The “for sale/owner occupant” housing market has been in a state of depression since 2007. The United States is now faced with millions of unoccupied, or soon to be unoccupied, homes resulting from foreclosures, abandonment or failure to sell after construction or rehab. Even in the good times, affordable housing was a serious national issue. A potential opportunity that presents itself in the context of the current housing situation is to put people who need housing into vacant homes. If done successfully, homes that would otherwise deteriorate would be occupied by people who, hopefully, would properly maintain them.
Articles have been written and studies have been conducted to address this issue. My experience is in representing developers in the area of condominium and planned unit development law. The purpose of this blog is to suggest possible approaches to dealing with the issue of vacant condominium units in the Chicago metropolitan area.
A large number of condominium buildings were built or rehabbed in the first decade of the 2000s with the intent to sell the units primarily to owner occupants. At the time that most of these projects were commenced, financing was plentiful and easy to obtain. People who were not economically, and sometimes not emotionally, qualified to buy a home were able to, and did, buy homes, often with little or no money down. Others refinanced their home to take out much, if not all, of the then current equity in their home.
When the market died, home values declined dramatically and even owners who had what appeared to be significant equity in their homes found that they were “under water” on their mortgage loan. Subprime and Alt-A loans disappeared. Lending standards were significantly tightened. The housing market became dependent on what became government financing (Fannie Mae, Freddie Mac, FHA and VA), which is often referred to as Government Sponsored Enterprises (“GSEs”). The GSEs historically have been charged with often conflicting missions, including facilitating the “American Dream” by promoting home ownership, promoting affordable housing and turning a profit, or more accurately in today’s environment, minimizing losses. As often happens with government programs charged with inconsistent or contradictory objectives, paralysis has set in.
The solution to the myriad of housing issues is beyond the scope of this blog, but I do have some experience and ideas for dealing with one area of issues, namely: what to do with condo units that currently cannot be sold or financed and, in some cases, cannot be rented and, as a result of these issues, are threatening the value of other units in the condo and the continued viability of the condo.
The simple and obvious solution is to facilitate the rental of vacant units at affordable rentals to people who need housing. In the current economic and political environment, this is more easily said than done, due to a combination of the following, often contradictory, government policies:
- For years, the GSEs would not buy or insure loans on units in a condominium where there was a high concentration of rental units.
- Presale requirements, which were designed for new construction condos, ranged from 51% to 70% of the units in the condo being presold or sold to owner occupants.
- Condo conversion of apartment projects to primarily owner occupants was facilitated and encouraged by the availability of GSE financing.
- The interests of tenants in apartment projects being converted were given some protection, primarily as a reaction to early conversions where tenants whose leases were summarily terminated if the were unable or unwilling to purchase the unit they were renting. However the protections were seen as a necessary nuisance by converters and never really gave much protection to tenants.
- The American Dream of owning your own home, even if it was a unit in a converted condo, was glorified and, in many communities, renters were viewed as being inferior to owner occupants in their economic status, social stability, their ability or willingness to maintain the quality of their home and their overall value to the community.
The GSE tilt against renters in condos together with the perception that renters in a condo were undesirable, led to many condo associations and municipalities severely restricting or prohibiting the leasing of units. The bias continues today.
The market has completely changed since 2007, but the GSEs have not adjusted. For example:
- The American Dream is in shambles. Many people who viewed their home as a source of profit, or at least a source of spending money, overextended themselves by buying or refinancing a home they could afford only if the value of the home increased over time.
- When a home mortgage went under water, the home’s owner became less able to support or maintain their home or pay the costs of ownership, consisting of mortgage payments, real estate taxes and assessments. With falling values the owner was unable to refinance or sell the home.
- Some owners walked away from their home and trashed or looted it. Others stayed in their home but stopped paying the costs of ownership and, knowing it was a matter of time before they had to vacate, stopped maintaining the home.
- The GSEs continue to refuse to finance units in condos with high delinquency rates or where over 10% of the units are owned by a single investor.
As a result of the failure of the GSEs to adjust to the changed world, condo units throughout the Chicago metropolitan area are lying vacant and unused and are dragging down the rest of the units in the condo.
Following are some suggestions for dealing with the issue of vacant condo units:
- The GSEs should be directed to make financing available to “qualified” condo unit investors, with demonstrated management experience, good credit and the ability to put 20% or more down, regardless of the number or percentage of units the investor owns in a given building.
- The GSEs should also be directed to make financing available to owner occupants in the same buildings, including both “market rate” and, if a program exists, the sale of units to owner occupants at below “market” or “affordable” prices.
- Investor owned rental units and owner occupied units in the same building should be eligible for financing regardless of the ratio of rental units to owner occupied units or the mix of market rate, affordable or subsidized units.
- Units in condos that restrict or prohibit leasing of units should not be eligible for GSE financing.
- GSEs should be encouraged, if not required, to donate or sell to non-profit or charitable organizations units to be rehabbed and made available as affordable or subsidized housing.
- Appraisal standards would need to be revised to take into account the range of “values” in a building where “market rate” and “affordable” owner occupants will coexist with market rate and subsidized tenants.
- If successful, occupancy will increase and, presumably, delinquencies in the payment of assessments and real estate taxes will decline.
- When the market for owner occupied units returns with availability of financing for both investors and owner occupants in the same building, the laws of supply and demand will control the mix of rental vs owner occupied units in the building and in the community.
- This model will give rise to various socio-economic issues resulting from the coexistence of owner occupants, renters, and subsidized tenants. These issues will be challenging and difficult to resolve. However, if properly structured and administered, the inherently democratic nature of condo governance could be effectively used to encourage the occupants of the building (both tenants and owner occupants) to resolve the issues on a local, indeed, a building by building basis.
- Hopefully, this model if, properly implemented, will generate a feeling of pride, community and involvement by all occupants of a building that will permit the occupants to live together without serious conflict and result in a well maintained property.
- The suggested approach could replace the now jaded goal of living the “American Dream” with a goal of reinvigorating the concept of America as a melting pot, at least in certain condominium buildings.