I met a wealthy developer who bought an entire 600-unit condo project after the 2008 meltdown for about $21 million ($35,000 per unit).
Those condos are now worth well over $600,000, giving that developer a hefty $340 million return (on top of the $1 million+ per month he’s netted from rental income over the last 15+ years).
SIDEBAR: This is an excellent example of two of the most important investment concepts: (1) always keep dry powder (cash) available to pick up assets on the cheap after crashes – which can happen at any time; and (2) never get caught up in crash hysteria and believe hype about an asset class “never coming back.”
And no, you don’t have to be rich. I watched many agents pick up multiple properties on the cheap in 2009 and 2010, and they’re living off the rental income to this day.
Concentration Rule
Anyway, I tell the developer story above to illustrate the concentration rule.
If that developer ever decides to start selling his units (instead of renting them out), he will have difficulty because his project will not be eligible for either FHA or agency (Fannie/Freddie) financing because of the concentration rule where “one person or entity owns more than 10% of the units.”
NOTE: There is another concentration rule associated with FHA relating to financing only – and I want to mention it to avoid confusion. No more than 10% of the units in a complex can have FHA spot financing too.
Balcony Issues
We are still getting a lot of condo deals with structural issues relating to balconies – which make the projects non-warrantable (ineligible for Fannie/Freddie financing).
FHA Single-Unit Approvals
As a result, we typically pursue FHA Single-Unit or Spot Approvals – where we get a single unit in a condo complex “FHA approved” in a complex that is not otherwise “FHA approved.”
These have proven to be surprisingly effective, so I am again touting them in a blog.
But – we do see two issues that sometimes kill FHA eligibility.
One is the concentration rule, as there are many complexes in which a single investor owns more than 10% of the units.
Owner Occupancy Ratios
The other issue involves owner occupancy ratios.
Owner occupancy ratios are irrelevant for owner-occupied Fannie Mae and Freddie Mac financing.
But, for FHA and Fannie/Freddie investor financing, owner occupancy ratios need to be 50% or more.
