- Location: How does the condo building fit with existing properties in the area? Proximity to highways or public transportation can be a positive factor.
- Neighborhoods: Is the area industrial, office, retail, or residential? What is the demographic of the population surrounding the property? What is the rating and reputation of the local school district? Is the property in any special taxing districts?
- Property Amenities: Are there views, water, or proximity to fixed amenities (e.g., golf courses)? Can fixed amenities be easily permitted or constructed?
- Area Amenities: Is there a local draw or attraction (e.g., schools, parks, shopping malls, downtown areas, water, industries)?
- Other New Developments: What else is currently being developed in the area?
The second concern is HOA Information. As an investor, you need to know every word of the HOA by-laws and how they will impact you as the investor. It is best if you have the ability to take over for the Board after you purchase the building. However, if this is not possible, you need to know what the by-laws say and how that will impact your investment. For example, if you hope to rent out the condo units, having a by-law of “owner occupied” would negate your reason for buying/investing in the property.
The final issue is property information. One of the main reasons why condos are so popular with some renters or buyers is because they prefer maintenance free living and will pay for the amenities that the condo building offers. In order to be an attractive opportunity, the condo building either needs to have these amenities or be something that you could cost-effectively add to the building.
Most lenders are not always thrilled about condo loans because they are not as easy to sell if the deal goes bad. In a previous course, we learned that Land is illiquid and has little to no cash flow. Of all other real estate investments, condos would be seen on the bottom of the ladder rung in terms of a good investment. Condo investments can usually use cash for years before it generates any cash flow; especially if you expect to rehab and hold. To purchase a condo building, buyers must come up with a bigger share of cash than when buying other income properties.
There are three financing options that we will focus on in addition to traditional bank financing. The first is the Seller Carry-Back. If you can find a seller to finance a portion of the sale, this can make the deal much more attractive. This is known as seller carry-back or seller take-back. The seller might finance the majority of the condo building by requiring a 10-to-20 percent down payment, or the seller might take a second-trust loan, subordinate in priority to the first-trust loan. The key points for the investor to consider are the interest rate, amortization, personal recourse, and the term of the loan, which should be the same as any first-trust loan involved.
The second financing option is the Contract for Deed. A contract involves a small down-payment and an agreed upon number of years to pay off the contract. Once paid-in-full, the deed is signed over to the purchaser.
The third option is the Seller Joint Venture. In many cases, the seller might partner with the developer and “contribute” to the deal, as an equity investment. In these cases, the partners need to first establish a value for what the partner will contribute. This can be done either through an appraisal or through the residual analysis method. The parties will want to enter into a joint-venture agreement or (more commonly) form a limited liability company (LLC) and then enter into an operating agreement.
After the approval risks are assessed and all condo issues are resolved with the HOA, the investor seeks to either rehab and hold or rehab and flip the condo units. As we have learned previously in this course, the investor needs to calibrate the sources and uses of funds as a first step in such development.
The first concern is the source of funds. These funds can come from a variety of sources. Let’s review these sources of funds below:
- Cash from buyer: Sponsor-direct or sponsor-promoted equity
- Seller financing: Seller carry-back, which can take the following forms:
- First trust: Seller carry-back
- Second trust: Seller carry-back (subordinate to first-trust lender)
- Equity: Seller joint venture
The second concern is the use of funds. The first use of funds is the acquisition cost. The key to all condo transactions is the acquisition price, or the basis. Most profits are made at the time of acquisition. Condo building buyers need to understand that the value of the condo is driven by the cash flows that the building will ultimately produce. The second area is the rehab cost. Bringing the rehab costs in on budget and on time is vital to profit. Sufficient contingencies need to be factored in to account for any surprises.
Just like any real estate investment, it is important to do your homework and to understand the deal. This is especially true for condo investments. You need to find the right price, the right location, and determine if you will hold the investment or sell it off with each condo unit. Finding the “right” condo building, at the right price, and with the right partners will go a long way in determining the success or failure of the project.
Due diligence is extremely important for condo investments. What are the key factors to consider when potentially investing in a condominium? Discuss each of these factors and how to perform due diligence.
Are you ready?
Congratulations, you have now finished the final lesson of this course. Now we recommend you review your assignments and notes before you take the exam. If you are ready, click the button below and begin your final exam.