|
How the Best Buyers Shop for a Condominium
By:
Gregory Braun, Partner
Condominium loan approvals come down to the lender qualifying the borrower, the unit itself and the condominium building. Often time buyers in search of a new home prequalify for the largest loan available based on their credit scores and earnings and then race off to find the perfect unit within these parameters – a condo unit in the right neighborhood with all the right features. With the large supply of available units, buyers often find one they love at the right price, but all too often, they cannot close on it. What happened? After all, the lender qualified them. Further, the agent did the competitive market analysis correctly, as the appraisal supported the contract price, and the buyer had impeccable credit and a large enough down payment. The bogey in the equation: before the closing the lender learned that the building itself did not meet standardized lending criteria.
Buyers and realtors typically pay little to no attention to whether the building and the association can pass the lender’s increased scrutiny. We have increasingly found that many buildings do not meet lenders’ standards. Most buildings fail lender scrutiny due to one or more of the following shortfalls:
-
High percentage of renters
-
Too many uncollected assessments
-
Special Assessments
-
Low reserves
-
Improper Insurance
-
Low presales
-
Large amounts of commercial space
Buyers and their agents need to assess the health of the association before making an offer by measuring it against the lender’s required benchmarks. For example, if 17% of the units are more than 30 days delinquent in dues, then the building will likely not qualify for traditional financing. To spend the time negotiating a price, getting signatures, delivering the contract and earnest money and then incur the inspection, appraisal and legal fees only to be disappointed by the building’s denial is too high of a cost when the result could have been identified up front. Ask the association or management about the characteristics above before making the offer and shop with the lender’s requirements in mind.
When an agent lists a unit, the agent should also
ask the same questions to ensure that loans can be written in the
building, whether conventional or FHA. Explore whether the building
is or can become FHA approved. In some cases, the characteristics of
the building do not meet conventional financing criteria but will
pass the less restrictive FHA guidelines. Many first time buyers can
qualify under FHA which allows lower down payments and credit scores
and requires lower fees, greatly expanding the pool of buyers.
Each of the criteria above makes sense as the presence of any one adverse factor often increases the investment risk for both the lender and the purchaser. If the association cannot meet the lenders’ standards, even the best unit cannot make up for the risks associated with the purchase. Buyers want to be sure that they can not only purchase the unit, but also turn around and sell it. It is imperative that buyers keep these lending guidelines in mind as they shop and as they participate in the association going forward to make sure it stays on track.
|
