A Love Letter to Dodged Bullets
When an investor colleague sent me a pre-foreclosure opportunity recently, it looked promising on paper. The homeowner was facing multiple missed payments, the interior needed manageable repairs, and I specialize in pre-foreclosures and short sales. What could go wrong?
Everything, as it turned out.
The Colorado Condo Conundrum
In recent years, several brokerages around Colorado have been talking up condos as great investments. Having moved here from Cincinnati, where I was programmed to steer clear of condos for multiple reasons—HOA complications, limited appreciation potential, and various ownership restrictions—I approach condo investments with extra caution.
That caution proved invaluable on this deal.
The Warning Signs Started Outside
While walking through the interior and documenting needed repairs, everything appeared manageable. The real problems revealed themselves when I stepped outside and noticed white tape dotting the siding. Taking a step back, I realized the entire side of the building was covered in these patches—clearly hail damage repairs.
That prompted me to examine the community as a whole. The parking lot was in desperate need of repair. If the HOA wasn’t maintaining the obvious cosmetic issues, what else were they neglecting?
The Warrantability Problem
This observation led me to investigate one of the biggest issues facing condo investments today: warrantability. To be warrantable for conventional financing, a condominium’s homeowner’s association must meet specific requirements:
- At least 10% of annual dues must be maintained in reserve funds for building maintenance and emergencies
- No more than 15% of units can be 60+ days past due on assessments
- The project must be registered with HUD and maintain current documentation
I immediately checked the HUD website to verify the community’s registration status. The results were telling: this condo community was nowhere to be found in the database.
The Information Blackout
I asked the homeowner to reach out to the HOA for financial statements and to speak with board members about the community’s repair history. Two weeks later, I’ve heard nothing but crickets.
This silence spoke volumes about the HOA’s organization and transparency—neither of which boded well for the community’s financial health or my potential investment.
Why This Matters for Investors
Here’s the bigger picture: while I could have easily structured a short sale on this property, how would I exit it? With warrantability issues, future buyers would face financing challenges. Traditional lenders won’t finance non-warrantable condos, severely limiting the buyer pool to cash purchasers only.
Even if I held the property as a rental, the HOA’s apparent neglect suggested I’d be buying into a ticking time bomb. Deferred maintenance, inadequate reserves, and poor management create a perfect storm for special assessments and declining property values.
Due Diligence Essentials for Condo Investments
Based on this experience, here’s my essential due diligence checklist for any condo investment:
Financial Health Check:
- Verify HUD registration and current status
- Request HOA financial statements for the past three years
- Review reserve fund levels and spending history
- Check delinquency rates on assessments
Physical Assessment:
- Inspect common areas and exterior maintenance
- Look for deferred maintenance issues
- Evaluate the overall community appearance
- Document any obvious repair needs
Management Evaluation:
- Assess HOA responsiveness to information requests
- Review meeting minutes for recurring issues
- Understand the board’s long-term planning approach
- Investigate any pending litigation
When to Walk Away
As Kenny Rogers sang, “You gotta know when to hold ’em, know when to fold ’em, know when to walk away.” Sometimes the best investment decision is the one you don’t make.
Red flags that should trigger an immediate exit:
- HOA financial information unavailable or incomplete
- Evidence of deferred maintenance on common areas
- Non-warrantable status with no clear path to compliance
- Unresponsive or poorly managed HOA
The Bottom Line
While condos can be viable investments under the right circumstances, they require significantly more due diligence than single-family properties. The combination of shared ownership, HOA dependencies, and financing complexities creates multiple failure points that can turn a “good deal” into a financial disaster.
In this case, walking away wasn’t just the right decision—it was the only smart decision. Sometimes the deals you don’t do are just as important as the ones you do.
