Is Some Austin Real Estate Worth Zero? Yes.

I previewed some real estate listings today that I wouldn’t own for free. These were condos in SE Austin priced in the $30Ks range. I’ve seen these listings online and I know the area, but curiosity finally got the best of me so I went and had a look to see just how bad a listing has to be to be priced in the $30Ks.

I don’t like condos in the first place. Yes, condos have their place in the spectrum of real estate product, but I don’t like owning or managing units with shared walls. I’m especially averse to not having control over water leaks from above or the sides. If a tenant calls and reports a leak coming from the ceiling in a single family home, I make 1 phone call to my roofer or HVAC guy, depending on the type of leak, and the problem is solved.

With a condo leak, I have to deal with the HOA and/or find out who owns the unit above and hope they make the proper and permanent fix to the problem. I don’t like that scenario because my action choices don’t have defined outcomes. I have to rely on someone else to cooperate in a competent way. There are also the issues and disputes with neighbors over parking and noise, neither of which come about with houses.

Nonetheless, how bad could it be that I would say “no thanks” even if (hypothetically) someone offered one of these condo units to me for a purchase price of zero? One word. Exposure. Exposure to risk. I don’t like certain types of risk.

Rather, I should say, I don’t like exposure to unpredictable risks associated with variables I can’t influence or control. I don’t like the sort of risk associated with owning a condo unit in a complex with obvious, visible and chronic problems with the foundations, siding, balconies, sidewalks and overall general condition. Such was what I observed at this complex. No thanks.

Upon arriving at the first unit, I noticed that the bottom of one side of the base of the stairway doesn’t even touch the ground – until you stand on the bottom step – because the sidewalk has settled and fallen away. Yikes! Also, the iron handrail to the stairs was rusted and broken off at the bottom step and just flopping when grabbed. Double Yikes! Ascending the steps revealed them to be slightly wobbly and “jellowie” (for lack of a better term). They had the wavey sort of shimmer you feel when walking up steps that don’t have proper lateral support, so they bounce and sway slightly, like walking on a stairway made of jello. Imagine hauling a heavy couch up this set of steps? Dude, you better have the emergency room address pre-programmed into your GPS.

The interior cosmetic appearance of the unit itself was ok, like lipstick on a pig. The entry door jamb was so far out of plumb I had to put a shoulder to the door to shove it open, and pull it shut with a hard slam when I left. The balcony seemed as unstable as the stairs, and when I opened the attic access and looked inside, there were no firewalls separating units, meaning I could have crawled through the attic and gone into another unit through it’s attic access. (Hello, just came over to borrow some milk). I don’t want to own a unit with this sort of security issue. Also, the insulation was falling and missing in most of the areas, further illustrating the degree of deferred maintenance present in the building.

In short, this mid-1980s set of structures is a disaster from stem to stern. That means that eventually there could and probably will have to be special assessments to the condo fee to cure chronic issues of safety and structural soundness. That’s the exposure any prudent investor should walk away from at any price.

Of yeah, there were mostly older model cars in the parking lot, young men loitering around the parking lot entrance, and mattresses and trash piled near the dumpsters. Through in a swimming pool along with its liabilities and expenses, and the entire proposition of owning one of these puppies is just a non-starter in the biggest sort of way. Really. I didn’t even go inside the other 2 units for which I had printed MLS listing info. I wouldn’t touch these units with a 10 foot pole.

Sometimes, the expected ongoing costs and risks of owning investment real estate are so heavy and/or unpredictable that the purchase price really doesn’t matter. Some risk should not be assumed at any price, not even zero.

Older 25+ year old condos in Austin Texas are, for the most part, very poorly constructed, hard to rent and difficult to maintain for the HOAs that are brave enough to attempt HOA management duties. Some were built as apartments and later converted. Many of these complexes, this one included, are not FHA approved, meaning it’s very difficult for a potential buyer to get a loan, making an investor’s exit from the property much more difficult than from a bread-and-butter 3 bedroom home in a plain vanilla subdivision.

Many of these ill-advised investment decisions were made made by California idiots “investors” chasing what appeared to be better cash flow and a cheap, low cost investment. I’ve preached the hazards of buying “spreadsheet result” properties for many years, and this is another prime example.

In this particular complex, almost 40% are owned by Californians. Of those with deed dates 2005 or later, over 50% are Californians. Of the 87 listings in this condo complex that have entered and departed the Austin MLS since 2007, 11 have successfully sold and 76 have expired or been withdrawn. That’s an 87% failure rate for sales attempts. Work that into your exit strategy, right next to the “on paper” positive cash flow. I want to call these type of investors and ask “how’s that better cash flow working for you?”

So, would I take one of these condo units off an investor’s hands for free? No thanks. Should you pay $30K for one? No way. Don’t do it.

18 thoughts on “Is Some Austin Real Estate Worth Zero? Yes.”

  1. While I agree with the specific data in this case, the general data are somewhat troubling – the fact is that in our regulatory environment, condos are not only the only multifamily dwelling that can be built, but the only kind of dwelling a middle-class person can hope to afford in certain (large, important) sections of town.

    The 1980s complex I bought in in 1997 was the only way I’d have been able to get in the central city, and I worked in high-tech (still do). Granted, it’s much better maintained than what you talk about here, but the era and construction are likely similar.

    At some point we reach a tipping point where people have to get over their visceral fear of condos – or we have to fix the regulatory regime to allow rowhouses – or something else – but they are here to stay. Like with any big growing city that’s not undergoing hollowing out, the typical person here now lives in multi-family housing; and the typical owner, at least in city limits, is more and more likely going to own a condo (or something like it); not a single-family house.

  2. I lived in the condos in question with many of my friends during college when it was an apartment complex. I had repeated problems with water entering my unit from above. When they converted it we really questioned who in their right mind would buy into it. They are cheap though. There are many fantastically run condo communities in the neighborhood, and their units are generally 3-5 times as much, so I can see how people would be desperate enough to buy in.

    It’s odd to me that investors would be interested in that complex though, when you can own an entire four-plex with larger units for about $35-50k per unit in SE Austin. Sure they need some massive renovation, but at the end of the day you’re not beholden to a condo association, and you own the land.

  3. I often wonder why you don’t report condo sales in your stats. You seem ill-versed in condo issues for a real estate prof. Well-run condos/HOAs exist all across this city. The relative impact of issues like water leaks and other nuisances is usually a direct reflection on HOA management. If it’s substantially owned and occupied then a well managed HOA would swiftly address needed repairs and nuisances. If you live in the city’s core chances are you’re probably dealing with noisy neighbors and parking issues on a regular basis no matter what kind of structure you live in. If it’s not then keep looking, there’s plenty to choose from these days. Like Mike says, condos are increasingly the only way average wage-earners can afford to live close to the city and enjoy it’s amenities.

  4. I assume most of the owners are postponing maintenance, hoping that the lakeshore developments will take off and they can bulldoze and replace with new expensive condos. Many of the lowest rent/highest crime properties in the area also have some of the most spectacular downtown and lake views.

    There are condo communities in the area that are fantastically maintained, however. There’s a bit of everything in 78741. Where else can you find a mansion next to a duplex?

  5. M1Ek: My general aversion to condos is mainly an economic one. I don’t think they are good investments, in general. Yes, I think they are ok for a certain buyer and purpose. For example, people who can’t or don’t want to handle exterior maintenance. And I do think the newer units are built to better standards with better sound proofing and better materials. And, yes, condos in Austin do provide entry level pricing into areas where a single family homes are unattainable for middle/lower incomes.

    But, the risks are still greater than with single family homes. Condos are the first to lose favor in a soft real estate market, and are the last to rebound when things pick up. More often than not, the concept of shared maintenance does not hold up to reality. Many, many older condo complexes in Austin are in poor to bad condition. This means the HOA fee did not accomplish its intended purpose, thus squelching one of the primary selling points of owning a condo – hassle free maintenance. Be that from poor HOA management or stingy owners unwilling to bill themselves the amount needed. I know many property managers in Austin who discontinued handling HOA management altogether because of the instability of owner-elected boards, and the changing faces each years who can come in an undo what the previous board started, or start up their own pet projects, such as expensive gated entrances, which the majority of other owners really don’t want. In other words, many good HOA management companies get hamstrung by flaky and/or uncooperative owner boards.

    There are just so many variables and areas of uncertainty that simply don’t exist in a single family detached house. Personally, as an investor and home owner, I’d rather just pass on all of that drama and extra effort.

    Tim: good point about 4-plex being a better cost-per-unit option, though I don’t like 4-plexes either, but I do agree with your point. I think a 4-plex would be a better option than a failing condo unit.

    Pat: I leave condos out of the stats reports that I publish because it skews the data house data too much. I just like the apples to apples approach of looking at houses alone. Most people own a detached, fee simple, single family home, so those are the relevant stats for the majority of our readers. In Nov 2010, Condos represented only 6.9% of all sold properties. Including them in the stats drags the sales numbers lower than they really are. The Austin Board of Realtors includes everything in their stats, which are released about the middle of each month, so if you’d like the stats inclusive of condos, they are available from that source.

    ttrentham: Good guess.

  6. Steve, we’re not an area where most people live in single-family homes anymore – and we’ll never go back to those days. Like it or not, multifamily housing, whether somebody else owns it or you do, is now the more typical dwelling.

    That being said, perhaps the reflexive opposition to condos would be more constructive as a set of ways to make condo ownership work better.

    I just can’t picture you going into Manhattan and telling people they’d be better off in single-family homes, for instance.

  7. “Most people own a detached, fee simple, single family home,”

    This is a distorted picture. The majority of people who own their dwelling own a single-family home; but this percentage is dropping, and the majority of actual people in the area do not live in single-family homes. (Note this is very difficult to google for; I couldn’t find the actual figure I remember; but you can get close by this census link:

    2009 in Travis, 40% of housing UNITS were multi-family. Extrapolate from the high number of students living together and other large households in multi-family and you easily get above 50% quite reasonably).

    will see if I can find the real figure though.

  8. Hi M1eK, I guess I should rephrase what I mean – The greater portion of all owner-occupied real estate in Austin TX and surrounding areas is single family detached homes. Houses remain, by a wide margin, the preferred dwelling of choice by most buyers. In other words, I’m not counting renters. I’m just talking about the places people buy to live in.

    That may in fact be dwindling, as you say, but as long as the best schools remain in commuter areas out in the suburbs, that’s going to be where most families want to be, and they want houses with yards and no common walls.

    I personally do think it would be great to live downtown in a condo, I’m not knocking the idea completely, but at this stage in life with teenage kids, it wouldn’t be a good fit for us. The demographic shift that is underway may well bring on the decline of the suburb, but I think that’s decades off.


  9. We live out in the Hill Country just outside of Austin. Every now and then I think it would be fun to have a condo in town for when we come to see the concerts and events.. I know you’re right about the adversity of owning a condo.. just never wanted to ‘see’ it.

    Hmm. maybe we’ll stick to the weekends at the Hyatt! 🙂

  10. This may not be a revealed preference, though, Steve, since for the longest time, most condos were pretty crappy – because of the prejudices expressed here among other things. (IE if you only provide bad instances of product X and both good and bad instances of product Y, don’t view peoples’ purchase of Y as a preference for Y itself when it may just be a reaction to quality).

  11. Hi M1EK, you may be correct. We might be at the front end of a shift back toward multi-family units. From strictly a cost standpoint though, not all condos survive the calculator test. By that I mean, if you sum up the costs of providing those things covered by an HOA fee, such as exterior maintenance and yard care, most single-family owners can hire out those tasks at a lower cost over time than the monthly HOA fee.

    I do think as oil will reach $100/barrel again this summer and gas pump prices slowly climb above $3/gal, people start to more properly factor in commuting costs to the home ownership equation. At $4/gal and higher for people commuting from further out, the smaller, closer in properties start to compete better from strictly a cost of living standpoint.

    Having just moved much closer in than before, there is also the intrinsic incalculable benefits of living closer in in a smaller dwelling – the convenience factor – that I think people will give greater value to in coming years.

    So I don’t disagree that condos may come more into favor, but the issue of school quality will still be primary for most buyers, as well as outdoor space to use, so I don’t think houses will be supplanted as the dwelling of choice in the US.

  12. I’m at a loss as to why there is such a booming condo market, I get that it’s quite something to own a property on a ritzy building, but the constricted space, and the whole HOA is quite a pain to me.

  13. Well the ritzy buildings sell in downtown Austin because there are so few of them. Considering there are very few new downtown condos on tap for the next decade the ones already built will probably only rise in value. My wife and I would love to retire there and live in the middle of the city. And the amount of space doesn’t seem like that big of a deal when you can just walk out your door to Lady Bird Lake.

    I think the majority of condo owners buy condos because that’s what they can afford where they want to live. The majority of condos in Austin are not in ritzy buildings. And very few Austinites get the privilege of living in a community wtih no HOA, whether in a condo or free standing house.


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