Condos gaining value, but are they good investment choices?

Published 9:00 pm Saturday, August 19, 2006

The Puget Sound region’s positive long-term employment outlook continues to propel area housing. While some areas of the country have slowed dramatically in the past six months, most well-priced Western Washington homes have no trouble luring good offers and solid buyers.

One of the more telling tales of the healthy local housing scene was the recent statistic provided by the Northwest Multiple Listing Service that revealed condominiums had appreciated at a greater pace (20 percent) than single-family detached homes (14 percent) during the past year.

Conventional wisdom usually holds that when interest slows for a specific commodity, the least desirable in the category is not only the first to suffer but also sustains the greatest loss. Traditionally, condos have not appreciated at the pace of single-family detached homes, so any “softness” in the market was expected to surface with condos before detached homes.

Condominiums have been the answer to many homebuyers – especially first-timers – stung by the cost and scarcity of affordable conventional homes. Condos have also been a target for investors who have been eager to rent out units in popular high-rent neighborhoods. The big jump in the recent appreciation numbers will do nothing to slow investor interest.

However, if you are an investor looking to become a landlord and rent out a unit in a condominium building, make sure you do your research on financing and association agreements. Fannie Mae and Freddie Mac, the largest suppliers of mortgage money in the country, often require that 70 percent of all occupants be owner-occupants before the lenders will supply financing for units in the building. In addition, while an individual owner might be desperate to sell to anyone owner-occupant or investor many condo association bylaws restrict or forbid renters.

Lenders are not ecstatic about extending loans in condo buildings that are heavily rented 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 real estate agents who specialize in condo sales say that 80 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 and very few are absolutely terrible, a survey of real estate agents showed. But it also pointed out that they rarely saw 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 when the market changes and owner-occupants are forced to sell in a down market? The condo bylaws could be amended to permit leasing for a specific period of time – perhaps one year – or allowing a certain number of units to be rented out at a given time.

Condo buyers – like many single-family homebuyers in the country – are purchasing a lifestyle. Most consumers buy condos because they can’t afford to buy a house, while others, like the ones who have purchased in exclusive downtown towers, are often not concerned about price tags. Some simply don’t want the maintenance, worry and cost of owning a detached house, or want to be around neighbors with similar lifestyles. They also want access to amenities, such as a swimming pool, tennis courts and recreation center – amenities few buyers can afford by themselves. Some condo buyers can’t maintain a house due to health, advanced age or lack of motivation.

Purchasing and maintaining a condo as an investor-landlord or as an owner-occupant bring a different set of issues and considerations. Financing and building restrictions are often important to both because of intended use. If you buy a detached home, you don’t have to answer to a condo board or live by its rules. Lenders really don’t care if you sell your conventional home to an investor or to another owner occupant.

When you buy a condo, you are buying in to a club. Check the rules before you sign and think not only in the present but also down the road. Would you ever be want – or need – to rent it out? And, more importantly, will you be allowed to do it?

Tom Kelly’s new book “Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border” was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com