Low-owner occupancy boosts condo loan costs
Q. Dear Rick: I’m thinking of buying a condominium this spring. One of the things I’ve been warned about is “low owner-occupancy” condo projects. Can you explain what those are, and why I should be careful of them?
— Maria from Quincy
A. Maria: Low owner-occupancy condo projects are those that have a large percentage of units rented to tenants. Many home buyers consider buying such units because they are often less expensive. But, as you’ve been cautioned, there are a number of issues you should consider before moving forward with such a purchase.
• Financial/management problems:
Your first concern is the overall well-being of the complex. Though certainly not true in all cases, the lower the owner-occupancy ratio in a condo development, the greater the likelihood the complex may experience financial problems and/or management problems.
This is because investment property owners are more likely to neglect — both financially and aesthetically — their property than owner occupants. As a result, your condo’s value and your ability to resell it, as well as your overall enjoyment of the property, may be less if you buy and move into such a condo complex. • Financing: Most local lenders sell their residential mortgages to the secondary mortgage market. To do so, they must follow secondary mortgage market lenders’ guidelines, which become stricter the lower a condo project’s owner occupancy ratio is. For example, on loans with a 5 to 10 percent down payment, an owner-occupancy ratio of a least 60 percent is usually required. Those with an owner-occupancy ratio below 50 percent often require a down payment of at least 20-25 percent and, in some cases, secondary mortgage market financing may not be available at all.
In such cases, your only option may be a “portfolio loan,” which generally requires a significantly higher down payment and interest rate.
Moreover, recognize that even if you can afford the more expensive financing a unit in a low owner-occupancy condo development may require, future buyers may not be able to afford the more expensive financing. This will lessen your condo unit’s resale value.
So, before deciding to buy a condo in a development with a low owneroccupancy ratio, be certain that:
• The price you’re paying is significantly lower than comparable units in developments with high owner-occupancy ratios,
• You have found a lender who will give you secondary mortgage market financing or other affordable financing with reasonable terms, and,
• You’ve had your property inspector and real estate attorney verify, extremely meticulously, that the condo complex is in good to excellent condition, structurally and financially.