By Harvey S. Jacobs April 10, 2012

This is part of a series answering your real estate-related legal questions. Got a question about a situation you’re in? Send it to

Q : Twelve years ago, I bought a unit in a co-op in Foggy Bottom. At the time of purchase, the bylaws permitted 20 percent of the units to be leased. Three years later, the by-laws changed the limit to 10 percent. During the real estate boom, this change had little impact on resale values but now that the market has slowed, owners like me are finding that the leasing restriction has led to very few people wanting to invest permanently in the building. Many home buyers in the area are State Department or World Bank/IMF employees whose jobs often send them out of town for short periods of time, and they would like to rent out their units while they’re gone – so they are very conscious of the rental restrictions. Some are walking away over concerns about the restrictions. How do we rebuild property value and attract new buyers?


A: The investor-to-owner ratio in condominiums, homeowners associations (HOAs) and other common area communities has become a very hot topic. As lenders have become more concerned about association fee delinquencies, they are not only looking into their borrower’s financial stability but the association’s financial stability as well. The main driver of this concern is that the Federal Housing Administration (FHA) and other quasi-governmental agencies will not finance units in an association with more than 50 percent non-owner occupants, or where association fee delinquencies exceed 15 percent. The belief is that investors are more likely to stop paying their association fee than owner occupants. Consequently, I am seeing a greater movement among associations to further restrict sales of units to buyers who do not plan to make that unit their primary residence.

As you are discovering, the decision to curtail lending to certain associations has exacerbated an already bad situation. Since most owner occupants need to borrow to buy their principal residence, less lending means fewer owner occupants are able to afford a condo unit. Thus, the only buyers who can afford these units are investors speculating that they can rent them out for a profit and eventually, as prices rise, cash out at a profit. Since the D.C. area enjoys one of the nation’s lowest apartment vacancy rates, investors have every reason to continue to deploy their cash in residential investment units. As with any supply/demand situation, when the supply of mortgage funds is artificially restricted by quasi-government action, the natural forces of supply and demand get out of balance. In this case, the imbalance is causing prices to drop even further since there are fewer eligible buyers.

Ken, I am afraid that until the quasi-government agencies get back on the sidelines and let the market forces stabilize the condo/HOA market, there is little you can do to attract buyers and build value in your condominium. Perhaps the best you can do at the local level is to make sure your condo association does the following:

  • aggressively collects all of its fees and assessments.
  • establishes prudent budgets that include substantial reserve fund allocations.
  • avoids overly restricting rentals of the units.

At the national level, you may want to urge the regulators to adopt a position that looks at the actual financial position of each association on a case-by-case basis to see if it is financially stable. Now, these regulators have adopted this 50 percent threshold that may or may not reflect a financially stable association. After all, which is safer: an all-investor condo with a huge reserve fund and zero delinquencies, or an all owner-occupied association with huge delinquencies and no reserve fund?

Harvey S. Jacobs is a real estate lawyer with Jacobs & Associates Attorneys at Law in Rockville. He is an active real estate investor, developer, landlord, settlement attorney, lender and Realtor. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. Contact Jacobs at (301) 417-4144, or