Condos As Investment Property

In a low-inventory market, investors tend to evaluate all options. Recently, I have been working and have been in contact with buyers and sellers who have turned to condos as potential investment.

Condos are appealing for a variety of reasons, ranging from low maintenance, to location, to community, to value, and to investment potential.

These units are regulated by bylaws. Some condos allow tenants, some only co-owner occupants, and others allow both, in various proportions. Hence, it is imperative to investigate all bylaws and amendments to ascertain that one’s investment plan is permissible under current rules. It is not uncommon to discover minimum homeowner occupancy requirements prior to renting, or restrictions on pets, rental unit caps, fees, and board approval. Sometimes rules are changed and if limiting amendments are approved while tenants are already leasing the units, co-owners are typically given a deadline or grace period to remedy the situation. With the unintended consequence that in some cases this could imply divesting or selling.

Case in point. Last week I showed a condo purchased one year prior as investment property by the current co-owner. Bylaws were amended afterwards, transforming that condo association in an owner-occupant only community. Owner had no other option but to sell – now to a restricted pool of buyers, one that no longer included investors.

Which brings me to a second aspect of the investment. While collecting rent certainly represents an immediate benefit, part of the financial appeal is in the real estate itself. Values grow along with the market and depreciation provides immediate fiscal advantages. Some investors see the ownership of rental properties as a retirement fund. Rental income offsets mortgage and maintenance expenses – in the very least; until the right conditions to cash in on the equity materialize. One word of caution should be spent on membership dues. In addition to monthly fees, condo associations may have plans that require the levy of special assessments. Depending on the nature and the scope of these improvements or repairs, additional fees could be small or otherwise significant; and when a unit is sold, assessments could be due in full at close, thus affecting one’s investment plan when sellers are reluctant to absorb them.

Condos in certain communities may be cash machines. When tenants abound and maintenance is low, fewer units might be on the market, sometimes giving FSBO and unlisted units an edge. And if a unit does not sell at or above a certain price, the seller will continue to rent and enjoy the cash flow.

Condos are also about community, more so than just conforming to a dry set of rules and regulations. One of the situations I encountered this month reflects the spirit of a community slowly moving away from rental units.

Here is the story.

At the beginning of July I was contacted by clients to help secure a unit in a condominium. Although a few units had become available and had sold there in the previous two months, only one was currently on the market and listed as FSBO. I approached the seller, and as part of our conversation I asked for copies of the bylaws, which I promptly obtained. Scrupulously, I contacted the association management, and requested a copy of the bylaws as well. Based on the available information, I advised my clients on the possible offer to submit, which was accepted by seller after short negotiations.

During the inspection and investigation period we discovered that the bylaws had been recently amended, but none of the amendments disclosed or shared with us. In order to investigate further, all parties agreed to extend inspection period and closing date.

The general sense that was gathered by our following contacts with the Board and the management was that this community was trying to move away from rentals in favor of co-owner occupancy. Bylaws did not prevent rentals, however one of the amendments specifically placed restrictions. Owners were required to occupy the unit for at least one year prior to renting. Furthermore, I was told that rental units were capped at a percentage of the total, that an application to rent had to be filed along with a fee, and that a spot could not be reserved ahead of time.

My clients felt the restrictions contained in one of the amendments and the rental rules were in conflict with their needs. Hence, we pursued further a conversation with the Board and the management in the hope of being granted an exception – for example in light of the incomplete information we were given. Nevertheless, our requests were all denied, including the possibility of seller placing a tenant in the unit before conveying the property to my clients. In the end this deal had no more margins for negotiations, and the agreement was terminated.

My clients’ offer was in cash and generous. Per my research, historically it had the potential to become the highest paid price for similar units within the association. In real estate, a general tenet among agents is that the first offer is almost always the best offer (as this Zillow article explains.) Ours was the first offer on this condo. Shortly after these events, another homogenous condo was listed on the MLS, priced below the one we were transacting. Given these facts, my personal opinion is that in this case, due to the restrictions imposed by one amendment, the seller probably lost an excellent opportunity to close quickly and sell well.

Communities change, boards change, bylaws are amended. Condos make excellent rental options, however anyone planning such investment should maintain a continued conversation with seller, Board, and management before, during, and after the purchase in order to maximize profit and minimize risks.

Happy condos everyone!

GL

Giuseppe Lupis REALTOR®