Dear PoP – Ownder Occupancy Ratios

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“Dear PoP,

I live in a medium sized condo building that has been around for a few decades now (beforehand it used to be a hotel). Our building management has alerted the condo board that the owner occupancy ratio is getting quite low – close to 55%. The board is looking at ways to manage this low owner-occupancy ratio, in light of FHA lending requirements. Currently the building’s by-laws do not have any restrictions or incentives to keep the owner-occupancy ratio high.

I was wondering if you, or any of your readers, had encountered this issue and how they dealt with it.”

Anyone live in a condo building that has rules/laws/incentives to keep the owner-occupancy high? Is it just a matter of convincing the board? If you have any of these rules/laws – what are they?

25 Comment

  • We simply amended our building’s bylaws. We set a percentage (75%) and had the building vote on it. It passed unanimously. The value of people’s condos was enough incentive to pass the amendment.

    • Yeah, there are a couple ways to do it. You could amend your bylaws, or you can set limitations on how soon someone can rent their unit after buying.

      It becomes harder to pass however in larger buildings because you need a large majority (something like 66%) of the membership to pass it and frankly there are many people who currently live in their condos but don’t want to pass a rule that would prohibit them from renting in the future if they need to.

      In the end, not everyone who rents out their condo is a sleazy re flipper looking to make life difficult for condo buildings. Lots of peoples lives change, they get transfered for work, family issues etc, things they have no control over and simply selling their condo isn’t an option.

  • We did the exact same thing in our condo building. It was a heated discussion, but the amendment eventually passed and I think most of the owners are better off because of it.

  • Just to play devils advocate…
    arent you narrowing the pool of potential buyers when you do this? There by lowering the worth of your condo when you enact these rules? I have inquired about a couple of condos that seemed like a bargain only to find out the reason is because I’d have to be an owner occupant.
    Who buys a condo expecting to live there forever? I would actually be a little PO’d if this happened in my building. I would like to reserve the right to hold onto my unit as an investment when I decide to move-up. Maybe I’ll downsize back into it down the road when we become empty-nesters. Rules like this not only prevent me from doing this. They force me to sell for below market rates as well. I know some people would be MORE interested in buying in a building with these rules. But there is simply no way that in a market like DC’s ruling out condo investors is a good idea for the bottom line.

    • I think there’s a big enough pool of people interested in buying a condo to LIVE in that you’re not narrowing your pool by much. I bought my condo in 2007; in 2004 the condo board had passed a rule for 67% minimum owner occupied. This actually attracted me to this building more than others I looked at, because in general people who own tend to take better care of the shared amenities (not that all renters are reckless, but you know).

      If I ever need to relocate, I’ll probably sell my condo rather than renting it out, because I don’t think I’ll be able to afford double mortgage. 😉

      • But you see, thats the problem. People don’t realize the money involved in selling your condo until they want to do it, and then they all of a sudden realize that they have to sell the place for 8% more than they bought it for, just to walk away from the settlement table even, and not owing anyone money.

        DC’s re market has held up well in comparison to the national market, no doubt but anyone who has bought a condo downtown in the past 3-4 years is probably at best, just breaking even in valuation, more likely down a minimum of 5-10%.

        So you bought a place for $350K, you can only sell it for $315K. Now add in the 8% (25K) selling costs (realtors, transfer taxes, settlement fees) and now it all of a sudden costs you $60K out of pocket to sell your place. Not many people have $60K in cash lying about to spend on something like getting out of your condo.

        Yes, people shouldn’t buy places if they don’t plan on staying there but life happens and if someone can’t rent their unit out when they need to move or leave, it will simply go into foreclosure, which hurts the valuation of the other condos in the builing a lot more than a high rent ratio.

        I agree, keeping the ratio low is important, but wholesale limits isn’t the way. The waiting period for new owners is fair all the way around.

        • Yup. I usually put the number at around 12%, for people who haven’t yet bought. You drop maybe as much as 5% on closing costs when buying, then you lose 6 – 7% when selling. To break even, you really have to live in the place for some time. Not being ale to rent a place out is a risky proposition.

          Say your job transfers you, you can’t rent out your place, so you’re stuck with a mortgage as well as rent in another city. You can’t sell because you can’t bring 6% to the table, and you’ll never be able to save that 6% because 50% of your income or more is going toward housing. So for couple years, you’re waiting for the market to go up, while you’re being bled dry by your bank and your landlord.

    • While some buyers might be put off by limitations on renting, the alternative is much worse. If a building crosses the 50% limit, no potential buyer of a unit in that particular building will be able to get FHA financing to buy in that building. That means that only a buyer willing to pay cash will be able to buy in that building. That scenario lowers the value of all units in a particular building by a much higher percentage than a renter-restriction. And once a building has “tipped” over the 50% ration, it is virtually impossible to get back below that limit.

      • Just because you can’t use FHA doesn’t mean you have to pay cash. Most people use conventional financing so you’ve still got a large pool of potential buyers.

        • MikeinDC is right.
          Actually a lot of underwriters won’t touch a condo with a high investor ratio. FHA or not.
          Just happened to us as sellers – we almost lost the deal due to this. Buyer almost lost financing due to high investor ratio. They had to bring more money to the table to get financed.

          • It actually is more than FHA. When condos are not 60% owner occupied, Fannie and Freddie won’t touch loans on them. Most banks sell their mortgages on the secondary market to Fannie and Freddie. So, even in a conventional scenario with 20% down, they’d have to shelf the loan if the ratio is less than that 60% (70% in some cases) number. It’s what is referred to as a nonwarrantable condominium. Bad news. Definitely limits your buyer pool to those who can pay cash, as stated above, or who has a relationship with a bank who is willing to keep their loan.

  • We changed the bylaws to require that new owners must live in the condo for a year before being permitted to rent it out. It doesn’t completely eliminate the problem, but precludes people purchasing with the intent to rent immediately and seemed like a good compromise to avoid the problem of some being grandfathered in and others not allowed to rent until the ratio came down.

  • You could also require that new sales in the building require the condo to be owner-occupied for a certain period of time (my co-op required you to live in the building for 2 years before you could rent…wouldn’t have to be that strict). That way you can at least discourage new owners who never intend to live in the unit.

  • this is exactly why we bought a small 2 bedroom rowhouse instead of a condo as our first purchase. we can’t stay in it forever, but we don’t ever want to sell it either. and when we are old, it will be perfect. except we will need an elevator or something.

  • We have reached our 75% ownership yet to actually start voting but the by laws currently state that you can’t have a rent out your condo for any period shorter than 1 year. I diffently going to see if we can get the comment about if someone does buy that they have to leave in it for at least a year that way we don’t attract anybody trying to flip it.

    Also at the same time I wouldn’t want to buy a place that wouldn’t let me rent it out either. Good Post

  • Carefully check the bylaws for rules on amending the bylaws. Ours require not only a 2/3 (maybe 3/4? don’t remember) majority of homeowners, but agreement from the mortgage holder as well – a very difficult – at least time-consuming – thing to obtain.

  • Common ground living is not easy, nor is it for everyone.

    The writer has hit upon a serious problem currently facing many condominium and cooperative apartment buildings with declining property values these past four years and greater scrutiny by lenders and their underwriters.

    Many unit owners are underwater and have seen their equity vanish. This causes problems in their willingness to provide adequate maintenance and needed improvements to their individual apartments, especially for non resident unit owners.

    Some get married, get new jobs, situations change and unit owners move on finding themselves unable to sell at current market value by coming the closing with cash to make up for the negative equity.

    Associations are notorious for keeping the monthly payments too low with board members submitting to unit owner pressure to keep them low or not getting elected by raising them. The condition of the common elements slide. Needed maintenance and replacements are postponed time and again.

    You can just legislate all your problems away by merely changing the by laws.

    The common elements need to be kept up and well maintained for the benefit of building and everyone living in it, all residents: unit owners in their occupied units, non resident unit owners, and rent paying tenant occupants. Yes, they are a part of the community, too.

    When the common elements are well kept in good shape and provided for, reserves for deferred maintenance and needed future capital improvements are kept and provided for, -by realistic and complete budgets all provided for with adequate funding with monthly payments at a level sufficient to provide,

    then chances are the individual units will be well maintained as well as the same high standard, and the quality of life for all residents are kept high, as well as property values.

    Don’t want to get involved in your association or in the truth and details of what it really takes on a regular basis to keep everything going ? Want to be more of the problem and not part of the solution ?

    Go live in a single family home.

    As I wrote before, common ground living is not easy, and it’s certainly not for everyone.

  • Our homeowners association requires that the buildings in the community maintain an 80% owner occupancy rate and those found to be illegally renting their units are assessed a higher monthly association fee ($500 vs $215)

  • that was the issue at 444 mass, which has royally screwed the owners and made it almost impossible to sell there.

  • My condo building is currently faced with this same issue. It’s a nasty Catch-22, but we’ve been advised to not to enact drastic bylaws to manage the problem. The “must live in the unit for a year” is a control that only goes so far, but has some impact. Another option is for the bylaws to state that if owner occupancy drops below FHA standards, then the owner must get permission from the board to rent the unit out.

  • For all potential condo sellers/purchasers – There are many well stated reasons listed as an argument to make the percentage of owner/occupants at a high rate. The MAIN reason is that FHA financing rules the Mortgage Market right now. If your development has more than 50% of the units rented out, then you WILL NOT be able to obtain an FHA loan to purchase a unit. In today’s market, the next highest option is around 10% down(unless they qualify for a special program). If FHA doesn’t support your building, then NONE of the owners will be able to sell. That should be the MAIN driver to keep owner – occupancy high..Think about it on the other end as a new purchaser…Why would they want to buy in an apartment building essentially?? All of the statistics show that owner-occupants keep the building in better condition, are more involved, and thereby RETAINS value on the re-sale. There are TONS of condo developments that can’t sell because of the high renter problem..TRUST ME, you’d rather be on the other side, then NOT be able to sell the investment….

  • I lived in a coop building in the past. We passed a penalty for those who wanted to rent their apt. They had to pay a “rental fee” equal to the monthly maintenance and renters needed to be approved. This kept rentals down but being a coop at that time we had trouble with financing anyway and apt prices were lower than equivalent condos.

  • Does anyone know if there are any alternatives in DC to an FHA or conventional loan? I know several people in my building have been unable to sell because a large portion of the building is commercial and because there are many renters in the building (which I imagine only increases as people are not able to sell their condos because it’s a mixed use building).

  • But isn’t changing the bylaws a huge project? I was told that to change the bylaws, not only does the condo have to agree to it but each individual owner has to get their current lender/mortgage holder to agree to it. And then you still have to pay to get it refiled with DC. Any condo boards do it differently?

  • Depends… do you want to own a condo with an active condo association or do you want to own a unit (no longer really a condo) in a rental building? Your call. Rental units also tend to get torn to hell in this situation, renters give two craps about the building and you tend to get less active neighbors, less people pitching in to keep the place nice etc.

    There is a reason it is harder to get a mortgage in building with high rental numbers – it does not bode well for the future of the building.

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