A condotel sells to a much smaller pool than a regular condo, because conventional lenders exclude buildings that operate like hotels. Most of these sales close in cash.
The frustrating part is that this usually isn’t fixable. A building with a documentation problem can clean it up. A building that is a hotel in everything but the deed generally stays that way.
I’m Adam Seguin. My business partner Jeremy Resmer and I run Myrtle Beach Home Buyers, and together we’ve bought more than 400 properties across Horry and Georgetown Counties. Here’s exactly what triggers the classification and what it means when you go to sell.
Four things in your building’s documents that end financing
Fannie Mae treats a project as a hotel or motel — and therefore ineligible — if any one of these is true:
- The HOA is licensed as a hotel, motel, resort, or hospitality entity.
- The legal documents restrict owners’ ability to occupy their own unit during any part of the year.
- The legal documents require owners to make the unit available for rental pooling, daily or otherwise.
- The legal documents require owners to share rental profits with the HOA, management company, resort, or hotel rental company.
Notice that all four live in the master deed and bylaws, not in your unit. You could own the nicest unit in the building and still be inside a project no conventional lender will touch.
The operating characteristics that disqualify a building outright
Beyond the documents, a project is ineligible if it’s primarily transient in nature or offers hotel-type services — registration services, daily or short-term rentals, daily cleaning, central telephone service, central key systems, restrictions on interior decorating.
Three more that catch Grand Strand buildings specifically:
- The project’s legal or common name contains “hotel,” “motel,” or “resort” — unless that’s a historical reference and not what it currently is.
- The project is marketed as a hotel, motel, resort, or investment opportunity.
- The project has a hotel or resort rating from a ratings provider, explicitly including travel agencies, hotel booking websites, and internet search engines.
That last one deserves a moment. If your building has a star rating on a major booking site, that’s a documented, checkable trigger. Nobody has to interpret anything.
Voluntary rental pooling counts too
Here’s the misconception I hear most: owners assume that because participation in the rental program is optional, the building is fine.
It isn’t. Fannie’s rules cover projects subject to voluntary rental-pooling, revenue, profit, or commission sharing agreements with the HOA or management company — along with similar agreements that restrict an owner’s ability to occupy through blackout dates or occupancy limits designed to keep units available for rent.
Mandatory pooling is separately disqualifying under the split-ownership rules. But voluntary pooling can do it too. The test is whether the arrangement exists and constrains occupancy, not whether you personally signed up.
Not sure which category your building falls into? Call (843) 507-5058 and we’ll read the documents with you.
The red flags that draw extra scrutiny
These don’t automatically disqualify a project, but they require a lender to dig further — and the list reads like a description of Ocean Boulevard:
- 75% or more of units owned as investment or second homes
- units without full-sized kitchen appliances
- advertised daily or short-term rental rates
- franchise agreements
- location in a resort area
- units under 400 square feet
- hotel or resort amenities — spa services, concierge, recreational equipment rentals, scheduled entertainment for short-term renters, airport shuttles
- interior doors that adjoin different units
That last item is the lock-off design used throughout Grand Strand oceanfront towers, where a suite can be split and rented as two keys. It’s a feature when you’re renting. It’s a flag when you’re selling.
Getting out of the rental program before you sell
Read your rental management agreement before you list, not after you have a buyer.
Look for the term length, the notice period to terminate, whether the agreement survives a sale, and whether bookings already on the calendar have to be honored. Some agreements bind the unit rather than the owner, which means your buyer inherits it.
Also confirm you’re current on state accommodations tax and local hospitality fees. Those get prorated at closing, and unresolved balances slow things down. The S.C. Department of Revenue handles the state side.
The real math: keep renting it or sell
A worked example, not a specific unit. Say an oceanfront condotel worth roughly $185,000 grossing about $28,000 a year in rental revenue.
Scenario A — Keep it. After the management company’s split, you might net around $15,000. Take out regime fees at $500 a month, property tax at the 6% non-primary-residence ratio, and your HO-6 policy, and you’re realistically in the $5,000 range before any mortgage payment — and before any special assessment the building levies.
Scenario B — Sell. The buyer pool is cash and specialty lenders, so price accordingly, but the carrying costs and the assessment exposure stop at closing.
The honest read: if the unit clears meaningful cash annually and you don’t need the capital, keep it. A condotel that performs is a fine asset. The problem is when the net is thin, because you’re holding something illiquid — and a bad year, or one assessment, wipes out several years of that $5,000.
One thing to handle before you sign anything: depreciation recapture. If you’ve been depreciating the unit, selling triggers a tax event that can be substantial. I’m not a CPA, and this is a conversation to have with one before you agree to a price.
How we buy condotel units
Step 1 — Send us the building, unit, and rental agreement. We read the management contract ourselves.
Step 2 — We check the project’s classification so there are no surprises about who can buy it.
Step 3 — We show our math, including how we’re valuing the rental history.
Step 4 — You pick the closing date. No project review and no lender, so a hotel classification doesn’t stop our closing.
FAQ
Q: What is a condotel? A: A condominium that operates like a hotel — front desk, daily or short-term stays, on-site rental management. Units are individually owned, but the building functions commercially, which is what lenders react to.
Q: Why can’t buyers get a normal mortgage on a condotel? A: Fannie Mae treats projects managed or operated as hotels as ineligible, so conventional financing isn’t available for any unit in them. Freddie Mac applies similar restrictions.
Q: My building’s rental program is optional. Does that help? A: Not necessarily. Voluntary rental-pooling and revenue-sharing arrangements can disqualify a project too, particularly when blackout dates or occupancy limits keep units available for rent.
Q: Can I sell my unit if it’s in a rental pool? A: Yes. Check whether your management agreement binds the unit or just you, what notice is required to terminate, and whether existing bookings must be honored by the next owner.
Q: How is a condotel valued compared to a regular condo? A: Usually lower per square foot, because the buyer pool is smaller and the money is more expensive. Rental income history helps, but it doesn’t offset the financing restriction.
Q: Will I owe depreciation recapture when I sell? A: Possibly, if you’ve claimed depreciation on the unit. It can be a significant tax event, so talk to a CPA before you agree to a sale price.
The bottom line
Condotel status isn’t a problem with your unit and it usually isn’t something an association can vote away. The building’s name, its amenities, its booking-site presence, and its management structure are the classification.
So the question isn’t how to fix it. It’s whether the unit earns enough to justify holding an asset that only cash buyers can purchase. Pull last year’s rental statement, subtract everything — management split, regime fees, 6% taxes, insurance — and look at the real number.
If it’s healthy, keep it. If it’s thin, you’re carrying illiquidity for very little return, and that’s worth reconsidering.
Ready to get out of the rental pool? Get a cash offer or call (843) 507-5058. If the numbers say hold, we’ll tell you that.