their situation wonderful like that a lot of times developers make it very difficult to do a resell because if they still have new units in the in the development they're going to make your life miserable if you're trying to resell that that property CU they're busy competing against you and they're going to beat you every time but also you have these people that have absolutely no other time on their hands and so they're the ones that go to all the board meetings they become the president and then they just spend their entire life trying to create more and more bureaucracy all right so extra costs rules rules rules and then I'm going to do one more here and I'm just going to call it lending problems so the next issue you're going to deal with when you try to resell a condo has all the lending problems that can come with it number one the HOA could be broke or they could have uh financial problems or just not have the financial ratios that the conventional lenders want to see so uh maybe they're not collecting as many monthly dues as they should be that happened a lot in 2010 2012 when we had the the market collapse so if but if they don't meet their ratios uh financial ratios most of the conventional lenders won't lend on it and so you have to go non-conventional and the pricing of the loan is more uh another problem you could have from a lending perspective is just the ratio of of uh owner occupant to uh to non-owner occupant and so if you have a bunch of investors buying condos this is completely out of your control you might be paying your dues following the rules um if the ratios get out of whack then a lot of lenders won't lend on that condo because they don't like the ratio and there's more I got a friend of mine's doing a deal right now where um trying to it's it's a listing trying to sell this condo and the problem is that the insurance is not adequate the association level insurance is not adequate so none of the conventional lenders will lend on it and the association basically saying we're not going to pay more for insurance you need to go find somebody else to lend you money or pay cash so you see all these problems and we're just getting started this is just condos so great lesson here is this be very aware you need to know exactly what the rules are exactly what the costs are here's another big tip before you buy you need to have the seller put in writing and the HOA Association the president everybody get them all to put in writing that they have no idea of any assessments upcoming in the future make them put that in writing because the way the laws work is on an esole letter they have to put if there's any active assessments but not if there's any upcoming so what sometimes condo sellers will do is they'll get rid of a condo because they know that a $10,000 assessment's coming in another thing to be aware of and to really keep an eye on is this I talked about how developers are always going to get the best of you if they have units available anytime there's a unit still available by the original developer you've got to be very very careful if you try to sell that I had a deal one time where what the developer was doing was giving two full years of free HOA and the HOA dues at that time on that deal were $800 a month they were giving two years of 800 a month for free the thing was that didn't show as a concession on the MLS it didn't show anywhere it was the secret concession so what was happening was that the new built condos were beating all of the existing ones because they were basically giving what amounted a $2,000 uh concession which wasn't showing up on the MLS so when you looked at the comps you never noticed yeah I mean there are all kinds of pitfalls please make comments below if I've forgotten some because I've I've I've done so many deals involving condos and town homes and others that are in associations and these are just some of the highlights of just the condo side of things all right let's get to town homes Town Homes suck as Investments first of all they're undesirable they're undesirable because they're not really a condo and they're not really a house you know so what happens the psychology of most buyers out there is that they want that single family home with that white picket fence or if they want to live downtown or Ocean Front they want a condo but the town home is kind of in the middle and it's the worst of Both Worlds so it's undesirable now yes there are a few buyers out there that that would prefer a town home but the vast majority of buyers don't so often times you will experience where a motivated seller wants to get rid of their property and it turns out to be a town home D dun dun and as soon as you see that that's when you're just like now a lot of times town homes are developed by uh developers that can't make money by putting single family homes on the land CU they just can't make the numbers work they you know they compress a bunch more units with town homes so they get rid of the new ones because they offer all kinds of incentives and it's brand new and usually town homes are less expensive in single family homes and so if you're in a really high-priced zip code area sometimes just to get your kids into that school people may buy that brand new town home but the chickens will come home to roost cuz when they go to sell that thing nobody wants it unless the price is drastically dropped so number one it's extremely undesirable number two we still have this problem that most if not all have associations and the ones that don't have associations are usually uh their own set of problems because the people don't keep up with them when the neighbor to the uh to the right or the left is you know just letting the thing go to pot okay so associations I I got a quick story for you I had this one um rental town home I did on a rent to own and um the the rule was that you had to bring the the garbage can out to the edge of this road which probably about 100 ft away from the house to where the uh the garbage person could pick it up but you had to bring that back that same day and if it was still there in the afternoon they they would they'd find you $25 uh well the way the tenant schedule was they bring it out but then they couldn't bring it back till the next day to their work schedule so they kept getting the $25 fine and so the tenants basically saying I'm not going to pay it screw that anyways I I I I I fought him for a while and I eventually had to evict the tenants it was awful because of a garbage can not being pulled back till the next morning absolutely ridiculous so associations are not only going to C we already talked about from the condo section costs but they got the rules and also they could have those same uh lending problems as well so you have the the worst of Both Worlds with town homes and uh you know there are going to be exceptions we have made some money on Town Homes but uh by and large if you can don't do deals that are Town Homes unless you can steal the property we'll talk about more of that at the end this idea of margin of safety all right now let's talk about single family homes in an association single family homes in an association can still run into problems even though at least it's a single family home the first we need to talk about of course is the association itself these associations have all kinds of rules I did a deal not too long ago where I replaced the roof with the exact same materials that the previous roof had on there same make same color same model same everything and um I I was in a hurry and I didn't go to look at the association rules I knew there were rules related to the roof materials I just didn't look at them turned out they had changed the rules and they had changed what manufactur and what colors were approved they had done it I guess um about 3 months after I'd owned the property I wasn't keeping all that good of track of it anyways they threatened to have me remove that brand new $9,000 roof and put their own stuff on there and I had to beg and plead for Mercy thankfully they allowed me to keep it on there U but it was a close call they also can dictate not only what roofing materials you put on a property but what your house color is they can dictate all kinds of things if you want to put a garage in if you want to anything and everything you can possibly think of on the exterior of the house uh a single family home and an association can be uh restricted so you need to know that going in you need to know all the rules you need to know uh just like we talked about on the previous ones the different uh the insolvency issue and all the other things that go along with it because single family homes and associations can also be a massive problem and also again when you go to resell these properties if the association bill is too high sometimes people will buy in a different neighborhood simply because the association is cheaper or they're not like just these crazy Gusto type associations all right well that covers the reason why you have to be so aware of the dangers of whether it's condos town homes or single family homes and associations what the solution is to doing deals that are in these situations is margin of safety I have a great video on that subject it'll be up here in in the top corner here a link to that take a look at that video so you completely understand the concept of margin of safety and when you do deals and associations make sure you have a massive margin of safety because it's not just the cost it can be the delays I mean I remember this one deal with that that Roofing that took up 3 months of time because they only only met once a quarter their board did it was ridiculous so you've got to be very aware of what's going on what the rules are cuz it can completely ruin you as a real estate investor and you have now been forewarned of the dangers of investing in condos town homes or single family homes and Association if you got questions and I'm sure you do put them in the comments just below here please put other comments as well if you know other horror stories and also if you have an actual success story where the association was wonderful and the dues went down and there were no assessments and you sold it for more because of how wonderful the association was I'd love to hear that story too well I'm Phil pusi with freedom mentor.com I hope you've learned a tremendous amount from this video and please watch many of my others if you want to learn more about how you can work with me personally head to my website freedom mentor.com and check out my Apprentice program me and a small team of coaches we work directly with those that want to become a players uh Market leading Real Estate Investors and it's wisdom like this and so much more that we're able to share with them things that would take them 30 to 50 years to learn on their own all right thanks so much for watching I'll see you on the next video

Channel: Freedom Mentor

Views: 186,123

Keywords: Condo, Townhome, Single Family Home, Homeowners Association, Condo Association, Single Family Residence, House, Real Estate Investing, Phil Pustejovsky, Freedom Mentor, Real Estate Investment

Id: F62gBeB_Pd4

Length: 17min 47sec (1067 seconds)

Published: Wed Sep 07 2016