Brooklynbaby, Home Buyer in Windsor Terrace, Bro...

Why would I buy into a building that claims to be a condo building, but clearly has apartments being rented directly from the developer?

Asked by Brooklynbaby, Windsor Terrace, Brooklyn, NY Sun Feb 7, 2010

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That's sometimes done by the developer when they aren't able to sell all their units. To maintain some cash flow, they rent their units--either as straight rentals or sometimes as lease-options.

To answer your question: Generally you would not want to buy into such a building. Lots of reasons: First, the fact that the developer hasn't been able to sell all the units indicates that the market is quite slow. So slow that even a developer, with all its power and leverage (over lenders, for instance) can't move the units. So, if you wanted to sell, you could find yourself competing against the developer. Or you could find that some lenders wouldn't touch your building because the percentage of rentals exceeded a specified level.

Another drawback: Usually, the condo documents specify that the developer controls the condo association until a certain percentage (often around 75%) of the units are sold. If the building doesn't reach that number, then you'll have a condo association controlled not by the individual unit owners, but by the developer. That's taxation (and more) without representation.

Now, it's possible that the developer sold a chunk of units to investors and, as part of the package, agreed to manage them as rentals. That would address some of the issues raised above, but not all. For example, you'd still run into a problem if the percentage of rentals exceeded a certain level. And while control of the condo association might be in the hands of the owners, you'd have a situation in which many of the owners really don't care about the building or its management. That'd be a bad thing.

So, you should find out what the real situation is. Ask your Realtor.

However, if the situation is as you describe, there are a lot of disadvantages to purchasing there.

Hope that helps.
1 vote Thank Flag Link Sun Feb 7, 2010
Don Tepper, Real Estate Pro in Fairfax, VA
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I think this is hilarious. I grew up in a house three doors up the street from 310, and we all saw the "apartment house" as akin to a welfare hotel. It smelled of insecticide and garbage. When we trick-or-treated there (and I'm talking about, say, 1966 -71) we always checked our candy from the "apartment house" because we thought it had cockroaches.

Now those apartments are selling for $350,000? Is the world crazy or what?
0 votes Thank Flag Link Wed Apr 4, 2012
I'm not so good at guessing games, but among the reasons are:

- you really love the unit
- you're getting a really good price
0 votes Thank Flag Link Fri Feb 12, 2010
Robin,

Many? Not from what we are seeing. Fannie Mae and Freddie Mac require up to 70 percent of the units in a project to be sold before they will back a loan. FHA is now at 50%, many of the buildings I have taken buyers to do not qualify for FHA loans. We were forced to look at buildings only with 70 plus percent sold.

I'm not a mortgage broker, and I have a great person who I use. As far as I know when it comes to FHA loans you are looking between 3-5% down payment. Probably 90 plus % of new developments in New York want to see 10% down, Banks won’t allow below 20%. You get the idea.

Only handful of buildings which I know of that are FHA approved.
0 votes Thank Flag Link Fri Feb 12, 2010
Alen, in a new condo development, many of the banks will allow financing with 50% sold or in contract. Contact me if you want information on that.
0 votes Thank Flag Link Fri Feb 12, 2010
Hello, since the market went down developers that built condos were unable to sell the units and had to eventually rent them out instead in order to keep up with mortgage payments. I don't think it's fair for people to buy into a new condo building and then realize that most of the units are being rented out. That will definitely bring downn your property value and usually the quality of living as well.

By asking this questions you already know the answer and you know what to do already.

I hope my answer helped you.
Web Reference: http://www.Kandhhomes.com
0 votes Thank Flag Link Fri Feb 12, 2010
Are you asking for us to convince you to buy into such a building or convince you out of buying in such a building?
Don is absolutely correct. You will come across much resistance from Lenders when looking for financing. Most banks today want to see at least 80% sold/contract signed in New Developments before approving you for a loan, while other banks may have slightly lower guidelines.
Do you know if this building offers rent to own option and if this developer is offering owner financing? My first guess would be no, but it’s still a good idea to double check.
Be cautious with Condo’s going Rental. Main reason for this caution is that typically rental tenants take less care of their apartments as compared to owners. As an owner it’s your home and you have more to lose, renters are there for a year, maybe before they move on. Also as an owner if a building which has very few units sold you may be taking a risk if some tenants decide not to pay their rent, developer is low on cash and someone has to cover the carrying costs for the building a.k.a. common charges. That responsibility may very well fall on the few current owners.
Also you have to review the building. Is this a large project or a boutique building like a converted townhouse?
I can see from your signature that you are in Windsor Terrace. Is that also where you are looking to purchase or will you be looking at other areas? Feel free to give me a call or shoot me an email at any time. I live Ten minutes from Park Slope, used to work out on Kensington Aerobics & Fitness and know the area very well and would be happy to help you.

All the best,
~Alen
0 votes Thank Flag Link Wed Feb 10, 2010
Brooklynbaby
Don gave a great answer and I echo. I personally would not purchase a condo that was being rented out like apts. Puchasing in my eyes is a place you want to live but also an investment. With that in mind I fear as an investment it would not be desirable at all. Of course I haven't seen them but instantly that would be my first instinct and I would stay clear.
0 votes Thank Flag Link Sun Feb 7, 2010
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