Many buyers in Vail buy their property intending to generate some cash flow by short terming the property out when they are not here. Some properties have front desks and operate as full blown hotels, providing maid service and other hotel-like services. These properties are viewed by lenders as condo-tels, meaning condominiums that operate like a hotel.
In other cases, owners either make their own rental and management arrangements through a management company or go it on their own via sites like www.vrbo.com (which stands for vacation rental by owner, and I understand was started by a guy over in Breckenridge).
Fannie Mae and Freddie Mac, which fund the majority of the mortgages in the U.S., do not like to lend on condominiums that condone or encourage short-term rental activity. The reason for this has always been rather foggy, but it’s the rule, and these days there’s little getting around the rules.
While properties such as the Charter in Beaver Creek or the Lodge at Vail are obvious condo-tel properties, if a lender plans to sell a loan to Fannie or Freddie, then he has to make very sure the property is not going to be deemed a condo-tel after the loan is closed. This means that lenders must make considerable inquiries to the HOA and research the property online to see if there is short-term rental activity in the building. Lenders do this many ways — they may Google the address to see if a rental listing pops up, call a local management company to see if they can book a stay there or search sites such as www.vrbo.com to try and find a unit for rent in the building.
This has resulted in many local condo complexes being deemed off limits for Fannie Mae or Freddie Mac loans. When this happens, owners and buyers will have to get what is known as a portfolio loan (one that is not sold to Fannie or Freddie).
The first problem is there are very few lenders that want to hold a loan on their books for the next 30 years, and if they do, then they can’t realistically lock a rate in for 30 years because they don’t have access to raising money to lend via selling an investor a 30-year fixed rate bond. In many cases they are lending depositors money out, or money they borrowed for shorter terms by leveraging their assets with the Federal Reserve Bank.
In addition, these loans do not have a backstop of a mortgage insurance company or the federal government. If the bank takes a bath, then they lose their own money. Not surprisingly, the above issues actually make banks more cautious about what they loan, for how much, how long and to whom.
This means that loans for condo-tel properties generally require a larger down payment (generally 25 percent) and won’t be a long-term fixed rate. The term of the loan can be for 30 years, but the rate will generally be fixed for five to seven years and adjust annually thereafter.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers.