- The Washington Times - Wednesday, December 3, 2003

Q: I am considering buying a new condo as an investment property in a

brand-new development in Northern California. The salesperson told me that at least one of the people on the title for the condo has to be living in it, and buyers will be asked to sign an affidavit saying so.

Can a developer dictate to me whether I have to live in a property I buy, and how can they enforce this? These units are in high demand. I’m on a preferred-buyer list, and they only sell on prescheduled sales-event days. It sounds as if they want to discourage people from buying them as rentals. Is this legal?

A: The builder can restrict who can buy by virtue of ownership/renter status because his financing might depend upon whether the development is an owner-occupied community.

There are various mortgage programs that allow only owner-occupancy financing. The builder may be using a government-backed program that has federal regulatory issues connected with the ownership consideration.

The builder obviously wants to maintain the ownership integrity of the community so that at least the initial condo owners can enjoy the benefit of owning in a development full of residents who want to maintain the quality of the property because they own there.

It’s an unwritten rule — owners maintain property better than renters.

I’ve seen some condo developments lose valuable financing options because the renter-to-owner ratio increased beyond the limits.

In one situation, a lender was willing to offer Federal Housing Assistance financing, for instance, only after 51 percent of each building became owner-occupied. As each unit sold, the new owners would have to wait till enough units were sold to owner-buyers to surpass the 51 percent mark before they could go to settlement. Some of the settlements were delayed for up to six months while they waited.

Can they enforce these rules? Yes, if they are willing to go to court to have the sale ruled null and void. You are signing legally binding contracts when you are buying real estate and saying, in writing, that you are the owner-occupier. If you aren’t and you move in renters, then you may be committing fraud and could be prosecuted.

Q: I realize that with a rental property, you obviously want to rent it for more than your mortgage payment. How do you determine the profit margin?

For example, if our current mortgage payment is roughly $1,500, a month and we know we can rent it for $1,700, is that enough of a margin? What other things should we consider in figuring out if this is a good risk or not?

A: Your $200 margin at least gets you past the positive-cash-flow threshold as long as the house is in good shape. At the end of the year, your gross profit is $2,400 — plus the renter has paid all the taxes and insurance per month.

However, is that enough? If your furnace breaks down, how much of your profit will you have to eat up to replace it?

I would highly suggest purchasing a home warranty to help protect you from unforeseen breakdowns in the rental. The warranty costs several hundred dollars per year, and it usually includes a deductible for each occurrence.

Other items you’ll have to be ready to pay for through the year include:

• Vacancies — the mortgage payment for each month it’s vacant.

• Insurance.

• Marketing expenses in between tenants.

• Fix-up costs between rentals — painting, repairs, etc.

• Homeowners association fee, unless this is included in your rent payment.

• Miscellaneous repairs — and there are always miscellaneous repairs. Think about your own home.

M. Anthony Carr has written about real estate for more than 15 years. Contact him by e-mail ([email protected]).


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