The time may have come for you to downsize.
Live Condo High Life Without Ownership Worry
By Dan S. Barnabic
The kids have grown up, moved away and you find yourself an empty nester, tired of the everyday chores of maintaining your home which may have more bedrooms than you need. The very thought of mowing the lawn and shoveling snow is something you dread with passion. One of the logical choices is moving to a condo, either by buying it or leasing it.
Condo buying requires careful examination of the condo complex you wish to buy into. Some complexes may be fraught with peril, like being inefficiently run or financially unsound, so the necessary due diligence is an absolute must if you wish to avoid disappointment in the future. Condo ownership is also subject to unpredictable market swings. All this may amount to potential risk and worry, which you’d rather avoid altogether.
Consider condo leasing. It will provide you with the opportunity to enjoy the condo lifestyle by remaining worry-free about the ups and downs of the market, including running of the condominium complex, and looking after repairs of its common elements.
From 2006 on to 2010, real-estate prices plummeted in many urban areas as much as 30% and more, causing the market to become flooded with empty condo units. Many units ended up being leased by condo associations or banks that owned mortgages on them. So, from that point of view, the misfortune of the owners who lost their condo units benefited tenants, who had plenty of rental inventory to choose from.
Overall availability of rental condo units seems favorable even up to the present time. Encouraged by the recovery of real estate by the end of 2010, many investors have been buying condo units again. As the present market climate prevents them from being flipped overnight, condo units are being bought for a longer run, thus providing renters a chance to obtain longer leases.
In fact, an incoming wave of real estate products, including condominiums, may soon become part of the available rental inventory. MarketWatch reported recently that the controller of the currency, which regulates national banks had been pushing banks to help borrowers whose home-equity lines are about to reset. The OCC estimates that $171 billion in home-equity lines held by the biggest banks will reset from 2014 to the start of 2018. Many borrowers won’t be able to tap those equity lines anymore. In other words, borrowers will have to start paying down their loans rather than just paying the interest on them. It is safe to assume that many such homeowners won’t be able to do so unless the banks again restructure their home-equity loans. One can therefore expect precipitation of more distressed real estate coming onto the market, many of it as additional condominium inventory.
Will the above possible scenario add to oversupply of condos? No one really knows, but one thing seems certain: There is going to be plenty of condo units available for lease in the years to come.
Average leasing rates
With the exception of Manhattan and some choice touristy areas of South Florida and California, the comparison of average rental of newly built condominiums in major urban centers across the country is about $1.20 to $2.00 per foot, on a monthly basis. For example, a one bedroom plus den unit measuring 1,000 feet can be leased from about $1,500 to $2,400 a month. A 1,200 plus foot 2 bedroom unit will set you back about 1,700-2,000 a month. You can expect to pay those prices in newer, well maintained condo buildings with amenities that usually include a parking spot, swimming pools, gyms, outside patios with BBQ, playrooms and in many cases, conference rooms.
If you don’t care too much about the pool and gym, you may choose a well-kept condo building with a more favorable monthly rental.
Needless to say, the word ‘location’ plays a big factor. Condo complexes in safer neighborhoods, in proximity to outside amenities such as shopping centers and entertainment districts usually come with more expensive rental tags than units located in suburban neighborhoods, where a car is most likely needed to access such outside amenities.
What to consider before leasing
First, go over your budget. Make sure that only one-third of your annual household income is allocated for your lease payments, including nominal future increases. Paying more would put a strain on your budget. Overpaying for the roof over your head at the expense of other necessities of life isn’t a good choice, so there should be no compromise in that regard.
When you choose the unit you wish to lease, always make sure to check if the homeowner’s association must approve your lease with the unit owner. Some associations have their internal statutory rules in regard to approving or vetoing a lease, and some don’t. In any event, the prudent thing is to hire a knowledgeable attorney to prepare the lease and then get it either approved, or at least acknowledged by the association or its property manager.
There are no set rules as to how long one can lease a condo unit, according to Miami based attorney, Mary Ann Ruiz, of the Condo Clinic. She indicates that the lease signed between the condo unit owner and the tenant, is governed by the Landlord and Tenant Act in most jurisdictions. Ruiz also states that the tenant is further protected by the federal legal safeguards that don’t allow tenant eviction in case of owner’s loss of the unit. Should a unit owner default or lose their unit, you’d be directed to continue making lease payments to the association or to the bank that holds the mortgage on the unit, as the case may be.
Simply put, regular monthly lease payments guarantee peaceful and quiet enjoyment of your leased condo unit for the whole duration of the lease term, without any outside interference. This is a big upside as it gives you peace of mind when it comes to any future uncertainties with respect to the financial status of the unit owner and condo complex. By paying your set monthly rate, you enjoy the condo lifestyle worry-free, by being detached of any problems associated with condo unit ownership.
How long do you choose the term of the lease?
You have two choices. Sign a short lease, say for one to two years or, try to negotiate a longer term, say three to five years. In any event, make sure your lease has a renewal clause, giving you the option to renew at the end of the term, at a predetermined monthly rate.
Yearly increases are a norm and so is the first and last month’s rent or security deposit, where applicable. Try to keep yearly increases to no more than 2%-4 % a year. Again, make sure the increases wouldn’t affect your housing cost to exceed one-third of annual household income. The increases should be clearly spelled out in the lease as to avoid any misunderstanding.
If the unit owner insists for a clause, giving them the right to terminate the lease prior to its maturity, ask them for at least six months notice prior to the vacancy date and the proof that the unit owner had entered into a contract for sale. If the contract for sale of the unit contains contingencies or other conditions to which potential buyer of the unit may not fulfill and the unit owner not willing to waive, then your lease should continue to be in full effect as originally negotiated.
You have to stand firm when it comes to negotiating the terms, as otherwise you may end up being bounced from one rental condo to another, incurring unnecessary inconvenience and expenses. It is for this reason that I urge you to engage a knowledgeable attorney who should, for a few hundred dollars, draft a solid and favorable lease that may go a long way in protecting your rights and making sure you’re properly reimbursed in cases of an early termination.
Always discuss and agree on all your terms with the unit owner before going to an attorney to save on time and cost.