Vail Daily column: Definition of a condo-tel can vary
The Mortgage Guy
When it comes to buying and owning a condo a big part of the equation is getting a mortgage. In any resort area there is a question that goes with about every condo from a lenders view and that is if the property is defined under Fannie and Freddie guidelines as a condominium hotel, or condo-tel for short.
The problem with financing condo-tels is back in the early 1960s when the concept of a condo in a resort area operating as a short term rental most properties were hotels that had been converted to condos. These properties were often haphazard makeovers, and over time they did not hold their value well at all. The lenders who loaned on them saw high default rates. That spooked the two major sources of funding for all mortgage loans , Fannie Mae and Freddie Mac, from loaning in condo-tels.
Unfortunately that stigma has never worked itself out, and the market for funding such loans is left to private portfolio lenders. This means harder qualifying, a larger down payment and a higher rate.
The problem is now defining a condo-tel. Fannie and Freddie have a long list of what might constitute a property being ineligible because it is a condo-tel, but there are a lot of properties that are gray areas. Fannie and Freddie require a lender to certify that a property meets it qualifications when the loan is delivered. If the loan closes and the agencies later audit the file and don’t like the property (regardless of how good the borrower is), then they can make the lender buy the loan back and keep it until it matures. As such, lenders are generally conservative when reviewing properties in resort areas.
One of the rules says if a property has the words lodge or inn as part of the name, then it’s automatically a condo-tel. Hence, the little project in East Vail called East Vail Lodging is ineligible, even though it’s no more a condo-tel than my single family house is.
Another rule states if there are any (even one) unit available for short-term rental the entire project is ineligible. The way this comes up is the lender will search the Internet and if they find a unit for short-term rent, then they will call and inquire about booking it. If they are offered a reservation, the loan is declined because the property is a condo-tel.
Pitkin Creek Park in East Vail is classified as a condo-tel to the point it is specifically on some lenders’ lists of ineligible projects because there are a few short-term rental units there.
We have run into problems in other parts of town where a local management company had advertised units for rent in a particular building just to make the phone ring, when he really did not have any.
In another case another company had one unit it managed as a rental and his web site looked like he had 10. When the lender declined a loan based upon such false advertising, we had to take the property manager to task and ask him to admit in writing the listing information on his website was not accurate, which was a very unpleasant task.
However, some of our lenders have a little softer view on that one and don’t look too hard if the deal is really strong and the property clearly is not operating as a hotel. But the problem is there are no clear cut rules when this will happen or not.
I’ve been told by an attorney that one possible solution for a HOA that is not operating as a condo-tel might be to copyright the name of the HOA and prohibit it from being used in advertising. I’ve had another attorney tell me he didn’t think that would work because, for example, Ford can’t stop people who own Fords from advertising they have a Ford for sale.
Some associations prohibit short-term rentals in their documents, but often a current board will not enforce that provision. It is important for owners as a group to decide if allowing a few short term rentals is worth it.
I would also note that if the project consist of townhomes versus being a condo, the rules are much different and easier to get approved. The legal and physical difference between the two are that in a true townhome, you own the land beneath your unit versus a condo you just own the airspace. There are a lot of properties around that look like they should be townhomes in that the unit goes from the ground floor to the roof, but are in reality condos so if in doubt look at your deed — if you own “Lot 4,” then you have a townhome, and if you own unit “4,” then you own the airspace and have a condo.
Chris Neuswanger is a loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His blog and a collection of his columns may be found at http://www.mtnmortgageguy.com.