A Renter-Heavy Building Can Make Finding a Buyer Tough

• March 27, 2012
• 8 Comments

by Shilpi Paul

Not long after we posted an answer to a reader’s mortgage conundrum last week, UrbanTurf heard from another reader with a tricky situation. The homeowner is worried about being able to find a buyer for his condo given the renter-heavy nature of his building. We reached out to Tom O’Keefe at Prosperity Mortgage and Matt Rexrode at BB&T for an explanation. See the question and answers below.

Question:

I own a condo in a four-unit building. All the other units are rented out right now to long-term tenants. My realtor said I will have a hard time selling my unit because no buyer will be able to get a loan to purchase in the building given its current renter-to-owner ratio. Is this true? Any exceptions out there? Am I just stuck? HELP!

Answers:

Tom O’Keefe: The number of lenders and banks that will lend in a building with a 75 percent renter-to-owner occupant ratio is very small. Community or local banks that do not sell the loans or underwrite to agency (Fannie Mae/Freddie Mac/FHA) criteria tend not to care as much about the ratio and may be a good source for financing.

The reason behind this policy is that overall, the risk to the lender increases on any investment property. If an owner is in financial trouble they are more likely to fall behind or ‘let go’ of an investment property over their primary home. When the majority of the units in a building are owned by investors, it increases the risk to the lender because the overall financial health of the building (upkeep, insurance, reserves) is dependent on owners making their payments. Therefore, lenders are not as secure with a condo as collateral.

Matt Rexrode: Fannie Mae and Freddie Mac have a requirement that if they buy a loan in a 2-4 unit building, all but one of those units need to be owner occupied as a primary residence or second home. With a 4-unit condo project, the risk is high; if just one unit that’s a primary residence decides to rent out, the percentage swings by 25 percent. This reader will probably have a lot of difficulty selling their home due to the other owners making the choice to rent out their units.

This article originally published at https://dc.urbanturf.com/articles/blog/too_many_renters_can_make_finding_a_buyer_tough/5340

8 Comments

1. KES said at 1:51 pm on Wednesday March 28, 2012:
   Thanks Urban Turf for the quick answer to this question! I'd love to hear whether other owners or lenders out there are aware of any banks that will make an exception to this.

1. TP said at 4:04 pm on Wednesday March 28, 2012:
   Also what is a seller supposed to do in this situation? A seller can't dictate to their neighbors whether they should or should not rent out but it seems unfair for a bank to impose this kind of judgement on a building. This seems to disproportionately affect smaller condo buildings as well.

1. Rob said at 5:45 pm on Wednesday March 28, 2012:
   Many condo buildings have rules that limit renting, in order to prevent this kind of situation.

1. mona said at 8:33 pm on Wednesday March 28, 2012:
   just had a friend go through this, couldn't purchase a condo because there were to many of the condo's in the building already rented out. Went to several banks but none were planning on keeping the loan so they turned them down. Some condo association will require you seek their permission to rent your place for this very reason. Small building should all adopt this rule or it ruins it for everyone else

1. Andi said at 8:50 pm on Wednesday March 28, 2012:
   There should be rules in the condo docs that explicitly say that you can't rent out your unit. The problem with smaller, self-managed buildings is that owners don't always know why these rules are in place and they don't enforce them. It puts other owners in a bad situation. It is one of the cons of condo living because if you are upside down on your unit and have to move, you may not be able to rent out your unit and may be forced to either stay, pay a mortgage on an empty property or short sale.

1. jag said at 4:52 am on Thursday March 29, 2012:
   Is it generally the case that a building must be more than 50% owner occupied for an established building (not under construction or anything like that) or is the number generally higher than that?

1. KES said at 1:03 am on Friday March 30, 2012:
   I'm second jag's question. Let's say two units in our 4 unit building are owner occupied, one is rented, and one is for sale. Will lenders approve a loan in that case? After the sale closes building will be 75% owner occupied? What if two units are rented out - will that pass the test?

1. JAG said at 11:36 pm on Monday February 20, 2017:
   my ten unit condominium is contemplating adding to the by-laws a rule that limits renting one's apartment should that push the investor/renter ration past 49%. Is this legal, and if so, would the existing owners who rent be grandfathered