Think Before Buying a Condo - Consider Alternatives

By
Real Estate Agent with Destination Properties

Within the Ogden Valley (Eden, Huntsville and Liberty) housing market area, condominium complexes are used primarily for vacation, second home and short term rental purposes, most of this to support the local ski industry.  

HOA fees for Moose Hollow, The Cascades, Wolf Lodge, Wolf Star and Lakeside condominium complexes are generally in the $240 - $300/month range.  Condo HOA fees went up significantly over the past several years because of huge increases in water, sewer, snow removal, insurance and maintenance expenses.  Assuming $250/month HOA fees and an interest rate of 6%, consider this: That $250/month spent on HOA fees is worth $41,667 in lost purchasing and investment power.

My recommendation to all clients looking to purchase a vacation property in the Ogden Valley is to compare condos with other options that may or may not allow short term rentals (allows owners to rent a unit for less than 30 days at a time).  The ability to rent a condo on a short term basis usually sounds good at first.  However, % utilization (always use the entire year vs busy periods during the ski season), cleaning, property management fees, utilities, wear and tear, etc are all added up, many people would be better off purchasing a single family home and letting it sit idle when not used by the owners, or renting it out on a long term basis April through November every year.

Following are some numbers to consider:

1) Occupancy:  Assume occupancy rates for condos used for short term rentals of 15-20%.  Some may be higher, others lower.  Using the higher figure, this represents 73 nights/year a condo is actually rented.  

2) Gross Rental Rate:  For a two bedroom condo, assume $150/night as an overall average.  For a three bedroom unit, assume $175/night.  Keep in mind advertised rates are always negotiable.  

3) Property Management Fee:  At a minimum, plan on 30% management fee.  These can be as high as 50%.  For this example, I will use 40%.  This fee is taken right "off the top".

4) Rental income calculations (these assume a buyer paid cash for the condo, so exclude loan carrying costs):

A) Two Bedroom Condo:

- 73 nights/year x $150/night = $10,950 gross/year

- $10,950 x 60% (assumes 40% management fee) = $6570 /year before HOA Fees

- Deduct HOA Fees of $250/month x 12 = $3000 + Property Taxes = $1500 + Insurance = $300

> Net = $6570 - $3000 - $1500 - $300 = $1770/year

 

B) Three Bedroom Condo:

- 73 nights/year x $175/night = $12,775 gross/year

- $12,775 x 60% = $7665/year before HOA fees

- Deduct HOA Fees = $275/month x 12 = $3300 + Property Taxes = $2000 + Insurance = $400

- Net = $7665 - $3300 - $2000 - $400 = $1965/year

The examples above assume each condo will be rented 73 nights/year and that the owner paid cash for the unit.

My recommendation to anyone looking to purchase a condo:  explore all of your options first.  It may turn out that a single family home in a PRUD (Planned Residential Unit Development) such as Trapper's Ridge, The Fairways or Fairway Oaks may make more sense, since these units tend to generate higher rents and occupancy rates, and lower HOA fees vs condo complexes, while still allowing short term rentals.  Another option to consider: purchase a single family home in an area that does not allow short term rentals.  Outside of the PRUDs mentioned above, most single family areas within the valley do NOT allow short term rentals.  By going this route, a buyer is able to purchase much more square footage for the cost, while still allowing a home to be rented on a long term (> 30 days) basis during the off season.

Comments (5)

Robert Rauf
CMG Home Loans - Toms River, NJ

great tips John, When I qualify a buyer and end up in the lower range their knee jerk reaction is to say "condo" and I quickly have to remind them that the Assoc Fee eats into what they can afford. It can be a huge difference.  Not ot mention that you need H06 coverage for insurance now that just adds more to the monthly payment.

May 18, 2010 05:39 AM
John Allaire
Destination Properties - Eden, UT
Recreational Property Specialist

Thanks for your comments, Robert.  Condos make sense for many people, especially in our local market because many people want a condo to enjoy when they come out to Utah to ski.  I would rather have the HOA association fee discussion with clients on the front end vs later on in the process, since it saves time and avoids surprises later on.  I wish NAR would do a better job of educating consumers.  It would save everyone in our industry lots of time and energy. :o)

May 18, 2010 02:13 PM
Robert Rauf
CMG Home Loans - Toms River, NJ

John, Education certainly is the key!  I agree, Condo's are great for the right person, as long as they are aware of the fees associated with owning one.

May 19, 2010 02:42 AM
Brandon Clark
UTAH INFRARED Home and Building Inspections - Ogden, UT

Hey John,

Great information. I bought a condo in South Ogden a while back and it has ruined the chances of me ever being interested in buying another one.

I was completely aware of the $160/month HOA fees during the purchase. After the purchase I quickly learned of the yearly assesment fees that have equaled over $3200 in the last 2 years.

If something doesn't change with this HOA board VERY SOON than your assistance with finding me a new home will be much needed.

May 26, 2010 09:21 PM
John Allaire
Destination Properties - Eden, UT
Recreational Property Specialist

Hi Brandon,

Thanks for your comment.  I am sorry to hear about your experience.  There are good associations out there, but people looking to purchase a home or condo that is part of an HOA, it is always a good idea to review board and annual meeting minutes, plus financial reports as part of due diligence to see if there are any issues or future surprises that may surface in the future. Let me know if I can ever be of assistance.

May 27, 2010 06:18 AM