Education >> Home Ownership

A Big Reason to Avoid Condos

Condominiums can be fine purchases in urban areas, but in the suburbs, you often buy them at your peril.

There are three common buyers of condos: retirees who are downsizing and want to eliminate the upkeep hassles of home ownership; investors who want to make money from rental income (and eventually by selling the condo for a higher price); and those who want to own their home but who can’t afford a townhouse or single family house.

Unfortunately, many condo owners discover that their condos fail to rise in value. Worse, in many cases, they cannot sell for any price. The reason is “investor concentration” in the building.

Here’s the problem: When you’re ready to sell your condo, who will buy it? a starter home. These people must finance their purchase, meaning they must obtain a mortgage. And this is where the problem starts.

Lenders like to loan money to people who will live in their homes, because owners tend to take good care of their homes. But when investors buy homes, renters live in them -- and renters generally do not take good care of the properties. For this reason, some lenders refuse to provide financing if renters occupy more than 40% of the building. If your buyer can’t obtain a loan, he or she can’t buy your condo.

That means you’re stuck with the property, forcing you to rent it. You have to hope that you’ll receive enough in rent to cover the costs, and by renting you exacerbate the problem of investor concentration -- creating a vicious cycle.

Some condominium buildings have experienced difficulty with resales because too many units are owned by investors. Some condominium associations have actually restricted the number of times a unit can be rented in a year; some prohibit short-term rentals. Others don’t allow owners to rent until after the first year of purchase or prohibit investors from owning more than one unit in the building. All these maneuvers are designed to reduce the problems of investor concentration.

So if you are considering a condo purchase, learn how many units in the building are occupied by renters. Stay away from buildings where investor concentration might become a problem in future years. Better yet, reject all low-priced suburban condos and wait until you can afford a townhouse or single-family house.

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