The Condo Owner's Dilemma
Saturday, May 3, 2008
Susannah Moss's trendy one-bedroom Adams Morgan condo, in a converted warehouse, has become a potential money drain.
Since Moss contracted to buy the unit in early 2005, she has married, had a child and outgrown the space. She is trying to sell the condo but has been hampered by the housing slump. Three months after putting it on the market, she has yet to receive an offer.
Now Moss, 33, wants to find a tenant for her condo while she waits out the economy. But the condominium association allows only 20 percent of the units to be leased at once, so Moss is on a waiting list. If she tries to rent the unit without permission, she could face a $500-a-month fine.
Condo residents have long scrapped over noise levels, pets and power plays. But the housing downturn is creating a whole new set of problems. Some associations are struggling with rising foreclosures and mounting delinquencies on monthly assessments. Others are finding that rental policies created to preserve property values have become too restrictive for owners who want to rent out their units while waiting for prices to rebound.
Rental policies vary by condo association, but generally they limit the percentage of units that can be occupied by tenants. Some communities require owners to submit the lease they plan to use to the condo board for approval. Renters, the associations believe, are not as diligent as owners about the upkeep of the property and could drag down home values.
The rental restrictions are also meant to guard against the condo being viewed as a risky investment by lenders who believe that buildings with a high concentration of rentals are harder to market to home buyers. Fannie Mae will not guarantee a loan for a condo in which renters make up more than 49 percent of the occupants.
Rental caps are as low as 10 percent in some condo communities, said Jason Fisher, vice president of the board of directors of the Washington area chapter of the Community Associations Institute, a trade group.
"These condos are saying, 'We don't want this to be just an apartment,' " said Fisher, a lawyer with Bethesda-based Lerch, Early & Brewer. "If you get above a certain number of units with renters, the lenders, the mortgage companies downgrade the buildings for purposes of loans."
But the policies can be restrictive during a housing downturn, when owners unable to sell their homes may want to turn to the rental market as a temporary fix. Unable to rent, such owners can feel pressured to sell at a low price.
Moss is not the only owner in her building who wants to become a landlord, and the issue has created tension. The debate "has created division within the community, and tempers and feelings are running very high," said Moss, who also is a real estate agent.
Part of the struggle for some communities is in balancing the interests of owners who live in the building and those who bought as an investment. According to the National Association of Realtors, 18 percent of the properties bought by investors in 2007 were condos.
In 2005, George Gozen jumped into the condo craze, buying several units that he planned to sell quickly. When the market turned sluggish, he decided to rent out his two remaining Washington area condos. He is looking for tenants but is facing a 20 percent cap on rentals in both buildings.