Real estate investing, like many investments, seem to have a lot of twists and turns. For the last year or more, I’ve been appreciating (in both senses of the word) the gains that our real estate “empire” have made. (For new readers, we invested in real estate reluctantly.)
Recently, we got notice that two of the condo properties we own in the same complex need major renovations. The whole complex needs renovations. This means having to pay for special assessments.
While I wrote “Surprise!” in the title, we had an idea that this was coming eventually. The property hasn’t renovated for more than 30 years. In the last few years they’ve raised the condo fees significantly (I think nearly 100%), but it simply was too little, too late.
(I can’t understand why places don’t plan ahead for these renovations. It’s as if they consult NFL owners about how much revenue they set aside for creating a new stadium every 20-25 years. The answer always seems to be, “Not the vast amount of money necessary.”)
The surprise is around $20,000… each. The Zillow estimates for the condos are around $115,000, which I believe to fairly accurate. Essentially, more than 1/6th of property value disappeared overnight thanks to a
pen stroke keyboard press.
Fortunately the property isn’t looking for people to cut a check on the spot. They were able to secure financing. Unfortunately, that financing seems like a parade of stinky skunks (a reference from Nickelodeon’s Blaze).
Specifically, the financing is a 20-year loan at 5.20% for 11.5 years. After that “it will adjust for the remainder of the term.” I did a quick search and 30-year fixed rates are around 4.30%… and 15-year fixed is around 3.25%. In fairness, these are the top rates for people with top credit. The bank has to balance their offering for the others.
However, they do have existing owners with a history of paying their condo fees every month. They are spreading this rate amongst many units, so I would think that they could use that to challenge the rates of a potential new home owner without the same “skin in the game.”
The 5.2% rate is bad enough, but the kicker is the adjustment in 11.5 years for the last 8.5 years. How will it adjust? Is it the prime rate plus 1%? Is it prime rate plus 6%? From the letter we got, there’s no answer.
And while I’m throwing the condo association under the bus, I’ll pause for a minute to acknowledge that they had a difficult job to do in explaining to unit owners why this is necessary.
Now I will resume throwing the condo association under the bus. In fact, I might hire a second bus for them. (Note: This is metaphorical. Never throw anything or anyone under a bus. Please consult your lawyer with regard to your actions involving buses. (Note: I feel that disclaimers like this are necessary in this day and age. (Note: (cons (car ‘(I spent too much of my life in emacs)) (cdr ‘(FML am so old)))) Note: The first person who leaves a comment explaining and deciphering the last note will receive $20 via Paypal. Please leave a valid email to claim giveaway.))))
I think there are a significant number of owners who were under the impression that they paid their condo fees to cover all this stuff. It’s a fair assumption for them to make. I view it as an admission that the condo association planned poorly.
Unfortunately for condo owners like me, we have to deal with the potentially exploding interest rate in 11.5 years. What’s that going to be? I’d estimate it around 8%. In 2004, I was very happy to get a 30-year fixed rate under 5% and that was historically great time. The average rate was probably 6% and times might be tougher in 11+ years. It seems to be around 100-200 basis points from what fixed mortgages are. Your estimate of interest rates is as good as mine… or maybe a monkey throwing darts. Overall, my thought is, “We’ve hit rock bottom… only one way to go, ‘Up’.”
I wonder if condo owners understand that. It feels like 2005 all over again. You can sign on for a simple payment, but it seems that it can (and will) explode. I find it unlikely that the rate in 11 years will adjust to something lower.
This brings me to yet another complaint against the association. (Who has another bus?) The Fed has raised interest rates a good amount over the last year. Lending rates have gone up. It wasn’t a surprise. The condo association has foreshadowed this by raising condo fees over the last few years. Could they have done an intelligent thing and locked in a lower rate? This massive, once in 30-year, renovation could have happened in 2015.
In the words of the greatest football coach of all time, “it is what it is.” We can play the the blame game all day, but it isn’t going to change anything.
My opinion on financing this is a topic for another day… maybe next week.
I have to give credit to one owner who is looking to sell. I got a recent Zillow alert for a property in the complex at around $150,000. I haven’t too many priced above $125,000 in the last five years. The unit was nothing special. Most of the pictures were of the utilitarian rug. This person has to disclose the assessment, so it’s like he’s asking for $170,000.
As my mother has said in the past, “Good luck to you and the Red Sox.” Hmmm, maybe that condo owner has a chance?
You’ve done a good job of pointing out some of the pitfalls of owning rental property, but this is a new one. I too would think the monthly fees would cover upgrades, but then, our HOA does special assessments when it’s time for things like a swimming pool redo. But it’s seldom more than an extra $150 for the year, not an extra $20k.
Have you looked into how the complex is managed regarding the funds?
Lazy Man says
The HOA had been very low in my opinion for a long time. I think the problem is more about them not charging enough rather than inefficient spending. If the HOAs were an extra $150 a month over the last ten years they would be in good position to renovate.
The problem I see with condo fees, is they want to be low to start with and never work with trying to fix things until they are really broken. I lived in a condo in St. Louis and it was 40 years old. The month after I left (ie. sold), they annouced a $20k assessment per condo for new siding, new roofs, and new decks. The place was purchased for $90k. Glad I missed out on that one :).
* I spent too much of my life in emacs
* FML am so old
Note: The first person who leaves a comment explaining and deciphering the last note will receive $20 via Paypal. Please leave a valid email to claim giveaway.
Lazy Man says
Good timing Big-D. The numbers don’t seem too much different from the assessment I mentioned in the article.
The decoded message that I’m looking for is a little different. It’s hidden in the code. And maybe I got the parentheses wrong in the previous notes, but I looked to make sure it evaluated correctly.
I have never used emacs, I am a VI guy :) I just downloaded a PDF of commands an tried to work it out :) When I get home, I will spin up a VM and install emacs, and see what it says :)
Lazy Man says
No emacs knowledge necessary :-). I think it might be one things that you either recognize or you don’t. The fact that you know emacs/vi is a good sign that you could recognize it. I’m guessing that more than 95% of readers have no clue what emacs is.
(I moved to vi at my first job after college.)
This might be long, but it’s a warning for those buying in HOA/Condo Association neighborhoods.
I owned a townhouse back in the ’90s in what is considered an upscale area in Virginia. A historic town with a large amount of tourism and tourism related businesses plus a large brewery. If you know the area you’ll know where I’m speaking of. The neighborhood was built by a developer who had done several neighborhoods and, subsequently, went bankrupt. The area we bought into was one of the last they did and to save money they went cheap on the roofing. Before we bought the entire 60 unit development required new roofing at a cost of (if memory serves) around $250,000 dollars. The monthly fee was raised to cover the cost and to start a savings account to cover future repairs. As a result the monthly assessment cost was around 30% of the cost of the mortgage! We were first time buyers and didn’t realize that, at that fee level we were paying more than the “upscale neighborhoods” which included pools, tennis courts and PGA Rated golf courses! As we were moving the HOA (which was mostly comprised of absentee owners) were in the process of trying to raise the fees AGAIN to build a drainage pond on the property due to ONE flooding event. Advice from one who has been there: If you plan to live in a condo or townhouse do your due diligence. Look into the fees in your neighborhood and compare them to other areas. And check the number of owner/occupants compared to owner/landlords. You’ll be glad you did.
Patrick Little says
I think your “cdr” comment is a reference to MIT Lisp. In my college class in 2003, we used that atrocious parentheses based language to do some linked list and tree structures. “car” and “cdr” referred to the left and right children of any node. They could also be recursively extended to traverse many levels of the tree, e.g. caaaaar, cddddr, or caaadddadadr [it’s a big tree ;) ].
Patrick Little says
I guess my memory isn’t as good as I thought, but hey it’s been over ten years since I used that language.
“cons” adds a first element to a list, “car” returns the first element, and “cdr” returns the lest without the first element.
Anyway – If my skills serve right, the decoded message after execution is “I AM SO OLD”
Patrick Little says
And yes, we were instructed to use emacs (well Xemacs) to do the exercises in that class.
Lazy Man says
Patrick Little wins.
I was writing up part and I found myself nesting parens. It brought up some bad Lisp memories (does anyone have good ones?) I was going to try to do the caddr stuff, but it took me so long to get this to evaluate. I think emacs was written in Lisp, so that was a subtle hint.
Is the email address your Paypal address?
Patrick Little says
Yep, that’s my email for my Paypal account.
My best memory of Lisp is the discussion with my lecturer concerning “why Lisp?”. Chris Dovolis said “This class is about the methods and the algorithms. If we taught it in C, then you’d think in C. We chose Lisp because NO ONE can think in open and close parentheses!”
Brian - Rental Mindset says
Thank you for inspiring me to never invest in condos. I already knew that I would manage the money / repairs better than an inefficient HOA, but this really is bad. $20k a unit isn’t even close. Makes you wonder where all the money they collected went?
I don’t want any apartment building syndication either. I like being in control of my simple single family homes! Of course these expenses come up, but I believe I can handle it much better…
Lazy Man says
I specifically invested in condos to ease the maintenance aspect. I think the 20K is a worst case scenario, but we’ve been coasting with cheap HOAs for 10 years (it went to things like snow removal and such).
These properties also had a price-rent ratio of 6.5 (excluding the HOA which is obviously important). That’s pretty low, right? So while I obviously expressed a lot of frustration at the association in this article, now that I take a step back, it isn’t terrible.
It’s interesting watching some of the home finder shows and listen to the HOA fees because some are crazy.