What do you mean…I can’t rent out my condo?

Condos aren’t common (yet) in Spokane real estate, condos for sale in Spokane represent less than 5% of all Spokane homes for sale.

However, for those that choose to purchase a condo as their Spokane real estate investment, this is an important topic.

 

A client of mine, who purchased a condo about a year ago, wrote to me today asking about limiting the percentage of condo units that can be used as rentals to 10%:

A neighbor of came by and had a petition to sign - that would limit the percentage of condos that could be rented — to ten percent of the total number of condos.

At first thought, it sounded good to me because it prevents the neighborhood from deteriorating with ever-increasing numbers of rental units. However, on second thought, I wondered: If that’s such a good idea, why permit even ten percent? Why not vote to prohibit rentals altogether?

The rub, as I see it, is that after the first ten percent of owners eventually rent their condos out - then effectively virtually nobody else can do it regardless of unexpected circumstances or need. But, what would I do if I were transferred to another job location and forced to move - and found I could not sell at a reasonable price because of some downturn in the resale value of the condo?

I’m conflicted over the pros and cons of this issue - so I’m really curious about your take on it. I fully appreciate how dreadful it would be to have 1/2 the condos eventually turned into rentals. All the riff-raff would make the condo little different from living in an apartment - and that would obviously torpedo the resale value of the units.

On the other hand, I dislike the idea that the first 10% of condo owners to rent their units out, are free to do so if it suits them - but then the gangplank is pulled up and for all practical purposes nobody else can do it - even if there was an unexpected and important need….

What’s your take on this interesting conundrum?

My Response: It’s a good policy…

As far as a 10% cap on rentals, I tend to agree with it. My experience is that a 0% cap leads to lower property values and no cap leads to lower property values.

See also: Top 5 Spokane real estate investments

The reason 0% leads to lower property values is because you’ve decreased demand for the units by effectively cutting out any potential buyer who has either long-term or short-term plans of turning their new home into a rental. I actually had this happen. A client of mine wanted to purchase a condo and turn it into a rental in about 2 years when he purchased another home. We found a wonderful condo, quite a good value (cheap), and he really wanted to purchase it. I found out the association didn’t allow ANY units to be rentals, so he ended up not putting an offer on the condo.

The reason no cap leads to lower property values is two-fold:

• One, more renters = less upkeep, more of an apartment-type atmosphere, less desirable, etc., as you’ve already mentioned.
• The second reason is that, if a certain percentage of condos are rentals, you can’t get Fannie Mae or Freddie Mac (conforming) financing. New borrowers, OR those trying to get a refinance, would have to look to portfolio lenders (which are REALLY scarce right now and tend to have higher rates) instead of conforming financing. I don’t recall what that cutoff number is for percentage of units allowed to be rentals is.

The way it works is, when a borrower is trying to get financing, the condo association has to fill out a form called and “condo questionnaire”. Some of the questions include things such as

• “what percentage of the units are rentals”
• “does 1 owner own more than 10% of the units in the complex”

If a condo association has a certain percentage of units that are rentals that are above the lender’s threshold, the lender won’t lend on the condo.

In practice, the way these caps work is that setting your unit up as a rental is on a first-come first-served basis. After 10% of the units are rentals, the association keeps a waiting list of those who would like to convert their unit to a rental. When anyone in the 10% sells, or moves back in to the unit, the next person on the list is granted permission to convert.

Generally, you can let a “family member” live with you and your unit isn’t considered a rental.

Enforcement, well, that’s another thing. If push really comes to shove, the 10% cap is already met and a homeowner absolutely can’t sell and needs to convert their unit into a rental, what would happen? Frankly, if the tenant is decent and doesn’t cause any problems with the neighbors, I’m not really sure how the association would find out.

Thanks,

Aaron

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