When purchasing a condominium there are a few additional things to be cognizant about. In addition to purchasing your specific unit, you are also becoming part owner of an entity called the condominium association. That is great in some ways – it gives you usage rights to common elements and also distributes the costs and risks of exterior and interior maintenance like elevators, hallways, roofs, parking lots and so on.
On the flip-side, you are at the mercy of the elected condominium board. They have great powers to enforce existing rules or to create new ones. They can also take up loans on the behalf of the association – and the unit owners all have to chip in to pay for it for years and years to come. So, for good and for bad, a condominium often works like the federal government…
One important thing to be on the watch for when looking at condominiums is something called the investor ratio. The investor ratio is the ratio of owner occupied unit vs rented out units (also called investor units.) If this ratio is too high (typically above 50%), you will not be able to qualify for a typical mortgage.
So, for example if a community has 100 units total and of those 56 are rented out, you would have an investor ratio of 56%.
How do you find out what the investor ratio is? Your Relator may know if he or she has done sales in the community previously. Best place to start is at the front desk of the community (if they have onsite management.) Other times a call to the management company may give the answer. However, in some case, there is no way to know until the lender submits something called the lender questionnaire to the condominium association.
The condominium documents will typically not list what the investor ratio is. Disclosure of the investor ratio was supposed to be part of revised legislation one of the previous years but was taken out as a requirement before being passed.
How is the investor ratio calculated for a community? The official calculation is done by the management company for the association. The amount of care and diligence involved in calculating the ratios as well as the frequency of recalculation varies. This can make it very frustrating for purchasers, particularly when it is a close call right around 50%. In those cases, the reclassification of just one unit can make a difference.
A preliminary way to get the number could be to just look at the public tax records and see how many owners are listed as non-resident owners. Unfortunately, tax records aren’t always updated quickly and owners sometimes don’t update the status if they convert an owner occupied unit to a rental or move back into their rental. So, typically, the condominium association will use their own records and mailing addresses for the dues payments as the basis for their calculation. That again isn’t fully exact as it will list people using postboxes for their mailing address (some do for privacy reasons), people that use the property as a second home (should not be counted as investment) and people who have others pay their fees for other reasons.
Why care about the investor ratio? Well, for starters the lenders do care. A lender may assume that a community with a large percentage of renters will be less well maintained than one with primarily owner occupants. Also, investors may take a more short-term perspective on finances, repairs and budgets than owner occupants would do.
Does the investor ratio affect prices? Yes, it can but not always. With a high investor ratio, financing possibilities are more limited. For example, FHA loans and VA loans may be more difficult if not impossible to obtain. Also, purchasers will typically need at least a 20%-25% down payment. Fewer financing options could mean fewer purchasers and could mean less demand and lower prices. With a lot of renters, the appearance of the community may be affected negatively, hence resulting in lower desirability as well.
Can current owners limit investors in a community? Yes they can. They can limit the ability of owners to rent out their units assuming they have enough votes and support in the community. It is not that common but a condominium association has broad powers and this does happen (Park Towers Condo in Falls Church and Potomac Point in PG are two examples where there are rental restrictions.)
The investor ratio in a community can change with every sale in a community. So, if a home had a 52% investor ratio a few months ago, that could have changed with just a couple of sales to owner occupants in the meantime.
A high investor ratio is typically already priced into the desirability and value in a given community. Investor ratios in a community do change over time, so just because a community has limited financing options today doesn’t mean it will be so tomorrow. As long as you have the necessary down payment and a long-term perspective a high investor ratio shouldn’t automatically exclude a community.