Investor Owns 10%+ Of Condos - Its Affect On Marketability

[MetroMixer]

Hello all,

I have a first...I am appraising a condo for a purchase and 89 of the 183 units in the complex are rented - so it has a higher rental rate than other condominium buildings in the surrounding area. After receiving the condominium questionnaire, I learned that an investor owns more than 10% of all the units.

My question to wrap my head around is the affect on marketability. What to research, document, and save in the workfile. Where or how would you research this. Is there just some common sense to use as well. I would imagine that this would result in longer market times and possible reduced pricing with this many rentals. With this entity that owns more than 10%, if theses got released all at once, there would be many new listings on the market for this complex - how would this affect marketability? Would it control pricing? Would he compete against himself with pricing? If he wanted to unload them and sell them at reduced pricing to pull his profit out, this could have an affect on marketability of any conventional owner tying to sell theirs...... there are many possibilities and 'what-ifs'.

My question is has any of you experienced this? How did you document it in the report? What were your sources? How did you research? Or are there too many unknowns and what-ifs and just inform the client of possibilities?

Thanks for any input...just trying to get this one out the door.

 

[J Grant]

. I would imagine that this would result in longer market times and possible reduced pricing with this many rentals.

What is the actual marketing time and prices in your subject condo, and how is the marketing time/prices compared to condos without so many rentals? That is the answer vs what you imagine...

With this entity that owns more than 10%, if theses got released all at once, there would be many new listings on the market for t

That is a future event you can not forsee...most owners of rental units don't unload them all at once though it is possible.
A condo with more rental activity may or may not have lower prices...just look at the sales in building and what their trend is ... In general, a condo with more rentals does not feel as upscale and has more cars parked around etc. BUT, what is the rental policy for unit owners? Are they allowed to rent their units out, or just this investor allowed to rent theirs out...some condos have restrictive rental policies, others restrictive, such as no renting for first 2 years ( to discourage investor buyers), or only allowed to rent once a year etc. That affects prices and marketability as well.

 

[hastalavista]

Along the lines of JGrant's advice...

• I would make an additional disclosure (in excess of the check-box on the form) of the scale of the single-entity's ownership ratio.
• I would review my MLS source for the project to see if any of the single-ownership units had been put on the market recently (either sold, or cancelled/withdrawn, or expired); if I did see evidence of prior activity, I would interview the owner regarding that activity. I would also interview the agent. From this information, I may make a conclusion about the likelihood of a renewed listing of multiple units (and, if I thought it were significant, I'd change the SOW for the assignment. In reality, that information would probably cause the lender to withdraw and I'd just get paid for my work to that point).
• Assuming there was no activity of the single-entity units on the MLS, I'd note that I researched that and found none. I'd ask the owner what their plans were as far as retention of the units and report that in my appraisal.
• I would make it clear that I am valuing the individual units and not the portfolio. However, I would also make it clear that the owner of the unit of my assignment owns multiple units in the project, and a decision to sell multiple units at any one time could impact (a) exposure time and (b) value.
• I would advise my client to carefully review the ownership structure of the project, the ratio of unit-ownership of the subject's owner, and consider it in its risk-assessment analysis.
• I would conclude that based on my research (assuming my research confirms it), I am assuming that sell of the subject's unit is not concurrent with a sell of the owner's portfolio; in other words, I'm assuming that the sale is a one-of-a-kind event.

What more can you research, disclose, and advise?
The lender has all the information it needs to make a decision to go forward or not. This is a potentially risky loan for the lender. But with the appropriate research and disclosure, I see no significant/added risk for the appraiser (you might want to consider this a more complex-than-normal assignment and base your fee on that complexity).

Good luck!

 

[J Grant]

Denis bought up some good points...along the lines of the "what if" scenario, it;s less likely for an investor to dump all units at once (though it is possible), however what has happened in some unlucky condos is that for reasons of their own, an investor who owns many units stops making HOA /maintenance fee payments. Why, I don't know, but it has happened, and THAT can affect marketability, because then you have a sizable chunk of units in arrears, rest of unit owners get stuck with an assessment, the HOA sues the investor, the investor sometimes sues back and it;s a mess..

So check with management office or board if there are outstanding arrears, litigation etc. If it's a responsible investor, with a history of making timely HOA payments and maintaining units, should be no problem, hopefully the condo management can chat a bit about it and answer questions (some do, some don't )i

 

[sail143]

Research the investor and their tenants. I once did an appraisal were an "investor" owned about 10% of the units which were all rented to Section 8 tenants.

 

[TRESinc]

with almost 50% rentals another factor to consider would be the availability of lending funds. not a single client of mine would make a loan on a unit with that percentage of rentals in the development. most of them have now capped it to 20-25% rentals, which means the pool of potential buyers is severely limited and most likely would only be cash purchasers, a.k.a. investors. that can make the situation worse.

we have that problem in one of the associations i own units in and am a member of the board. out of 72 units currently 37 (51.4%) are rentals and no lender will give a loan for purchase so we are currently limited to cash buyers. we had to change our bylaws, not an easy task at all, to limit the number of rentals allowed so we can open up the buyer pool. it took months and months and months of meeting, mailings and phone calls to get majority approval from the owners. all current rentals are grandfathered but no new rentals are allowed until the percentage of rental units dips below 20%.

also keep in mind that FHA got rid of all of their approved condo developments about 10 years or so and every condo is on a spot-lot type approval basis. i don't do FHA work anymore but i seem to recall they had a set percentage of allowable rentals as well (but it's been so long since i did FHA i could be wrong today).

 

[J Grant]

good point Tres Inc!

 

[timd354]

with almost 50% rentals another factor to consider would be the availability of lending funds. not a single client of mine would make a loan on a unit with that percentage of rentals in the development. most of them have now capped it to 20-25% rentals, which means the pool of potential buyers is severely limited and most likely would only be cash purchasers, a.k.a. investors. that can make the situation worse.

we have that problem in one of the associations i own units in and am a member of the board. out of 72 units currently 37 (51.4%) are rentals and no lender will give a loan for purchase so we are currently limited to cash buyers. we had to change our bylaws, not an easy task at all, to limit the number of rentals allowed so we can open up the buyer pool. it took months and months and months of meeting, mailings and phone calls to get majority approval from the owners. all current rentals are grandfathered but no new rentals are allowed until the percentage of rental units dips below 20%.

also keep in mind that FHA got rid of all of their approved condo developments about 10 years or so and every condo is on a spot-lot type approval basis. i don't do FHA work anymore but i seem to recall they had a set percentage of allowable rentals as well (but it's been so long since i did FHA i could be wrong today).

A single entity owning more than 10% of the units is an even larger problem as that makes the condo non-warrantable and ineligible for GSE financing.

 

[gregb]

There is one condo project in Camarillo where the builder has retained ownership of 70% of the units. VA is virtually the only lender I have seen making loans to buyers in that project.

 

[Tim The Enchanter]

There is one condo project in Camarillo where the builder has retained ownership of 70% of the units. VA is virtually the only lender I have seen making loans to buyers in that project.

I'll guess the project was built circa 2006 - 2008.