Mid-Year Mortgage Overview

I t might have better to have titled this article “Condos for Cash,” since it seems that all-cash might be the only guaranteed way to purchase a condo today.  Simply put, if you are interested in buying a condominium in today’s market, be prepared to face some substantial financial hurdles. 

Let’s define what a condominium really is.  Most of us view a condo as an apartment-style unit that can be either in a high-rise or low-rise building that you can own rather than rent. Most condo units are like that.  

However, the true, legal definition of a condominium is an “estate in real property consisting of an individual interest in an unit and an undivided common interest in the common areas of the project such as the land, parking areas, elevators, stairways, exterior structure, etc.” 

This means that, while you own the inside of your property, you jointly own everything else with all the other owners of that condominium. This definition also can cover a single-family, detached home as well as a townhouse.  

Part of the “bundle of rights” you have in a “fee simple” form of ownership (a fee simple estate is the most absolute form of ownership you can have and it’s the way most people take title to their homes) is the ownership of the land on which your home sits, as well as the air rights above your home.  No one could build a bridge over your house or drill sideways from another property without your permission.  

If any of the townhomes in your development are piggy-backed (i.e. one built on top of the other) chances are the entire development has to be sold in a condo form of ownership since land and air rights are in question.  

In the case of single-family detached homes, you will often see a condo-style of ownership in retirement developments or gated communities where the Home Owners Association or Management Group is completely responsible for exterior and grounds maintenance. 

The problem now lies with the speculative growth that took place during the last real estate boom.  Apartment buildings were converted at an incredible rate to take advantage of the demand and sold at exorbitant prices. 

When the market sagged, it affected developers who were building new units.  Since a condo owner is also a joint owner of all the common areas, any sizeable drops in ownership due to people not going through with their contracts, being foreclosed on or sales coming to a halt affects the cash flow (since condo dues are not being paid) needed to pay the association’s bills. 

As this economic stress began to impact condo communities, its effects have been disastrous for their financing.   Almost all mortgage insurance companies are now refusing to insure any condo loans and Fannie Mae and Freddie Mac have tightened their rules considerably, making financing very hard to obtain. 

So how can you buy a condo?  First of all, all-cash transactions will always work and you can negotiate some incredible deals in today’s market due to the enormous supply and lack of buyers.  However, this is generally a path reserved for well-heeled investors. 

If, like most, you have to finance the purchase, here are your current options: 

FHA—This is the only option if you have limited funds since FHA only requires a 3.5% downpayment.  However, the condo project has to be FHA/VA approved and this approval list can change rapidly.  The key requirement for FHA/VA approval is the size of the investor concentration in the project.  

The higher the percentage of non-owner occupants (renters), the greater chance that the project is not approved or is in danger of losing its approval.  

The reason the number changes is that in a slow market if you can’t sell the property you may have to rent it in order to stay current on your mortgage.  

Conventional Financing—You will have to make at least a 20% downpayment and pay a premium (rates will be higher due to the perceived risk) in order to get the mortgage. 

Fannie Mae also has rules regarding investor concentration.  But Fannie Mae also monitors the type of development you are buying in (mixed–use projects that have a non-residential component are not eligible), seller concessions and the percentage of units already sold and settled.  

A seller will have to provide an incredible amount of documentation to satisfy both Fannie Mae as well as the underwriter.   

Developer/Seller Financing—Where one party is eager to sell, many options are always available.  Developers may well be able to offer below-market financing from the bank that provided the construction loans. Here, everyone has an interest in making things work. 

If you are thinking about buying a condo, extra due diligence is required, so you will need to: 

• Find a Realtor who is knowledgeable about condos and who you can trust. 

• Closely analyze the financials that must be provided to you before the contract can be ratified.  Be especially careful if the development lacks adequate reserves for future maintenance (parking lots will have to be repaved), has a large number of delinquent condo dues payers or too many units on the market.   

Today’s approved project may be tomorrow’s casualty. 

• Don’t give up hope.   Many good developments are being affected through no fault of their own.  Bargains are there but will require some extra effort on your part. 

• BE PATIENT. These purchases and loans will take longer.