My fiance and I have made an offer with the bank for 8 foreclosed condos for $60k each and it got accepted. They were appraised at around $110k and others have sold for that 2 years ago. My fiance and his parents have experience with REI, but I’m new to it. I’ve been doing a lot of research for the past month (I love this site! Great information) and was excited about this deal. We want to live in one of the condos and really like them. So we were in the process of getting financed and we found a local bank that said they could finance the 8 condos together at 6.5% for 20 years. We wanted to shop around for a better rate and found out that Fannie Mae and Freddie Mac have tons of restrictions on buyers purchasing condos. http://www.thinkglink.com/article/2010/01/11/condo-financing-faces-strict-rules-from-fannie-mae-freddie-mac-fha :banghead
Our plan was to buy and hold these properties, renting them out. I don’t think that they would sell quickly, but we would like to owner finance them one by one. The entire condo association consists of 24 condos. If we bought 8 of them, then at least 30% of them would not be owner-occupied. Would that affect other condo owners selling theirs due to the new Fannie Mae rules (which states only 10% of condos can be non-owner occupied)? We really like these condos, but now we’re worried about getting stuck with them in case they don’t rent. It would be more difficult for potential buyers to get financed due to these new rules. I’m not sure if the Fannie Mae rules would affect us much since we want to rent them out and owner finance them. Can you guys give us some advice? What would you do if you were in our shoes?
:help
Purchase price: $480k for 8 units
Downpayment: 20% = $96000
Approximate Touch-up Costs = ~$8000 (not factored in below and overestimating)
Closing costs ~$8000? (not factored in below; just guessing)
Mortgage Payment: $2863/mo for 20 yrs at 6.5%
HOA fees for 8 units: $640/mo
Taxes for 8 units: $430/mo
Insurance estimate: $267/mo
Total monthly cost: $4200/mo
Potential rent per unit: $795/mo
Worst case rent per unit: $650/mo
We can easily cover the monthly cost of $4200 with our salaries and still have $3k to live off of monthly (with no other debts, just utilities and such), so we should be ok if they don’t rent at all. Do you guys think this is a good deal?
Sorry for the long post! Thanks in advance for any help
Buying that many units in a complex will cause you problems at any point you try to exit, it will cause problems to you and any other owner in the complex or any future buyers / sellers!
I am surprised that there are not restrictions in the CC&R’s discussing and limiting non-owner occupied units. I like condo’s and think they can make good investments but you should diversify your investments into 8 different complexes if you want 8 units, and only purchase in complexes where the CC&R’s limit non-owner occupied units and the complex has 91% or more after your purchase still owner occupied! And limits the total number of non owner occupied units to not more than 10%!
These are some of the things you need to educate yourself to knowing what you can and can’t do any what your state / county allows for limitations / allowances on non owner occupied condo’s!
It is also advisable to seek approval from the HOA in writing, approving your unit for renting as non owner occupied!
I tend to agree with Gold River’s assessment… Maybe it’s better to put some of the eggs in another basket? Sorry, I can’t speak about the investment part itself, as I’m still a novice
Thanks for your replies. I had never heard of these restrictions from Fannie Mae so I was really surprised when I found out. I read the entire HOA restrictions and it didn’t mention anything about having to be owner occupied. The problem with buying in different complexes is that there aren’t many around here. We’ve searched all over town and this is the only decent investment. We want to start off with a multifamily home and saw every single property here. These condos require hardly any work and they were built a couple of years ago, unlike everything else. We fell in love with it and were really excited to move! Our plan was to rent them out for a couple of years and then start collecting other bargain properties and owner-financing our condos.
Do you see any way around these restrictions? I wouldn’t like to limit other owners in the complex from selling their properties because of us. We asked our real estate agent who said that one way around it is to buy 2 under my name, 2 under my fiances name, 2 under an LLC that I form, and 2 under an LLC that he forms. It seems to me that it wouldn’t help with the owner occupancy restriction, though.
I don’t want to get flamed by condo investors, i know they can make good investments,but have you considered single family or 2-3-4 plexes,you have very little control of the condos, and lots of restrictions,
Here’s another idea if you can’t buy the condos due to the difficulty of resale…buy an apartment building and move in there.
I had friends who owned an 8-unit apartment building in LaJolla, California, a really gorgeous area. Except the building was on the outskirts, as you entered town, and it was very standard with the 4 apartments upstairs on the open balcony, and 4 downstairs. Just like a budget motel.
They told the other tenants that they were the “managers”. That way they saw who were the good tenants and constantly upscaled the clientele. The LaJolla zip code assured ever-increasing rents as my friends had lush landscaping installed to cover those ugly exterior balconies. They created courtyards in the parking area. It became a sought-after complex.
You can do that plan over and over. Good luck and let us know how it goes.
I suspect that appraisal is far from conservative unless I’m missing something.
If similar condos sold for around 110K two years ago, then I’d venture to guess your appraisal should be less than 110 now.
If your appraise used comps from two years ago, the numbers are worthless.
Appriasals from 2 years ago atre worthless on condo’s. There is no financing available for condo’s today and there is no way to project financing available in the next 5 years. So no matter how great a deal you get today, who are you going to sell it to.
Thank you for sharing this REIEngr. I really appreciate it.
I do have a couple of things to share and I hope it is helpful.
First, did the real estate agent you are working with doing their own comparable sales analysis for you to show you what they think you could sell them for right now? You will want to them to do a full analysis on them as if you were going to have them list them for sale for you and have them sell within 60 days (the 60 days part is important). If your agent does not specialize in selling those condos, you may want to call an agent or two that sells a lot of condos in that area and have them come to give you a listing presentation on them and maybe use them to list the properties for sale.
Something else that I am not sure if you considered since you’ve been talking a lot about renting, but if you decide to sell each unit individually with owner financing from the beginning they then become Owner Occupied. I would talk to my attorney about it to find out some of the downsides (like how to deal with the property if the borrowers stop paying), but it may allow you to change the numbers and characteristics of the entire deal.
For example, if they are worth $110,00 (and owner financing should allow you to get top of the market), you might get 10% down ($11,000) up front and then finance the balance to the buyer at a reasonable interest rate.
If you loaned $99,000 (that’s $110,000 - $11,000 down payment) to the buyer at 7.5% (one percentage point higher than your proposed loan), their payment to you would be $692.69 per month for 360 months.
They would also then be responsible for taxes, insurance and the HOA on their own. This would significantly improve your cash flow on the properties for the first 20 years and after the first 20 years, you’d still get $692.69 per month for 10 more years since it is a 360 month term for them (unless they pay you off early).
I hope that helps and please let me know if there is anything else I can do to be of service.
