I have to admit the recent sales numbers for condominiums from the National Association of Realtors had me scratching my head.
According to a May report (published in June), existing condominium and co-op sales increased 6.1 percent to a seasonally adjusted annual rate of 520,000 units in May from 490,000 in April but nevertheless were 8.9 percent below the 571,000-unit level in May 2008.
What surprised me was the amount of volume left in the condo market, especially when it’s so difficult to get financing for one of these. Indeed, in some places like South Florida, it’s probably easier to climb through the eye of a needle than to get a lender to offer a mortgage for a condominium.
So what’s a potential condominium investor to do?
About the only condo sales moving quickly to fruition these days are all-cash deals. Maybe that’s because NAR also reports that the median existing condo price had deflated to $173,800 in May, a 21.9 percent drop from a year earlier. That means much more condo product appears to be cheap enough to self-finance from a middle-class investor perspective, i.e., a buyer with stabilized employment, savings and who didn’t lose money speculating in the real estate markets between 2002 and 2007.
Despite busted condos, homeowners associations going bankrupt and other bad news, condos are still fairly well liked by buyers. It’s the lenders who have turned on the product. Fannie Mae and Freddie Mac don’t really want the paper, and according to some insiders, there is an unofficial blacklist of certain condo projects — meaning units from those buildings will never, ever see financing by a major bank.
Your local lenders, even if they like you, can’t make a condo loan because they no longer keep mortgages on their books but instead sell them to the big, failed and now taxpayer-owned GSEs (government-sponsored enterprises) — Fannie Mae and Freddie Mac — which have gotten very restrictive.
Fannie Mae, for example, won’t guarantee mortgages in a condo development where fewer than 70 percent of the units have been sold (it used to 51 percent); where 15 percent of more of the occupants are behind on their homeowners association dues; or where an individual investor owns 10 percent or more of the units. Freddie Mac is expected to implement similar restrictions.
In April, the GSEs unveiled new loan-level fees: a conforming mortgage secured by a condo with less than 25 percent equity would have closing fees of up to 0.75 percent of the loan.
"In Florida and Las Vegas, many newer condo developments are only 20 percent occupied, more than 15 percent of projects are not paid up on their homeowners association dues, and 30-40 percent of units are in foreclosure," says Jack McCabe, principal in McCabe Research & Consulting LLC in Deerfield Beach, Fla. …CONTINUED
In addition, so many new condo projects went upscale, meaning individual units cost well over $500,000. That means a jumbo loan, and that market is all but dead. To pull off a jumbo loan for a condo, an investor would need to come up with 30-40 percent down, a 700 FICO score and a strong, verifiable history.
The problem, of course, is that so many condo loans are upside-down — the mortgages carry numbers much larger than the current value of the property. In bank lingo, the collateral value is not there to back up the asset, nor will it be for many years to come. The problem is so serious in some developments that a blackball environment has emerged, with lenders compiling a list of buildings that won’t get loans. Fortunately, for everyone else in the country, most of the properties on this supposed blacklist are in South Florida.
In many regions of the country, condo prices in 2009 are still a slippery slope. I would tell you that the buy-in price for many condo projects is almost irrelevant. The key factor is "risk." You, as a buyer, have to investigate how much risk is involved with that purchase: Who was the developer? Is the developer still around or is the project in bankruptcy? How many units were sold? How is the homeowners association faring? Is a bank "fire-saling" units? Are services being cut back?
How would you get this information? One way is to, if possible, sit in on a meeting or two with the condo association.
If your concerns are satisfied and you feel the risk can be minimized, how do you finance a mortgage? Let’s say — only God knows why — you want to buy a $750,000 condo in Miami Beach. Some banks will do this for you: If you put money into a certificate of deposit (CD) account sponsored by the bank equal to a fairly large portion of the amount you want in a mortgage, it will finance the purchase. Why? The bank now has recourse if the loan fails.
A more common approach is to front-loan the whole process — that is to go to your lender and get preapproved under an FHA-type program. The banks are generally willing to make this type of loan because the Federal Housing Administration will guarantee the first 20 percent of the deal although the buyer may only be paying 3 percent downpayment plus 2.5 percent closing costs.
"If you don’t have cash and you are looking to buy a condo, the chances of closing are less than 50 percent," says Peter Zalewski, a principal with Condo Vultures LLC in Bal Harbour, Fla. "If you do need financing and are willing to roll the dice, then you are going to go through a lot of time and effort just to get to the point where you might have a chance for financing."
It’s all about front-loading, he adds. "If you don’t have your file in place, if you don’t have your documentation, there will be no chance to get financing. The earnest has really shifted from the lender to do the underwriting to the buyer to produce all the documentation necessary for the bank to even give the borrower serious consideration."
Steve Bergsman is a freelance writer in Arizona and author of several books, including "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade."
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