Is Your Condo a residential community or an investment community?

By Deborah Goonan

I read an interesting article last week about a condo association in South Florida that is considering a change to its pet policies. They currently have a very liberal 2-pet limit and are known as a pet-friendly condominium, but now the Board in the process of changing the policy to allow only one pet per unit.1

Pet policies are common controversial issues, but the most interesting part of the article, in my mind, were the incidental facts provided about the condo association itself. It is a 17-story building with over 200 units, very few resident-owned units, most of them leased to tenants with pets. Reading a bit further, the article stated that the Board recently had to replace carpets in the common areas at a cost of $80,000. (Why would you have carpet in the hallways and lobbies in a “pet-friendly” condo?) Apparently there are problems with irresponsible pet owners not cleaning up the “accidents.” Then we hear from some residents who complain that although the pet owners are required to use the service elevator, non-pet owners often get stuck using the service elevator, too, because the main elevator is frequently out of service!

Pet policies aside, I found myself thinking, “who is running this Condo Association, and why aren’t they taking care of major responsibilities such as keeping the elevators in service, getting bids on easy-to-maintain flooring, and enforcing rules about responsible pet ownership?”

Digging for details

One of the owners interviewed for the article happens to own 16 units. I checked the County Assessors database. Many of the “owners” are listed as LLC and INC business enterprises, and they own multiple units. Some of the individual owner names are repeated more than once, too. And there are several bank-owned units. Overall, there appear to be more investor-owners than resident-owners, so I would classify this Condo as an Investment Community. I did a quick Google search, and discovered that the one or two bedroom units have been selling for $230,000 - $390,000 recently, with monthly maintenance fees at approximately $520 for a 1-bedroom unit, and $730 for a 2-bedroom unit. Rents start at $1350 per month for a studio, all the way up to $2300 per month for a 2-bedroom unit.

Not exactly chump change for the average buyer or tenant.

What can a resident-owner expect?

So, if a condo is owned mainly by multiple-unit investors, how does that affect the resident-owner that owns just one unit?

With a condo full of tenants, you will likely see a higher level of turnover, because tenants tend not to stay long term. Tenants are probably not going to be concerned about long-term maintenance projects, only immediate problems or repairs that must be done. They might not bother to take good care of their units, let alone any of the commonly shared areas. There are exceptions, of course, but people generally take more pride in something they actually own.

Because a tenant doesn’t own any property, she cannot vote for members of the Board, and she doesn’t have any input regarding any changes to rules or policies. But if that tenant doesn’t like the way things are managed, she can simply not renew her lease, and walk away.

As an owner of a single unit, you will have very little influence as well. For instance, the neighbor who owns 16 units will get 16 votes to your ONE vote. And looking at the list of owners in the public record, it is quite clear that a few investor-owners have acquired even more than 16 units. This forms an investor-voting bloc that will outvote the individual unit owners every time. I would predict that the condo Board is made up entirely of majority investors, because, after all, they control most of the votes. I was unable to verify this, because there is no specific information about the Condo Association available online.  

So if you happen to be a minority owner, and the majority investor-controlled Board decides to spend oodles of money on improvements, with a contract awarded to one of their family or business affiliates, there isn’t much you can do about it. If the Board decides to stop heating the pool, or reassign parking spaces, or change pet policies, likewise, there is little you can do about it.

If you don’t like the living conditions, and you cannot sell because you’re still underwater on your recent purchase, you will probably do what so many other owners have done: move out and rent your condo to tenants.

But if you are the landlord of a single unit, and the Board changes its pet restrictions from maximum of two pets to one pet – as it is in this case – and your tenant is adversely affected by those rules, too bad for you. You will likely lose your tenant, and have a few months of vacancy while you get the unit ready for the next one. If the Board continues to poorly manage the building, and the elevator stops working altogether, it may become difficult to find and keep any good tenant.

What does the future hold for a minority owner?

A little more Google research on this condominium turned up an article written in 2008. The building underwent a condo conversion in 2006, but sold units in 2005 before the certificates of occupancy were issued!2  Those poor buyers had to rent elsewhere, paying the mortgage and condo fees, while waiting months or years for their units and floors to be completed!

No one can predict the future accurately all the time, but a savvy buyer can and should request Association documents and financial records, and review the public records, just as I did. It didn’t take long to recognize that a condo in this building is, at best, a risky investment. Condo de-conversions are occurring all over Florida, and in other states as well. I think it’s very possible that these investor-owners will consider dissolving the Condo Association, as soon as they own enough units to force the issue by vote. If that happens, as a minority owner, you would be forced to sell, perhaps at a loss.  

What if you just want to rent a condo by the beach?

But what if you are a prospective tenant, looking for a place to rent near the Atlantic Ocean? Well, as a tenant, you do not have access to financial records of the condo association, but you can still check out who owns not only the unit you intend to rent, but most of the others as well. You can check to see if the taxes are paid on the building AND on any unit you intend to rent. What you cannot verify is whether or not the unit owner is current on assessments, and that is a potential problem for a tenant. Past due assessments can lead the association to foreclose on the unit, and then you would probably have to vacate. Or the association might order you to pay rent directly to them (see previous blog), and that would put you in the middle of a dispute between your landlord and the Condo Association. So you might want to consider renting in an apartment community instead, so you only have to deal with ONE party for paying your rent, and for that matter submitting maintenance requests.  Furthermore, you won’t have to deal with several investor owners attempting to agree on one set of reasonable and fair rules and policies.

In conclusion, there are plenty of important considerations involved in purchasing or leasing a condo. I have seen similar situations occur in townhouse and villa communities with HOAs as well. Do a little research, and carefully consider your options, before you buy or rent!

Footnotes:

1.     Condo residents have mixed feelings on stricter dog policy, The Miami Herald, Joey Flechas, February 14, 2015

2.     401 Blues: Those Who Bought Into a North Beach Condo Conversion Thought They Were Getting a Piece of the American Dream. Many Experienced a Nightmare Instead, The Miami Sun Post, Ben Torter, March 18, 2008 

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