condominium conundrum

September 3, 2009 at 11:32 pm Leave a comment

- from one of our favorite mortgage voices, David Reed, CD Reed Mortgage Bankers, Austin

… not knowing condo rules can kill your deal….

 A few newsletters back I let you know about HUD’s decision to eliminate not only ‘spot’ condo approvals but all previous HUD condo approvals.  The new ruling doesn’t apply to HUD approvals issued since October 1, 2008, but the ruling affects about 70,000 condominium associations across the country.

 If your buyer was using an FHA loan to buy a condo they’d better hurry.

 Not only that, but fewer and fewer lenders are issuing approvals on “non-warrantable” condos.  I know our company stopped approving non-warrantables some time ago.

 This affects both the listing agent as well as the selling agent.  Let me give you a few common “condo killers” you need to be on the lookout for.

 Owner occupancy levels

 Fannie Mae and Freddie Mac like to see at least a 51% owner occupancy status.  If the condos have 100 units, at least 51 of those must be occupied by their owners and not rented out.  If a condo has been foreclosed on and is bank-owned, the REO is considered owner-occupied.

 Lenders however can have their own occupancy requirements and they can vary depending upon their current appetite for condos.  A lender can require that any condo they approve has to have a 70% owner occupancy, for example.  Regardless of Fannie/Freddie rules.  A mortgage broker can do his own homework and find out that the condos indeed have an owner occupancy rate of 60%, submit that to a lender and get declined at the very end because the lender requires 70%.

 And with new disclosure rules in place, there’s little, if any, time to change lenders mid-stream.

 Litigation

 A deal-killer.  Any time there’s a lawsuit a lender will stop everything dead in its tracks.  What type of litigation is it?  Structural?  Something wrong with the building?  What if the HOA loses and the owners are hit with a huge, unexpected assessment to cover attorney fees?

 I’ve done a few deals in the past where I got a letter from an attorney explaining the nature of the lawsuit while also providing a copy of the HOAs insurance policy showing there was enough insurance to cover a loss but only in instances of very minor lawsuits, say a few thousand dollars.  Rarely do lenders accept this, and only if they’re assured the insurance company has agreed to pay the suit if they lost.

 Even if there’s no lawsuit filed but one that is “pending,” the lender will balk.

 If you’ve got a condo listing it’s good to keep a pulse on the HOA.  I’ve seen HOAs that are “lawsuit happy,” especially if there’s an attorney on the HOA Board.  If you’ve got an offer on your unit and there’s been a recent lawsuit filed there’s little chance of anyone getting a loan.

 Conversions

 If the condos have been converted from an apartment building within the previous three years the lender might want to know some more details such as how much conversion was done, were the apartments completely gutted from wall to wall and other construction details.

 Conversions are often found in university cities where someone buys an apartment building, converts it to condominiums then sells the individual units one by one.

 You can’t tell a conversion just by looking at it, the conversion will be noted in the HOA documents.

 For better or worse, condo lending guidelines have become more stringent.  In fact, some lenders aren’t making any condo loans at all.  If you’re listing a condo or searching for one for your clients, do your homework up front and avoid the egg-on-face scenario.

© Julie Nelson and The Nelson Project at Keller Williams Reatly, 2008-2010. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Julie Nelson and The Nelson Project at Keller Williams Realty with appropriate and specific direction to the original content.

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Entry filed under: Smart Buyers, Smart Real Estate, Smart Realtors, Smart Sellers. Tags: , , .

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© Julie Nelson and The Nelson Project at Keller Williams Reatly, 2016-2020. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Julie Nelson and The Nelson Project at Keller Williams Realty with appropriate and specific direction to the original content.

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