11 Condo/Townhome Deal KillersDaniel Dobbs2023-05-25T11:57:28-07:00
With prices on SFR homes skyrocketing out of reach for most 1st time buyers, many look to condo ownership as a way of beginning the homeownership quest.
But, all too often, condos have hidden structural defects, lack of Fannie/HUD certification, and other hidden deal killers lurking in many condo transactions.
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The first warning sign is that there are an inordinate amount of properties “for sale” in any given community. There’s usually a reason(s) for that, and listed below are the 12 most common condo “deal killers.”
Neither you nor your lender needs more “practice” by working on transactions that can’t/won’t close.
Better to do your due diligence upfront and discover any problems; before your buyers get frustrated and lose confidence in the buying process and the professionals serving them.
Condo Deal Killers
1. “Concentration Rule” No single entity/person/LLC can own over 20% of the units in the complex.
2. Commercial Use. No more than 35% of the square footage of the entire complex can be “commercial.” Before 2018, the limit was 25%.
Note: Many “wholesale lenders will not approve a condo development with commercial use, despite the fact Fannie allows it. Check with your lender before offers are written.
3. Owner Occupancy: Owner Occupancy is irrelevant if a buyer intends to occupy the unit. However, if the buyer is an investor, the occupancy rate must be over 50%.
4. Rates Are Higher. Condo financing has higher interest rates (usually 1/4 higher, but if the LTV is over 75%, the pricing can be as much as a half percentage point higher.
Higher rates mean more reluctant buyers, and many buyers are stretched so thin, the higher rates are deal killers.
5) HOA Delinquencies/Deed Restrictions: A typical condo cert form requires a lot of information. Wrong or incomplete answers are a threat to your commission checks.
For example, 15% of the units can’t be more than 60 days delinquent with HOA dues. This info is contained in the condo cert form.
6) In addition, Insufficient surety bonds, lack of fire coverage. Lack of management financial reserves and pending litigation issues are all required to be disclosed and can derail your transaction in an instant.
Unfortunately, it’s the norm that the certification process gets overlooked until late into the buying process. After inspections are completed, apprisal(s) are paid for, and the client hopes are dashed.
Here’s why this usually happens!
During the “Great Recession,” many HOA management companies floundered or were either closed or consolidated into more prominent companies, And there are simply fewer companies to provide services.
Condo management employees are often overworked and underpaid and are seen as interchangeable (expendable) by management. To say there’s a high rate of turnover among these employees; is an understatement.
The “Post Covid” economy has created a shortage of skilled workers, so this situation will worsen rather than improve.
Your best chance to avoid last-minute certification issues is to:
Jump on this issue, as the offer is being bantered back and forth.
Befriend the listing agent and push the process along as best you both can. Don’t play commission roulette by waiting. If you get lucky, the listing agent will have done their due diligence and rooted out any issues before accepting your offer,
Don’t count on luck; suck up to the escrow officer, as they are the ones who can push the process along as well.
And, get the HOA president’s, board of directors’ names and seek their help.
7. Litigation. Litigation involving an HOA is usually a deal-killer unless it’s minor or doesn’t affect the subject unit and its building.
If there’s litigation involving a builder’s workmanship, or if there’s been damage to the complex “common areas” due to wind, flood, or earthquake, back out of the transaction (run don’t walk) before your buyer wastes money on inspections and an appraisal.
Your buyer(s) will thank you.
Note: Some lenders advertise they fund condo transactions with litigation as they are a “non-Fannie or non-QM lender,” but the interest rate and down payment requirements will both be significantly higher.
And, from a strictly practical point, buying a unit in a damaged community (usually) will only hurt its resale in the future.
8. FHA/VA Approval. Entire condo complexes need to be FHA or VA approved before FHA or VA financing can be used to finance a unit.
There is no updated list of VA condo approvals as VA quit updating approval lists in 2018. Each transaction must conform to specific VA approval conditions.
Here are some general guidelines for VA condo approval:·
· At least half of the units need to be owner-occupied
· No single entity can own more than 10% of the units
· At least 85% of residents should be up to date on HOA dues
· 75%+ of the units in a new construction development must be “pre-sold”
· The VA can deny a condo project or suspend the approval process based on “deviations from VA requirements.”
· But that doesn’t have to mean the end of the road. A condo project that is denied can be revisited, pending receipt of additional information required by the VA; but the approval process could take months to finish.
9. If a project is not FHA approved, the other option is conventional financing.
3% Down financing for condos up (up to conforming loan limits) are an alternative to FHA financing, but guidelines (debt ratios and credit standards) are much stricter.
For “High Balance” loans, the minimum down payment is 5%.
10. Is It A Condo Or A PUD? Check the preliminary title report and/or zoning. PUDs Do NOT need an HOA cert; townhomes and condos do!
11. HOA Dues. Throughout most SoCal, HOA fees have been rising.
Higher HOA fees make it harder (and less desirable) for buyers to qualify.
Deferred building maintenance, rising insurance requirements, and increased property and casualty premiums have caused many HOAs fees to grow, often annually.
Many HOAs have “special assessments” (for 15 years), effectively doubling monthly fees.
Some good news!
“Two To Four Unit” condo complexes no longer require “Specific Project Reviews; which was (formerly) a long, drawn-out process.
This is a relatively new change, and it is now much easier to get financing for small complexes.
