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Friday, November 21, 2008

Watch the Denominator

"Context, Context, Context"

I've got numerous clients, savvy investors all, who are beginning to nibble on distressed properties, including multi-family units like condo's. For those so-inclined, the new mantra is "context, context, context."

That plays out two ways.

First, multi-family units typically bear a pro rata share of their building or complex's common area charges. To take just one example, I just sold a Minnetonka townhome in a 22 unit complex that had a $300 monthly association fee.

What if suddenly one-third of those units went into foreclosure? (They didn't, and won't -- the complex is extremely well-run, is in a great location, has low turnover, etc.)

The complex would still have the same expenses, but they would be divided across a smaller base. At the very least, the foreclosure units would likely fall behind on their share of the townhouse association's dues, crimping its ability to perform things like standard maintenance, snow removal and lawn care, etc. Such is the stuff of vicious (as opposed to virtuous) cycles.

The other consideration when scouting an investment is to know what's around you. One foreclosure on a block -- or in a building -- likely isn't fatal. But a couple can signify a very dangerous trend, and more than a couple probably isn't worth the risk, especially when there are so many other choices.

Fortunately, a good realtor, using the tools provided by MLS, can advise clients accordingly. In my case, being a CPA/attorney is a good start when it comes to assessing the financial strength of any given building or development (though I'm careful to advise clients who get that far to consult someone who's licensed and has practiced within the last decade!).

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