Author Topic: Removing a rental cap on condo?  (Read 8289 times)

JoJo

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Removing a rental cap on condo?
« on: April 29, 2014, 01:14:18 PM »
Back story:
I bought a converted apartment condo in 2007 (biggest mistake of my life).  The original documents allowed 20% rental but between going into contract & purchasing, that changed to 30%.  There are 20 units

Fast forward to today... units that were bought for $500,000 average are now worth $300,000 tops.  Several units were sold due to short sales and new investors are ignoring the rental caps so about 50% are being rented out.  Furthermore, attempts to collect rental cap penalty fees aren't working and several are threatening to sue.  There are also a couple people that are on a waiting list to rent.

So, the board decided to propose to just remove the rental cap altogether, which will require a 67% vote. 


This is in the US.  I'm aware there may be FHA loan impact for rentals above 50%.

Does anyone have experience with this - either positive or negative?  I couldn't find any good results in google - both some good and bad but no solid evidence.

I am nearing early retirement and want to do what's needed to maximize my ability to sell the unit for the best price (preferred) or rent the unit if I can't sell it.

arebelspy

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Re: Removing a rental cap on condo?
« Reply #1 on: April 29, 2014, 01:22:27 PM »
If too many units are vacant, and the HOA gets in trouble a lender may not lend.  They want to see a strong HOA.  I can't recall off the top of my head lending restrictions around too many units in an HOA being a rental.

I am nearing early retirement and want to do what's needed to maximize my ability to sell the unit for the best price (preferred) or rent the unit if I can't sell it.

These may be conflicting things.  If you want the former, you vote no*. The latter, yes.

*Unless, of course, allowing rentals means investors are interested, opening up your pool of buyers and potentially getting you more. That may be something to investigate as well.
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JoJo

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Re: Removing a rental cap on condo?
« Reply #2 on: April 29, 2014, 01:34:16 PM »
As for selling, I think there are still investors sitting out there with cash payments, so possibly removal might raise the price but maybe not?  That's what I'm specifically asking - will removing the cap raise or lower the selling price?

As for renting, at most I would get $1900 rental price per month, from that there are about $300 in dues, $300 in property taxes, I would need a property manager since I'll be out of the country a lot.  Plus, knowing the state of the building, I wouldn't be surprised if we're slapped with some large assessments in the future.

Another factoid: the condo is fully paid off, if that makes any difference.
« Last Edit: April 29, 2014, 01:55:07 PM by JoJo »

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Re: Removing a rental cap on condo?
« Reply #3 on: April 30, 2014, 02:50:29 PM »
If too many units are vacant, and the HOA gets in trouble a lender may not lend.  They want to see a strong HOA.  I can't recall off the top of my head lending restrictions around too many units in an HOA being a rental.


This site has a comprehensive list of reasons they why they wouldn't lend in a community, including the requirement that at least 50% need to be owner-occupied.

http://www.bell-anderson.net/_blog/Property_Management_Blog/post/Does_your_condominium_meet_FHA_standards_for_loan_approval/

arebelspy

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Re: Removing a rental cap on condo?
« Reply #4 on: April 30, 2014, 05:56:58 PM »
If too many units are vacant, and the HOA gets in trouble a lender may not lend.  They want to see a strong HOA.  I can't recall off the top of my head lending restrictions around too many units in an HOA being a rental.


This site has a comprehensive list of reasons they why they wouldn't lend in a community, including the requirement that at least 50% need to be owner-occupied.

http://www.bell-anderson.net/_blog/Property_Management_Blog/post/Does_your_condominium_meet_FHA_standards_for_loan_approval/

Thank you.  I thought there was something, but like I said, I couldn't recall.  Thanks.  :)

So you have to weigh the pool of investors who may purchase versus the pool of FHA buyers who may purchase.

Is your condo in an investor hot town/part of town?
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JoJo

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Re: Removing a rental cap on condo?
« Reply #5 on: April 30, 2014, 07:20:25 PM »
According to stats, 27% of mortgages are FHA.  I don't know if any of our existing owners have FHA which are traditionally first time and low income borrowers - there are other condos our size (2 bed, 1 bath) in our area for about $120,000.  The difference is that ours are very near the water, beach, and have western views, thus ours are in the $275,000-325,000 range.  Freestanding homes in the area are $400,000+ although those in the near vicinity are in the $1,000,000+ range.

As for investors - as mentioned above it's in a good area and walking distance to a new Google office.  On the other hand, there is new construction of 180 studio apartments going up just 4 blocks away so that will also be competition for renting.


I'll put another question out there - anyone own a condo or live in one where there is a large percentage rentals (50%+)?  Positives or Negatives?  Any comparison (Zillow) for similar nearby condos that can be shared?

We're actually finding that the investor owned units are less likely to be delinquent on their HOA dues, which is one positive.  The board is made up a mixture of investor owned and owner occupied units.
« Last Edit: April 30, 2014, 07:25:18 PM by JoJo »

arebelspy

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Re: Removing a rental cap on condo?
« Reply #6 on: April 30, 2014, 07:35:31 PM »
According to stats, 27% of mortgages are FHA.

Okay, but we need to know what percent are bought in cash for that to have any meaning.

For example, if 50% are bought with cash, then you'll capture all those investors, plus 2/3 of the mortgage investors, and leave out only the 27% of mortgage investors (13.5% of the overall investors in this scenario) that use FHA.  Worth grabbing 50% to lose 13.5%.

If only 10% are bought in cash, then you're gaining 10% and losing 24.3% (because 90% are mortgage investors, and 27% of those is 24% of the overall), not worth it.

So it will get a little more complicated.

Even more important is who is buying in your city, and in your neighborhood, and in that building, if possible.  What are cash versus financed sales like?

That may help you know which way to vote.
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Another Reader

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Re: Removing a rental cap on condo?
« Reply #7 on: April 30, 2014, 09:04:15 PM »
I just saw this thread.  Here's what appears to be happening.  When values dropped, owners stopped paying their HOA dues and many went into foreclosure.  The HOA could not function without the dues money and the property began to deteriorate.  A downward spiral of less money and further deterioration began.  At the bottom of the market, investors began buying into the project heavily.  The HOA ignored the rental cap so it could collect dues from the new owners who were making money and were therefore willing to pay.  This allowed the HOA to begin to deal with deferred maintenance and operate the property at a reasonable level.

The improvements that have been achieved cannot be sustained without more money.  Investors tend to vote down increases in dues and special assessments.  Unit owners have to self assess for capital improvements, which means you need owner-occupants.  If the rental cap is removed, the project will begin to deteriorate again.  Below about 70 percent owner-occupied, owner occupants lose interest, because of the presence of tenants and the inability to finance.  What you end up with is a poorly operated apartment complex with weak management.  That's a recipe for investment disaster. 

The best way to improve the property and attract owner occupants that will pay more for the units is to leave the rental cap in place and devise a plan to reduce the number of rentals over time.  Units currently rented can be grandfathered for a few years, but must become owner occupied at sale until the cap is reached.

In your shoes, I would vote no on removing the rental cap.  Smart investors will have an exit strategy for their units that involves selling to owner-occupants and will do the same.  The rest of the short-sighted herd will likely vote to remove the cap.

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Re: Removing a rental cap on condo?
« Reply #8 on: April 30, 2014, 10:12:45 PM »
Not sure where the OP is from, but there is a great example of this on the SF Peninsula in San Bruno.  The project is called Shelter Creek.  Back in the 70's, it was a large, multi-building apartment complex, with a big population of young singles and divorced men whose kids were living with their mother in the family house nearby.  It was later converted to condos.  The owner retained some of the units and rented them out.  The others are generally owned by investors and first time buyers.  These units are among the least expensive and worst maintained condos in San Mateo County.

arebelspy

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Re: Removing a rental cap on condo?
« Reply #9 on: May 01, 2014, 07:44:40 AM »
The best way to improve the property and attract owner occupants that will pay more for the units is to leave the rental cap in place and devise a plan to reduce the number of rentals over time.  Units currently rented can be grandfathered for a few years, but must become owner occupied at sale until the cap is reached.

I like that strategy.  Well played.
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JoJo

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Re: Removing a rental cap on condo?
« Reply #10 on: May 01, 2014, 09:40:18 AM »
I just saw this thread.  Here's what appears to be happening.  When values dropped, owners stopped paying their HOA dues and many went into foreclosure.  The HOA could not function without the dues money and the property began to deteriorate.  A downward spiral of less money and further deterioration began.  At the bottom of the market, investors began buying into the project heavily.  The HOA ignored the rental cap so it could collect dues from the new owners who were making money and were therefore willing to pay.  This allowed the HOA to begin to deal with deferred maintenance and operate the property at a reasonable level.

The improvements that have been achieved cannot be sustained without more money.  Investors tend to vote down increases in dues and special assessments.  Unit owners have to self assess for capital improvements, which means you need owner-occupants.  If the rental cap is removed, the project will begin to deteriorate again.  Below about 70 percent owner-occupied, owner occupants lose interest, because of the presence of tenants and the inability to finance.  What you end up with is a poorly operated apartment complex with weak management.  That's a recipe for investment disaster. 

The best way to improve the property and attract owner occupants that will pay more for the units is to leave the rental cap in place and devise a plan to reduce the number of rentals over time.  Units currently rented can be grandfathered for a few years, but must become owner occupied at sale until the cap is reached.

In your shoes, I would vote no on removing the rental cap.  Smart investors will have an exit strategy for their units that involves selling to owner-occupants and will do the same.  The rest of the short-sighted herd will likely vote to remove the cap.

This isn't exactly right - the situation isn't that dire - to give more details

We currently have a 30% rental cap
Of the 20 units, the developer sold 7 as rentals (breaking his own written rule of 20% or 30% max).
Only 3 of the owner units have short sold - but 1 was sold to another investor that ignored the rules.
A couple units are owned by parents who are letting their children rent or stay there, which is technically not allowed
So we are sitting at about 10 units that are not "owner occupied".  One other unit has been empty for 7 years as the buyer couldn't sell her other property and couldn't rent out this one.
None of the dues have gone unpaid, but there have been a few times owner occupies were far delinquent but we recovered via liens against the short sales and catch-up.
The reserve is medium funded - we won a lawsuit against the developer which paid for most of a new roof and rotted decks last summer.  There is $80,000 in reserve and most of the other stuff to be done is mostly cosmetic.
There is another pending lawsuit against the insurer of the developer.  These lawsuits have been pending for about 4 years now, and also don't help our situation.
There are 2 owner occupied residents that are sue-crazy and have brought several legal complaints against the board, which doesn't help either.

Again, I just want out of this place in roughly 2 years so I want to maximize my selling options and price, so I'm one of those short-sighted owners.
« Last Edit: May 01, 2014, 09:41:56 AM by JoJo »

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Re: Removing a rental cap on condo?
« Reply #11 on: May 01, 2014, 10:10:15 AM »
I guess I was unclear.  If you want to maximize the value, you need to appeal to owner-occupants who will pay more for amenity value than investors will pay for the income.  To achieve that, the units must be financeable and the project has to be in good condition.  In every project I have ever seen, prices go up and time on market drops once the number of rentals is reduced below the cap.  I can find numerous older projects in the Mesa-Tempe area where that happened.

Voting for removing the rental cap is shooting yourself in the foot.  Enforcing it over an agreed upon timeline will maximize the value of your unit.  Waiting for this to happen and for the construction litigation to be resolved is the smart thing to do.

waltworks

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Re: Removing a rental cap on condo?
« Reply #12 on: May 01, 2014, 12:11:19 PM »
What amount of equity (if any) do you have? Depending on your personal feelings on walking away, that might be something to consider.

-W

JoJo

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Re: Removing a rental cap on condo?
« Reply #13 on: May 01, 2014, 12:28:30 PM »
What amount of equity (if any) do you have? Depending on your personal feelings on walking away, that might be something to consider.

-W

It had a 6% interest rate (2007), so I paid it off.

JoJo

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Re: Removing a rental cap on condo?
« Reply #14 on: May 01, 2014, 12:35:13 PM »
I guess I was unclear.  If you want to maximize the value, you need to appeal to owner-occupants who will pay more for amenity value than investors will pay for the income.  To achieve that, the units must be financeable and the project has to be in good condition.  In every project I have ever seen, prices go up and time on market drops once the number of rentals is reduced below the cap.  I can find numerous older projects in the Mesa-Tempe area where that happened.

Voting for removing the rental cap is shooting yourself in the foot.  Enforcing it over an agreed upon timeline will maximize the value of your unit.  Waiting for this to happen and for the construction litigation to be resolved is the smart thing to do.

This would ultimately be my preference too, but it seems owners are just ignoring the rules.  They are threatening to sue.  They are ignoring the waiting list.  They are not paying penalties when we try to apply them.  They are not informing the board when there are new move ins, as they are required to do.  The management & board hasn't done a good job to organize the waiting list.   It just sucks. 

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Re: Removing a rental cap on condo?
« Reply #15 on: May 01, 2014, 12:59:33 PM »
Fix the board, fix the problem.  In your shoes, I would work on the maximizing the value aspect with the Board members and the other unit owners.  Money has a way of motivating folks.  Get the Board to hire an attorney and enforce collection.  Lien the non-paying offenders.  BTW, this is a perfect example of why real estate is NOT a passive investment.  It's also not mechanical or predictable so modeling often fails.  You cannot always predict the best holding period and your exit strategy has to be flexible.

BlueHouse

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Re: Removing a rental cap on condo?
« Reply #16 on: May 01, 2014, 02:03:08 PM »
I own a condo that voted for the rental-cap (at either 30 or 35%).  Because I already owned the unit, I'm grandfathered in forever so I can always rent it out.  I know the building is already over the cap, so they're waiting for it to go below, but I've been really curious about what they do if someone follows the rules, gets on the waitlist, but then others just don't follow the rules. Do the rule-followers have to wait longer?

Just curious

JoJo

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Re: Removing a rental cap on condo?
« Reply #17 on: May 01, 2014, 02:41:46 PM »
I own a condo that voted for the rental-cap (at either 30 or 35%).  Because I already owned the unit, I'm grandfathered in forever so I can always rent it out.  I know the building is already over the cap, so they're waiting for it to go below, but I've been really curious about what they do if someone follows the rules, gets on the waitlist, but then others just don't follow the rules. Do the rule-followers have to wait longer?

Just curious

Have their been any sales after the cap was added?  Do you think the cap impacted sales prices?


arebelspy

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Re: Removing a rental cap on condo?
« Reply #18 on: May 01, 2014, 04:00:02 PM »
I own a condo that voted for the rental-cap (at either 30 or 35%).  Because I already owned the unit, I'm grandfathered in forever so I can always rent it out.  I know the building is already over the cap, so they're waiting for it to go below, but I've been really curious about what they do if someone follows the rules, gets on the waitlist, but then others just don't follow the rules. Do the rule-followers have to wait longer?

Just curious

If you don't follow an HOA's rules that they decide to enforce, you get fined. Repeatedly.
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Fishingmn

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Re: Removing a rental cap on condo?
« Reply #19 on: May 01, 2014, 04:15:44 PM »
Personally, I'd do the opposite of what others have recommended.

You want out in 2 years is the key for this.

For the time being I think you are better off with no cap. My reasoning is that by instituting a cap you are basically eliminating a pool of potential buyers (investors). If you are selling soon you might want as large a pool of buyers be it owner occupied or investors.

In addition, in that price range I think there will be plenty of non-FHA buyers so the FHA restriction shouldn't be too big of an issue.

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Re: Removing a rental cap on condo?
« Reply #20 on: May 01, 2014, 05:12:52 PM »
There is unresolved construction litigation as well as an unenforced rental cap.  The HOA is a disaster.  It's common for conventional lenders is decline to finance in this situation.   Selling into a market of cash only buyers is not something I would want to do.  Does the OP know if there have been any sales in the last couple of years that have been financed?  Were the three short sales cash purchases?


JoJo

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Re: Removing a rental cap on condo?
« Reply #21 on: May 01, 2014, 07:06:51 PM »
There is unresolved construction litigation as well as an unenforced rental cap.  The HOA is a disaster.  It's common for conventional lenders is decline to finance in this situation.   Selling into a market of cash only buyers is not something I would want to do.  Does the OP know if there have been any sales in the last couple of years that have been financed?  Were the three short sales cash purchases?

I don't know anything about the financing of the recent sales.

The litigation was possibly a blessing - there would have been an assessment of $10,000 per unit if we hadn't won the first half of the settlement, which just paid us last year.  The lawyers are pretty on top of this.   As mentioned before, most of the fixes that are needed are mostly cosmetic now (need to resurface the parking lot, paint the building, resurface the decks, etc).

BlueHouse

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Re: Removing a rental cap on condo?
« Reply #22 on: May 01, 2014, 08:12:00 PM »
I own a condo that voted for the rental-cap (at either 30 or 35%).  Because I already owned the unit, I'm grandfathered in forever so I can always rent it out.  I know the building is already over the cap, so they're waiting for it to go below, but I've been really curious about what they do if someone follows the rules, gets on the waitlist, but then others just don't follow the rules. Do the rule-followers have to wait longer?

Just curious

Have their been any sales after the cap was added?  Do you think the cap impacted sales prices?
It's really hard to tell.  When I moved out over two years ago, which was right about the time the cap was passed, the sales prices for similar units were anywhere from $240 - 280.  I bought at $350 so prices had been really depressed.   The prices now are moving back up and are around 310-320.  It's hard to know what is the effect of the market rebound and if it's being held down at all because of the cap.