Arrow-right Camera
The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Tom Kelly: Condo financing taking dead aim on renters

The rising cost and scarcity of undeveloped land will continue to change how and where we live.

What we have long thought of as alternative housing is getting more consideration in many conventional neighborhoods. Traditional East Coast co-op apartments and more rural-based cohousing communities are sprouting up in common suburban environments. Developers now are promoting the financial logic of building up, not out.

Condominiums now will shoulder much of the future city-dweller load. The condo market has resurged as all rungs of the housing ladder look to sample the size, safety, amenities and location of well-built condominium buildings.

But the big question behind condo and alternative housing is financing. Will lenders bend their conservative outlook toward condos to support growth? In order to obtain financing, the percentage of owners in many buildings must equal 50 percent.

That’s what Fannie Mae and Freddie Mac, the largest suppliers of mortgage money in the country, often require, and it is one of the main reasons condo associations are pushing for owner-occupants.

A court case, however, sent a message that condo associations should be careful on how owner-occupant ratios are achieved.

Several years ago, in the Shorewood West Condominium Association v. Sadri case, the court ruled that an association seeking to restrict a use in a bylaw must first amend its declaration.

In a capsule, Asghar Sadri and Dorothy Grazul purchased a unit with the consideration that they be able to lease it if they decided not to live there. Nearly a year later, the association passed an amendment to its bylaws stating no owner may lease a unit after that date. In addition, when any leased unit was sold, the new buyer must be an owner-occupant.

Sadri and Grazul then leased their unit and the association filed a complaint for declaratory judgment and injunction.

The trial court found that although the association had the authority to amend its bylaws to restrict leasing, the amendment was only valid as to those persons purchasing units after the amendment became binding. A state’s Court of Appeals reversed the decision, ruling that leasing restrictions was included under a “reasonableness standard” a year earlier when the couple signed their original deal.

The state’s Supreme Court, however, sided with Sadri, ruling that an association seeking to restrict a use in a bylaw must first amend its declaration if the original declaration allowed the use.

The reasons lenders are not ecstatic about extending loans in condo buildings that are heavily rented is because the mortgage default rate of absentee landlord-borrowers is higher than for owner-occupants. In addition, condo complexes primarily occupied by renters are often poorly maintained since absentee owners often vote against improvements and increases in maintenance fees.

Are renters really that much different than owners? What about the philosophy that people take better care of their investments than the roof over their heads?

Many Realtors who specialize in condo sales say that 80 percent to 90 percent of renters take less care of a condo than an owner does. They say about 10 percent take better care than owners, but very rarely do you have an investor taking better care of his investment property than his primary residence.

Most tenants take reasonable care of their unit. A very small percentage are absolutely terrible, the Realtors said. But they also pointed out that they rarely see renters doing the extra added things like picking up around the building or forming a work party to do some common-wall painting.

But what happens if/when the market changes and owner-occupants are forced to sell, not rent, in a down market?

Attorneys say when restriction works to the disadvantage of the owners, there are ways of taking away the restriction. The association could permit leasing in only two of the previous five years of ownership. Or, it could waive the restriction for a year.

Some condo buyers – like many single-family homebuyers in the country – are purchasing a lifestyle. Other people buy condos because they can’t afford to buy a house or don’t want the maintenance, worry and cost of owning a house, or want to be around neighbors with similar lifestyles.

They also want access to amenities, such as a view, swimming pool, tennis courts and recreation center – amenities few buyers can afford by themselves. Some condo buyers can’t maintain a house because of health, advanced age or lack of motivation.

But maintaining a condo as an owner brings different issues, mainly because of financing. Check the rules before you sign and think down the road. Would you ever be willing – or needing – to rent it out?