HOA Assessment - Pay up and hold or get out? - Posted by Jennifer

Posted by Ronald * Starr(in No CA) on December 12, 2002 at 16:10:45:


This is a difficult decision, and you are the only one who can make the decision. One good thing, you now know another thing to ask when you do your due diligence on the next condo purchase.

I think that there are a couple of issues here: can you afford to carry the property while paying off the special assessment. If you just cannot afford to pay it, you probably will need to sell.

The other issue is what do you see in the future for appreciation? If you can afford to pay the assessment, but you don’t expect the property to increase in value, getting out makes sense. If you think it will increase in value, you might want to hold on to it, depending upon your projection of the amount of increase.

Now we think about the question “If I don’t keep this investment, where will I put the money?” If you don’t have a good alternative investment, that pushes the scales toward keeping this one.

You are making two mistakes, in my opinion, in your thinking. First is the capital gains tax. You bought this as an investment, thus, if you structure a resale as a 1031 tax-free exchange, you can trade into a different investment property and not have to pay a capital gains tax. Some people say to hold investment properties for over a year or over two years to prove that they are investment properties. But, given the circumstances, I’m sure that should the IRS question the quick resale, you can convince them that the exchange is ok, especially if you hold the subsequent property/properties for many years.

The other issue is the real estate broker’s commission. I would suggest that you sell the property yourself. Now, this might not be feasible for some properties, but you are describing a highly attractive property. If you sell it yourself, you can save the commission–or perhaps 1/2 of it: you reduce your price below other sales by about 1/2 of the cost of a commission to give your buyer a break and an incentive to buy your unit.

If you do decide to sell, sell it yourself and exchange into other income property and things will not be as bad as you have been envisioning.

If you do exchange into other income properties, I would recommend places with lower prices and better rent to value ratios. I think that the interior of CA will show good appreciation over the next decade or so, provided the population increase projections come true. Also, you can get a better cash flow. I suggest looking at such places as Fresno, Kings, Tulare County. Maybe Mariposa or Madera. Perhaps inland in the South, but I am not familiar enough to make recommendations that far down.

Good InvestingRon Starr

HOA Assessment - Pay up and hold or get out? - Posted by Jennifer

Posted by Jennifer on December 12, 2002 at 13:29:06:

I own a townhome in Orange County. Close to beach, award winning schools, surrounded by beautiful upscale homes. The location is A++. I bought it as an investment in January at an acceptable price and it’s rented out to a stable tennant. At the time I bought it the HOA sent a letter stating that they had to several make repairs and that the reserves are not sufficient to cover the cost. In short, the cost of repairs turned out to be twice as much as I anticipated. It’s about $20K total. They are “allowing” us to pay it out over time but it’s still a major cash flow strain. My question is should I sell now and take the hit: $20K off the asking price, plus capital gains tax, plus realtor commission; or should I try to hold out long term? The last sale of the same unit in my complex was $279K. Local comps in the area are $325 and above.