Getting financing on a small Condo complex - Posted by Tim (CT)

Posted by Tim (CT) on March 28, 2001 at 21:50:38:

When you say sell with owner financing, would that have to be 100% or can that just be a 5 or 10% carryback?

Getting financing on a small Condo complex - Posted by Tim (CT)

Posted by Tim (CT) on March 26, 2001 at 20:37:20:

Here’s the situation: 2 building condo complex with three units each. Three of these units are owned by the tenants (I believe) and the other three are being sold. I’m looking to purchase the other three. They are just being rented out currently. Here were my thoughts:

The condos units are valued at about 50k each. The seller wants 128k for all three units. My thoughts were to try and purchase all 3 units (or the 1 building) for about 115 to 120k. I was then going to spend about 1000 on each of them to fix and clean them up. Once this was done, I was going to try and L/O each one of them to either the current tenants or new tenants. My selling price would be about 55k. I was recently speaking with a friend of mine who is a very good RE agent. He was telling me that I would have difficulty selling the condos off separately because banks like to have at least 51% of the condos owner occupied. If they aren’t, then they don’t want to touch them (I apologize, he did tell me why but I’m drawing a blank). It has something to do with rental units vs. owner occupancy. If the other three units turn out to be just rented, do you think I’ll have difficulty selling the ones I’m purchasing from a financing point of view? If the other three are just rented and I try and sell my three then that creates a 50/50 split of rental vs. owner occupied. Has anyone ever heard of this problem with smaller condo complexes? I hope I gave you enough information to respond. If not, let me know the specifics you would need to answer my question and I’ll try and get it for you.

Any thoughts would be greatly appreciated.

Re: Getting financing on a small Condo complex - Posted by Jim Rayner

Posted by Jim Rayner on March 26, 2001 at 22:01:02:


The rule your are speaking of is Fannie/Freddie guide line. There are two separate conditions that they look at in regards to occupancy and ownership. The first being the number of units that are owner occupied…the requirement 50% owner occupied minimum. The second regarding ownership…does any one owner control more than 30% of the property.

If either of these conditions exist then the community will not qualify for Fannnie /Freddie insured loans. this translates in sub-prime lenders and typical down payment of 30% regardless of credit.

If you plan on using financing you may have difficulty in this regard entering into this deal and the buyer of at least the first one you sell will likewise have the same problem. The sales of the other 2 units would likely not have a problem.

All this is assuming that the other three units are and remain owner occupied.

I have found myself in this situation myself with a small complex where I had control of 27.5% of the property and owner occupied percentage exceeded 50%. I sold off some units as did another 2 investors and the problem corrected itself.

i also have 3 units in another complex of 240 units where for years it has been ineligible for Fannie/Freddie loans because of owner occupancy issues. financing has not been easy but its possible.

Re: Getting financing on a small Condo complex - Posted by Tim (CT)

Posted by Tim (CT) on March 27, 2001 at 08:31:28:

Thanks for the information. If there are 3 out of 6 units currently owner-occupied and I try and sell one unit, I would think the banks would look at that situation and say once the sale goes through the percentage of owner-occupied units would be 66%. This obviously is above the 50% they would be looking for. I haven’t heard of the other issue of having 1 owner control more than 30% of the property. Is this issue more important than the 51% owner-occupancy? Are they the same? If so, my thoughts are that even if I’m able to sell 1 unit to make the complex 66% owner-occupied, I still own the last 34%. And, the banks may not look upon this situation too favorably. Would that be correct?

Thanks for your knowledge!

Re: Getting financing on a small Condo complex - Posted by Nate

Posted by Nate on March 26, 2001 at 22:30:50:

Presumably though, you could owner-finance in the properties in question and would have good success with it if conventional loans are not available…


Re: Getting financing on a small Condo complex - Posted by Jim Rayner

Posted by Jim Rayner on March 27, 2001 at 09:18:50:

Both criterions are equally important and either will disqualify the property for Fannie/Fredie loans. When I sold my first unit it took the property across the threshhold on the owner occupancy threshold and the buyers were able to get the fannie/fredie financing as were subsequent buyers of other units.

My only run in with the 30% rule was when I explored buying additional units in the same complex. Even with 30% down I was not not able to locate financing even with the sub-primes that I had worked with that would make exceptions on the 50% occupancy issue.

I don’t want to discourage you from investing in condos but just want to make you aware of the financing pitfalls to watch out for. At least 30 % of the money I have made over the past 5 years has come from condominiums. They can be a great investment in the right market when purchased for the right price in communities that are well managed and funded.

As Nate says below owner financing will prevent all the problems with the financing but the impact of exceeding the limits effects all owners and future buyers. Faced with higher financing costs potential buyers will be reluctant to purchase units. This can seriously impact the values and force them down. After I sold my first unit in the complex I mentioned earlier the next unit sold was 14% higher and the last two just sold were 47% higher. This last price is 108% higher than my purchase prices paid in 1996.

Hope this helps

Re: Getting financing on a small Condo complex - Posted by Nate

Posted by Nate on March 27, 2001 at 11:26:15:


Although I didn’t elucidate my idea very well, that was exactly what I had in mind - find complexes that have fallen onto the “bad” side of the 30% or 50% rules, buy up enough units to make a difference, and then sell them, with owner financing, until you’re back on the “good” side of things and can sell off the rest…