For many investors and homebuyers in the San Jose condo market, 1550 Technology Drive is a familiar name. 1550 Technology Drive is a community called The Sonora. It has the right location, right features and the right price. It would have been the perfect opportunity for first time home buyers and investors alike. As of late December 2010, out of 315 total units, 25 units are on the market – 22 short sales and 3 REO. The average DOM is 124 days. The Sonora is not absorbed by the market fast enough because there are two hurdles which I will discuss later.

First let’s talk about the highlights. The Sonora is located at the corner of North 1st and Skyport Drive, conveniently close to 87, 101 and 880. While it’s next to the San Jose International Airport, it’s on the east side and thus not directly under the flight path. You can hear some highway traffic and barely any flight noise but noise level is acceptable. There are a few high tech companies close by such as Brocade, Atheros and Ebay. With a few eateries in the mix, the neighborhood is clean and quiet and perfect for professionals.

The complex was built in 2005 with 315 units of 1-bedrooms and 2-bedrooms in a 4 story low-rise. It has all the amenities that a high end condo should have, club house, pool, spa, gym, gated parking and for-rent guest suites for your out-of-town guests. I especially like the abundance of covered guest parking slots which are especially valuable in condos. The grounds are attractively designed and landscaped. There are several elevators through the building which are especially when you are moving furniture or carrying bags of grocery. Inside the units, the floorplan is optimized for space and storage.

Price-wise, as of late Dec, the 1-bedrooms are listed for $160K-225K and 2-bedrooms are listed for $247K-$279K. If you take the average rent, HOA fee, property tax and insurance, the units in Sonora can generate about 6 to 7% cap rate. That is a very decent return. Then why is it not selling?

The biggest challenge is that the Sonora HOA is under litigation with the builder over building defects. While defects may look minor, any litigation means no bank can give any financing. The only exceptions are the units owned by Fannie and Freddie under Homepath program. Buyers can still obtain financing through Homepath and the program is open to both homebuyers and investors. Out of 25 units, only 1 unit is Homepath and that is pending. So all cash buyers only please.

That would have been still attractive to investors if not for the second hurdle. The Sonora HOA dictates that all units have to be owned for a year before it can be rented out. That restricts units to homebuyers only. Let’s think about this: how many homebuyers are there who have $200K+ cash at hand and want to live in a 1-bedroom condo? Both you and I know that there are not many and the sales at Technology Drive reflects that.

This kind of Catch 22 situation can be resolved. Either HOA settles the lawsuit as quickly as possible and / or HOA removes that first year no-rental restriction. All the cards are in the HOA’s hands. It will depend on how much the homeowners have a say in the HOA to protect their property. Until then the sales will continue to be slow and prices will continue to go south.

Market can change in a blink of an eye. If you are interested in monitoring this condo complex, drop me a note.