Financing and Low Owner Occupancy

mjlbFebruary 4, 2013

I have been looking to buy a small condo as an investment property. Oddly, two properties that I've looked at recently are in bldgs with low owner occupancy. But the reason is not foreclosures or anything like that. The reason is that the original apartment bldg owner filed a master deed to condo the bldg, but still owns 50% - 80% of the units, and is not trying to sell them. I'm not sure why a bldg owner would do that, but my real question is how does that complicate obtaining a mortgage.

I would not need a mortgage to acquire a condo, but obviously someone that I might wish to sell to might need a mortgage. Also, are there any non-financing issues with this scenario?

Thanks for your input!

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Lenders do look at the %age of owner occupied condos. I don't recall the specifics, but it does play a role in getting a mortgage.

One non-financing issue is the willingness of non-occupant owners to pay monthly fees and to spend money on building improvements. As long as they can't rent the place, they may not care like an owner occupant would.

    Bookmark   February 4, 2013 at 3:21PM
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Is this an apartment conversion to condo? I personally would steer clear of those until they were completely sold and occupied, and the HOA completely clear from the builder/ex-owner.

    Bookmark   February 4, 2013 at 6:30PM
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It is an apt to condo conversion, but the conversion and sale of some units happened more than a decade ago. The owners of the bldgs retained ownership of the majority of the units. Our real estate market was really hot during much of that time period, so I'm sure it's not a question of being unable to sell units. Rather, the owner retained a big portion perhaps for his/her own future appreciation. It's odd tho' since real estate taxes of course go up once the apt bldg is converted to condos.

    Bookmark   February 4, 2013 at 7:58PM
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Okay, I understand. The problem I see here is that one owner basically controls the condo because of his number of votes is going to sway everything his way. (1 vote per unit)
As an "investor" he should understand mortgage rules better.

I just took a condo financing class, and the Fannie Mae 51% owner-occupancy applies to investors only, not primary or second home mortgages (this is the big mistake lenders often make reading the Fannie Mae rules). However, if a single entity owns >10% of the units, it is ineligible.

    Bookmark   February 5, 2013 at 10:49AM
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C9 -- very interesting -- I didn't realize the 51% rule worked that way.

And I had never heard of the single entity owning >10% rule. Do I understand correctly that the 10% rule would make all the units ineligible, even if 89% of units were owner-occupied?

    Bookmark   February 5, 2013 at 1:58PM
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I'm just grabbing this from my notes, and I can't remember what they said but it made sense at the time. This was specific to FLORIDA, but Fannie Mae rules are the same. However different lenders may overlay add'l requirements.

- Fannie Mae 97% primary (in certain cases) but usually 95%
90% second/vacation/seasonal rental ok
85% investment (no PMI available for this)

- Requires condo review (4 different types depending): (1) PERS for new/newly converted, (2) Limited Review not for investors and 75%/70% vice 95%/90%, (3) CPM expedited for established condos, or (4)*Lender Full Review for established, best financing, Budget 10% for reserves, questionnaire, PEW (project eligibility waiver) fee for "compensating factors" if you don't meet some requirement - this is the most common one required

- Ineligible: condo hotel, timeshare, >20% total sqft commercial (some exceptions), single entity owns >10% (some exceptions), association in litigation (not foreclosures - and some exceptions)

- Items needed for lender (most lenders)
- condo questionnaire from lender to Board or Management company
- copy of condo docs (declaration, by-laws, rules & regs, and all addendums)
- evidence of master insurance (fidelity, hazard, flood, other)
- copy of current budget
- contact for HOA or Property Management company

Initial things to look for:
(1) Less than 15% of unit owners >30days past due on HOA fees (may be critical what day of the month you submit the questionnaire)
(2) Less than 20% total sqft for non-residential/commercial use
(3) No hotel or resort like amenities, nor allow daily rentals (meaning no rental office on site)
(4) No pending litigation involving the association

Hope some of this helps! I think you can look it all up on the FM website (except for the lender stuff at the end) but this is easier to know what to look for.

    Bookmark   February 5, 2013 at 8:19PM
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