Eric Rojas, Chicago Real Estate Broker

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Tuesday, August 06, 2013

The rental factor when buying and selling a condo

The number of rentals in a condo building can affect the pricing and financing options for a condo sale.  Interestingly it can have a negative OR positive affect depending on the over-all situation.  Here's a few examples:

NO RENTALS! If a building does not allow rentals or has capped any new rentals it can be a turn-off for buyers looking for more flexibility. For example, some buildings only allow 25% rentals at any time or require owners to live in a unit for 24 months prior to allowing the unit to be leased out.

On the other hand, buildings that don't allow rentals or have capped them to a low percentage will usually be attractive to mortgage lenders.  A "no-rental building" will also attract a certain market looking for more stability and less issues come re-sale time.  All things being equal, a "no- rental" building may command a little higher price.

HIGH RENTAL OCCUPANCY! If a condo building has 50% or more rental occupancy it may be hard to get a conventional loan or to use your lender of choice to do a loan in the building.  In these cases, some specialty lenders for the building may be one of only few options.  These higher rental occupancy buildings often require 20% down loans or cash purchases.

Condos in high rental occupancy buildings with restricted future rentals may have to be priced 10% to 20% less (we've seen up to 50% less) than other comparable condos without the rental issues.

The rental situation in your building matters when it comes to pricing.

NO RENTAL RESTRICTIONS!  This can cut both ways.  A building with no rental restrictions and low rental occupancy can command a good price.  It gives the buyer the most flexibility (of course, the building could become a high rental occupancy building in the near future and change the game).

A building with no rental restrictions and HIGH rental occupancy may need to be priced lower than comparable units OR may still command a higher price.  In fact, because a lot of buildings in certain desirable locations are restricting rentals there may be high demand for a rent-able condo.   Some buyers are willing and able to make a larger down payment and pay a higher price for the flexibility to rent out the unit as they have few other options in a desirable location.

When pricing a condo for sale or working with our buyer clients we make sure to get all this information up-front to better understand the value of a condo.  It's also important to understand the risk tolerance and goals of the client.

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