We received a lengthy comment regarding one of our recent columns relating to leasing restrictions in condominiums. We’ve abbreviated the letter as follows:
Rental restrictions really can decrease resale values and hurt individual owners who think they might never have to rent until they find out they do. After all, life is unpredictable. And no one should have to beg condo boards for hardship waivers. Too many boards have and promote misinformation about how the percentage of rentals can affect mortgage financing.
Therefore, you would do a service by clearing up the widespread and oft-quoted misperceptions about Fannie Mae and Freddie Mac guidelines regarding rental restrictions for mortgage financing.
Too many news articles state that FNMA and Freddie Mac have “rental restrictions” of 51 percent. In fact, neither Fannie Mae nor Freddie Mac has any “rental restrictions.” The only restriction they have for established condos is an “owner-occupancy” ratio that applies to investor loans. There are no — repeat, no — “owner-occupancy” ratios required for people buying condos to live in as a primary or even as a secondary residence.
FHA has a 51 percent owner-occupancy ratio, but for many luxury condos, conventional FNMA or Freddie Mac financing is used much more than FHA financing.
The USA was built on the basis of individual property rights. But condo and homeowners’ associations have become private, feudal governments that are often neither transparent nor subject to meaningful checks or balances. It’s getting worse and worse, especially since it’s hard to find any new housing that is not a condo or HOA.
In the meantime, individual owners should be allowed to use their units as allowed within the real federal and state laws. No one else should be allowed to restrict lawful use including the ability to rent. There are much better ways of dealing with bad renters and bad owners than by a priori discriminating and restricting such. Better management; notifying and making sure owners take responsibility; requiring provisions in leases that protect the condo common areas and behaviors; helping owners rent to responsible people in the first place by providing a tool kit including how to do due diligence; incorporating renters into the community — all of these will help improve the quality of those who live in the complexes!
You raise a couple of interesting issues. We even agree with some of them, but we don’t agree with your general contention that people in condominiums or other associations should be bound by no rules other than state and federal laws.
Condominiums are a legal creation to allow the division of parcels of land into either vertical or horizontal condominium associations. By their own definition, specific laws were drafted to allow condominiums to exist. In condominium buildings, an individual owns the air space within a specific unit, but the building as a whole is owned by all of the unit owners. That means that everybody owns a part of the whole. And when everybody owns part of the whole, you have a committee that needs to decide issues dealing with the whole.
You have to have this kind of system to decide how to make repairs and handle issues that affect all homeowners. Some issues affect them more than others. If a condominium building needs major, urgent repairs, that will affect all of the owners and take priority over other issues.
How does leasing a unit come into play? There are valid reasons for regulating leasing of units. Some of those regulations may be the same as making sure owners in buildings follow the rules. You certainly don’t want an extended family of 20 living in a 1,000 square foot condominium unit, whether its owner-occupied or rented.
So the real issue is making reasonable rules and not overdoing it. We know there are plenty of condominium boards and homeowner associations that make rules for everything. In some cases these rules are necessary, as many homeowners live not by the spirit of the association but rather by the strict interpretation of its rules.
Having said all that, you are wrong in your interpretation of Fannie Mae and Freddie Mac guidelines for their loans. If you have a rented unit in an association, that rental unit is considered an investor-owned unit.
Freddie Mac’s project review will require an established condominium development to have a certain number of owner-occupied units in order to allow buyers to borrow up to a certain amount. While a condominium development may allow a greater number of rental units, the borrower buying in that development may not get as high a loan as he or she would have wanted. Given the buyer’s propensity to finance 80 to 95 percent of the sales price of their properties, the number of rental units in the building does become an issue.
Keep in mind that Fannie Mae and Freddie Mac set the ultimate guidelines, but individual lenders may have stricter requirements. The lender furnishing the loan may have more stringent guidelines requiring a significantly higher owner-occupancy level.
Federal Housing Administration (FHA) rules currently require that at least 50 percent of the units in a condominium project be owner-occupied. If the requirement is not met, the borrower may not get an FHA loan.
The FHA has the most stringent guideline among the big players in the real estate market, and many condominium associations will adhere to the one that allows borrowers to get loans from all of them.
So it’s valid for condominium and other association developments to mandate some level of owner occupancy. However, some developments have limited the leasing of units entirely. Whether you’d want to live in such an association is entirely up to you. Given the tone of your letter, it seems as though you would be best off owning your own single-family home, where you’d have a fair amount of distance — and autonomy — from your neighbors.
Ilyce R. Glink’s latest book is “Buy, Close, Move In!” If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11 a.m. to 1 p.m. EST. Contact Ilyce through her Web site, www.thinkglink.com.