Fractional condo ownership - pros & cons

[Fabiola F.]

I'm considering the acquisition of a batch of rental condos from a single owner with about 40% ownership of the total number of units within the condo bldg. The batch has significant NOI with immediate opportunity to increase it by 25% with less than $200k in rehab.

Pros:

1 Strong cash flow as is and rent premiums make it that much more attractive.
2 My end goal would be to resale the individual units to cash out.
3 Even if the environment for resale changes, there's still upside from rental income to hold on to the asset.

Cons:

1 HOAs can be a pain and could enforce restrictions that make it tougher to rent to new tenants or sell the individual units all at once or since.

2 Since this is just fractional ownership with the remaining owners owning individual units, the value & marketability of my units could be affected by the actions and upkeep of the other units.

Are there any other cons that I should consider besides the ones I have already listed?

[John Corey]

Originally posted by @Fabiola F.:

@John Corey Does it adjust your perspective the fact that the remaining 60% of the condo units are owner occupied? For clarity, only the batch of condos are non-owner occupied rentals. And yes, the intent is to resale a few at a time instead of going through the time it takes to sell 1 unit at a time.

They work from the unit count. If 60% of the units are OO and the magic number is 70%, a lot of lender will never approve a loan for a unit in the building until 70% are OO. So, you need to force the issue by selling 10% at what ever price you can achieve before more conventional lenders. When OO buyers struggle to get a loan, the price they will pay is significantly lower.

This is why I am saying you might need to sell a batch all at the same time if the lenders accept that by the time the loan for a unit is put in place, you will high the target percentage. Or, offer OOs buyers seller financing to tip the percentage. They can refinance later to cash you out of those loans.

Now, if any of the 60% choose to rent their unit, that will shift the percentage in the wrong direction. Unless there is something in the title that stops them from renting, it can happen at any time. Each of the future buyers will pick a lender and the lender will ask the HOA at the time the loan is being processed. That is when the current percentage will be checked.

Definitely buy if the deal is a great deal to you. The problem I am highlighting has already negatively impacted everyone in the complex. Not just your seller. So, you should not be accepting the problem unless you are being paid well to accept the seller's bad situation. Just be prepared to live through the issue until you can fix it. Or, be prepared to offer the same sort of discount to the next buyer when you want to exit and OO buyers can not qualify.

There will be a few lenders who will lend to an OO even with a higher percentage of rental units. Find those lenders and make sure any OO buyers agree to use them so you can get the deals done. They are likely portfolio lenders who are not going to resell the loans after origination. Most lenders resell (to a government agency) and the buyers of the resold loans are the ones with the high threshold.

Ask a competent mortgage broker what the lay of the land is at present. My experience is old. With one building and a specific lender, they declined when I hit 10% of the building's units under one name.