Today’s rigid loan environment never ceases to create interesting and challenging scenarios for sellers and buyers, alike. Buyers beware: before falling in love with a property, ask the owner or the representing broker about the percentage of sponsor and rental units in the building. One of them should have the answers. The reason to ask is simple: many lenders, often following Fannie, Freddie or FHA guidelines, have caps on these ratios, beyond which they can not lend to the building at all.
10% appears to be the threshold for the maximum ratio of sponsor units, while 20-40% is the range for the maximum ratio of renter-occupied units.
The implications of these limits are quite significant.
- For sellers, this means you now have to restrict restrict yourself to a smaller buyer base that can afford to purchase the property outright with cash. It’s tough enough that you have to hold your breath until buyers get approved by their banks. Should you be unlucky enough to live in an investor-heavy building, or one in which one entity holds more than 10% of the units, pray to the God of Cash to bring along an interested buyer … and prepare yourself for your property sitting on the market for a bit longer. Make sure, before you list, that you know these ratios so that you can build that in to your expectations during the sales process.
- For buyers, this means you need to really love the place to go for it, and that’s IF you can afford it. Should you come across such properties, you should expect greater price flexibility in your negotiations. Make sure you ask the ratio questions before thinking of the apartment as your own. Further, ask the owner or broker if they are aware of any specific lenders who are more adventurous and lending to the building despite the higher ratios. Sometimes, the smaller, local lenders are willing to go out on a limb more than the larger household names.
Until the credit markets loosen up and the housing market improves, these kinds of limitations will be par for the course.