The Condo Owner's Dilemma
If You Want to Move but Can't Sell, You May Not Be Able to Rent, Either

By Renae Merle
Washington Post Staff Writer
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.

At one of them, a luxury building near the Walter E. Washington Convention Center, the condo board has said it could evict unapproved renters, said Gozen, a mortgage loan officer. "My idea was not to be a landlord. My idea was to flip them, but here I am. I am stuck with them," he said.

Gozen is applying for hardship exemptions from both condo boards, arguing that without a renter he will not be able to keep the properties and will be forced into foreclosure or will have to sell at a particularly low price -- either of which would drag down values for the entire building.

"I can only afford to pay their mortgages for a few months, and then I will have to go to foreclosure," he said. "If they would ease up on this until the market gets better, that would be great."

Many condo associations have tended to turn a blind eye to the rental restrictions or simply lacked the capability to keep track of when units were being rented out, real estate lawyers said. But now they are now tightening oversight as mortgage lenders and insurers take a closer look at loan applications.

For example, starting this month, AIG United Guaranty will no longer insure mortgages in condo projects in what it defines as "declining markets." In other places, the major private mortgage insurer requires that no more than 30 percent of the units within the association be occupied by renters, down from 40 to 50 percent.

It will probably also become more difficult to finance the purchase of a condo with a high number of rentals using loans backed by Fannie Mae and Freddie Mac, the federally chartered mortgage-finance companies. The companies are taking a more detailed look at loan applications, said Eric D. Gates, a mortgage broker at Apex Home Loans in Bethesda.

Lenders and insurers contend that buildings with a high concentration of renters can be more difficult to sell and have more trouble maintaining their value, Gates said. "I think they [lenders] also get concerned about the finances of the condo association. Investment properties have higher rates of default than owner-occupied properties," he said.

Condo associations have reacted to the more intense scrutiny by tightening oversight of their rental policies. To discourage rentals, some condos are now charging owners to have a tenant in their unit -- $100 a month in one community, said Robert J. Segan, a lawyer with Segan, Mason & Mason in Annandale.

"In the last year, more condos have wanted to put rental restrictions in place," he said. "I am hearing it more and more."

Yet the Federal Housing Administration sees room to loosen restrictions. The FHA proposes lowering its requirement that 51 percent of a condo building be owner-occupied to 33 percent, part of an overhaul and streamlining of its operation that is pending before Congress. Currently about 2 percent of FHA loans are made for condos, and it can take three months for agency approval because of overlapping requirements, said Meg Burns, director of FHA single-family program development.

"We think that particularly in urban markets, that it's fairly common for large buildings to have lots of rentals," Burns said. "We feel like first-time home buyers should have access to prime rate financing for those buildings."

Real estate lawyer Pia Trigiani has advised condo communities to loosen their rental restrictions and try to address the behavior they fear from renters by requiring a longer lease -- at least a year and sometimes two -- as well as by requiring the tenant to abide by all of the association's rules and regulations.

"The sense is that if you are an owner, you are going to be a better neighbor, you are going to take better care of building," said Trigiani. "I don't know if that has ever been proven. A long-term tenant is as good as an owner."