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11 Condo/Townhome Deal Killers
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11 Condo/Townhome Deal KillersDaniel Dobbs2025-03-02T09:18:39-08:00
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.
The first warning sign is an inordinate number 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.
It’s 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 Fannie allowing it. Check with your lender before you write offers.
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 are stretched so thin that 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 is overlooked until late in the buying process. After inspections, apprisal(s) are paid for, and the client’s hopes are dashed.
Here’s why this usually happens!
During the “Great Recession,” many HOA management companies floundered or closed or were consolidated into more prominent companies. 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 these employees have a high turnover rate 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. Get the HOA president’s and 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 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 that they fund condo transactions with litigation as a “non-Fannie or non-QM lender,” but the interest rate and down payment requirements will be significantly higher.
From a strictly practical point of view, 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 approved by the FHA or VA 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 approval based on “deviations from VA requirements.”
· But that doesn’t have to mean the end of the road.
A denied condo project can be revisited, pending receipt of additional information required by the VA, but the approval process could take months to finish.
9. The other option is conventional financing if a project is not FHA-approved.
3% Down financing for condos up (up to conforming loan limits) is an alternative to FHA financing, but guidelines (debt ratios and credit standards) are much stricter.
The minimum down payment for “High Balance” loans 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 of SoCal, HOA fees have been rising.
Higher HOA fees make it more complicated (and less desirable) for buyers to qualify.
Deferred building maintenance, rising insurance requirements, and increased property and casualty premiums have caused many HOA fees to grow 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 getting financing for small complexes is much easier.
