Condo Units Make Sweet Investments…Which Can Lead to Problems

By
Services for Real Estate Pros with ReadySetLoan Condo Team LLC

Condo Units Make Sweet Investments…Which Can Lead to Problems

fha condo approvalThe obvious motivation behind real estate investing is to purchase real property for which the investor could charge a rent that exceeds the property’s carrying cost.  At its root, it’s a pretty simple and straightforward concept.

The best types of properties in which to invest are those that are in move-in condition and require very little maintenance thereby maximizing the net annual profit to the investor.  Multi-families, such as 3- or 4-units or more, also present opportunities to generate profits by allowing the collection of more rents on one property.

Condominiums also create an ideal situation for this as there is no exterior maintenance.  The investor purchases the unit and simply pays the association fee.  The association is responsible for any exterior maintenance.  The investor won’t even have to mow the lawn, in most cases, and would only be responsible for the maintenance of the interior.

Condominium units that are under $100,000 are prime targets for investors because of the low carrying costs.  I have noticed in my data collection for condominiums in Connecticut, projects with units in the range of $50,000-75,000 typically do not have a problem selling whether they are approved with FHA or not.  Based on the above, I would attribute this to investor purchases with some first-time buyers mixed in.

In speaking with many property managers who have condominium clients in this price range, they have relayed to me that many of these projects have issues with investor concentration.  That is, there are more investors than owner-occupants.  When this happens, financing units becomes more difficult.

fha condo approvalThis also renders the condominium ineligible for programs that cater to first-time buyers, such as FHA and CHFA in Connecticut.  Luckily, Fannie Mae released temporary guidance last year that will allow the ignoring of the investor concentration if the loan is to an owner-occupant or for a second home.

However, once the threshold is crossed to where investors are the majority in a project, it is very difficult to turn it back around.  When units become difficult to sell, unit owners who wish to move become landlords and rent out their units, thereby further increasing the investor concentration.

Another issue that can occur with a high investor concentration is that the overall pride of ownership of the community becomes diminished.  Many investors and tenants do not care for the property and the community with the same enthusiasm as the owner-occupants.

Projects with a high investor concentration often have financial difficulties.  As mentioned above, the investor is concerned primarily with the carrying cost of the unit which affects the bottom-line profit.  Single investors with a high percentage of unit ownership can pose a serious problem to the financial status by refusing to pay (or timely pay) association fees and/or special assessments.  To an extent, this places the burden on the remaining unit owners.

Condominium associations must be diligent to monitor the number of investor-owned units within their community.  I have spoken with many who go so far as to amend their legal documents to create a limit as to the number of units that may be rented at any given time.

If your association wants to obtain an FHA condo approval and is concerned about leasing restriction language, please feel free to contact me.

 

Top image courtesy of nattavut/freedigitalphotos.net

Lower image courtesy of 

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The Condominium Project Approval Team at ReadySetLoan is dedicated to helping condominium projects across the nation to obtain their approvals with FHA and the VA or become recertified with FHA.  We have assisted nearly 200 condominiums and we can help your association.

 

ReadySetLoan is an active member of the Connecticut and New England chapters of the Community Associations Institute (CAI) and is a frequent contributor to Common Interest Magazine as an expert in FHA/VA condominium project approvals.

 

Please contact us with any questions regarding FHA or VA condominium project approvals.  You can email me at askeric@readysetloan.com or call me at 404-433-4565. I will be happy to answer any of your questions.

 


FHA/VA Condo Approval Specialist

404-433-4565 Cell Phone

860-644-3772 Fax Phone

eric.boucher@readysetloan.com
ready set loan condo team

 

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 Check out our article in Common Interest magazine on page 19!

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Rainmaker
3,641,460
Dorie Dillard CRS GRI ABR
Coldwell Banker United Realtors® ~ 512.750.6899 - Austin, TX
Serving Buyers & Sellers in NW Austin Real Estate

Good morning Eric,

Very interesting post with some important points to keep in mind when purchasing a condo! Thanks for sharing your expertise.

Jun 05, 2014 10:14 PM #1
Rainer
219,946
Suzanne Otto
Six Twenty Designs - Lansdale, PA
Your Montgomery County PA home stager

I think when investors have too many properties under their belt, it becomes difficult to manage them all. I'm playing around with the idea of renting out my small townhome once I move onto a single family home. But I think because it was my first home, I'd still take excellent care of it. I couldn't bare to see it go down the tubes. 

Jun 05, 2014 10:16 PM #2
Rainmaker
673,069
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Eric, This is definitely "an issue." As an investor, I WOULD NOT want to own in a project that was  mostly investor owners. All the things you mentioned are important.

But I would say that carrying costs are not how investment property is analyzed. A proper analysis assumes the property to be "free and clear." Financing may be utilized by investors, but does not play a part in the ROI. You must compare apples to apples.

Bill Roberts

Jun 05, 2014 11:45 PM #3
Rainmaker
350,373
ReadySetLoan Condo Approval Team
ReadySetLoan Condo Team LLC - South Windsor, CT
The FHA/VA Condo Project Approval Specialists

Thank you Dorie.  Have a great weekend!

Suzanne - that will probably work out well for you.

Hi Bill - I wouldn't want to own in a project with this composition either.

Jun 06, 2014 12:29 AM #4
Rainmaker
715,828
Wayne Johnson
Coldwell Banker D'Ann Harper REALTORS® - San Antonio, TX
San Antonio REALTOR, San Antonio Homes For Sale

Eric-I have noticed that the most difficult condos to sell are in complexes with high percentage of investor owned units. HOA's here seem to be pretty diligent about exterior and common area upkeep regardless the ownership composition.

Jun 06, 2014 12:55 AM #5
Ambassador
3,619,152
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Eric great job in pointing out the multitude of problems a high investor concentration rate can cause for a condo complex.

Jun 06, 2014 04:19 AM #6
Rainmaker
350,373
ReadySetLoan Condo Approval Team
ReadySetLoan Condo Team LLC - South Windsor, CT
The FHA/VA Condo Project Approval Specialists

Wayne - I cringe when I hear that the investor concentration is too high in a condominium.  It's hard to recover from that.

Thank you George.  It is a real problem.

Jun 06, 2014 05:22 AM #7
Rainer
1,756,848
Conrad Allen
Re/Max Professional Associates - Webster, MA
Webster, Ma, Realtor

The 10% reserve requirement seems to be the big reason for the lack of lender approval Eric.

Jun 06, 2014 08:40 PM #8
Rainmaker
2,183,235
Joe Petrowsky
Mortgage Consultant, Right Trac Financial Group, Inc. NMLS # 2709 - Manchester, CT
Your Mortgage Consultant for Life

Good morning Eric. Have bought many condos over the years to flip, but never to be a long term holder. Too many possible issues, many of which you described.

Make it a great weekend!

Jun 06, 2014 08:58 PM #9
Rainmaker
350,373
ReadySetLoan Condo Approval Team
ReadySetLoan Condo Team LLC - South Windsor, CT
The FHA/VA Condo Project Approval Specialists

Conrad - it is surprising to me that some Boards still are not aware of this requirement.

Joe - I'm sure that there are few types of properties with which you haven't dealt!

Jun 08, 2014 02:00 AM #10
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Rainmaker
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