There is only one valid reason to purchase a condo. You purchase a condo to fit your lifestyle. Low maintenance, no exterior work and often, these homes let you live in expensive areas for much less than a single family home. One of my favorites is The Spire in downtown Denver. The Spire covers all the lifestyle bases to validate a condo purchase.
If you love the home, plan to live there and enjoy the amenities, then great, it’s the home for you. If you think you have another reason, you should remember that they can become a real estate nightmare for many, many different reasons. Here’s one of them, financing.
Lately condo financing has become much more difficult. On a recent transaction for a new construction condo conversion down in Littleton, I ran across a couple financing issues that I now know to check out early in the buying/selling process to make sure the property is salable.
Legal Actions A legal action taken by(or against) the HOA may make financing the unit impossible leaving only cash/owner financing as an option. This is a very bad thing if you own one of those units or don’t have cash.
Investor concentration. To high and the investor concentration in the condominium complex may tank your deal! This often information comes over on the HOA certification letter that is usually required for conventional financing. While the ratio may change and loosen up a bit in the future for conventional financing it is still important to find out what this ratio is as soon as possible. Sometimes a simple phone call to the home owners association may be enough, other times, it’s a little more formal. Anything over 30% should be enough to bring it up with your mortgage broker. Sometimes for conventional financing, that in itself is a deal killer. FHA financing allows the investor concentration to be up to 50% but the buyer should know about the issue as it could impact the future resale if the situation doesn’t chance. If you feel this could be a a concern, be proactive so that there are no surprises later.
HOA Default Rate. This is another piece of info from the HOA. Greater than 15% could be mean trouble. The lender would be concerned that the default in the HOA payments may suggest future deficiency in the HOA accounts and perhaps deeper problems. If the lender would be worried, so should your buyer. At the least, he should be informed of the potential issue.
HOA Financial Reserves This should be greater than 10%.
Now there is a home purchasing program that will finance these properties. FNMA (Fannie Mae) sells some homes with HomePath financing. That means that they’ll finance the property. They usually don’t require the HOA certification. The downside is still this, if the buyer wants to sell later, FNMA won’t be there to offer financing.
There are many more reasons to be concerned about the financing for a condo, especially these days.
Check out RealEstateUndressed for another possible issue.