After the 2008 Great Financial Crisis, we saw an enormous number of non-warrantable condos.
The biggest issues then were HOA (Homeowners Association) dues delinquencies and under-funded HOAs in general, as condo foreclosure rates were much higher than single-family residence foreclosure rates.
As a result, many condo complexes were left sitting half empty with nobody paying HOA dues for any of those vacant units – leaving the HOAs high and dry.
Interesting Aside: Sometimes entire complexes went belly up – creating enormous opportunities for anyone with cash.
I knew of a gentleman in Fort Myers, Florida, for example, who picked up an entire 330-unit complex out of foreclosure for $10 million – or a little over $30,000 per unit. The units are worth about $650,000 now, making the complex worth well over $200 million. So yes, the rich get richer – but he bought at the very bottom of the market when nobody was buying, and everyone was saying “residential real estate is dead.” It is another reminder too that when everyone is saying an asset class is dead – it may be the time to buy (which is why we’re seeing wealthy people buy commercial real estate right now).
Non-Warrantable Condo Definition: A condo that does not meet the guidelines set by Fannie Mae and Freddie Mac – making it ineligible for traditional financing (including Jumbo, FHA, and VA too).
We are again seeing a large number of non-warrantable condos, but this time it is for different reasons. For starters, Fannie Mae and Freddie Mac are more stringent when it comes to guidelines. But we’re also seeing a large number of condos with insurance, structural and/or litigation issues. Shortages, inflation and the overall insurance crisis seem to have exacerbated these issues.
Alternative Financing Available
Fortunately, there is alternative financing available – sometimes – but it requires larger down payments (20% or more in most cases). In addition, some issues are not insurmountable such as severe insurance, litigation, and/or structural issues.
While we have numerous financing alternatives at JVM, the criteria for each of them differ. This is why agents need to clearly define the issues for us (and provide related documents if necessary – like insurance policies or litigation documents) – so we can shop the issues with our investors to see which will finance the loan.
TLDR: If readers have a non-warrantable condo – tell us what the issue is and we will happily try to find financing for it.
And finally, in light of all this, I am again repeating our “14 condo considerations.”
14 Condo Considerations
Below are fourteen things buyers and agents should consider if they plan to finance the purchase of a condo.
Note that the issues below primarily relate to Fannie Mae and Freddie Mac financing, but many can be easily overcome with Non-QM financing.
Structural Issues
The #1 leading reason we see complexes fail to meet the requirements for more traditional financing is because of property repairs noted in the meeting minutes, outlined in special assessments, or confirmed on the HOA Questionnaire. Even if the subject unit is not directly impacted by the issue, it is often still a problem for Fannie Mae financing.
Insurance Policies
If the complex has a “pooled” insurance policy, traditional lenders need confirmation of the dedicated limit for the subject HOA. This is often not possible to obtain. We also need to ensure the Master Insurance policy provides sufficient coverage.
Litigation
Litigation involving the HOA is usually a deal-killer, but not always if it is minor or doesn’t affect the subject unit. We need to review the actual litigation/complaint. We can also use a non-Fannie Mae or non-QM lender, as mentioned above, but the interest rate and down payment requirement will both be higher.
Concentration Rule
No single entity/person can own over 20% of the units in the complex. (Prior to 2018, it was 10%.
Commercial Use
No more than 35% of the square footage of the entire complex can be “commercial.” Prior to 2018, the limit was 25%.
Owner Occupancy Ratios
Owner Occupancy is irrelevant if a buyer intends to occupy the unit. It must be over 50%, however, if the buyer is an investor.
Rates Are Higher
Condo financing has higher interest rates if the LTV is over 75%.
HOA Delinquencies
No more than 15% of the units can be more than 60 days delinquent with HOA dues. This is rarely an issue these days, but it often surfaces during real estate downturns (it was a common issue from 2009 – 2012, for example).
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, in most cases. You can find FHA’s list of approved complexes here, and you can find the VA’s list here.
3% Down
This is a reminder that we offer 3% down financing for condos up to loan amounts of $766,550. This is a great alternative to FHA financing, but guidelines are much stricter. For “High Balance” loans (from $766,551 to $1,149,825), the minimum down payment is 5%.
Is It A Condo Or A PUD?
This is a reminder that you can’t tell simply by looking at a unit. You need to check the zoning. If the unit does not touch the ground it is very likely a condo. But if it does touch the ground, it could either be a PUD/townhome or a condo. PUD/townhomes are not subject to any of the condo restrictions.
HOA Dues
Lenders need to know exactly what they are because they are much higher nowadays than in the past and they significantly affect qualifications. Buyers and agents should also remember that HOA dues can offset significant purchasing power – as much $12,500 per $100 HOA dues in a 7% rate environment.
Investment Properties Subject To “Limited Review”
This is relatively new; investment condos formerly required more stringent “Full Reviews” but now only “Limited Reviews” are required. (Limited Review means only the condo’s insurance policy is required along with basic HOA info).
