The housing boom brought us a slew of new community developments including condos, townhomes and retail/condo buildings. While financing on townhomes is still doable, financing options for condo & mixed-use buildings is becoming very difficult. The developments with the hardest time getting financing are the ones that have had the highest rates of foreclosure.
So many condos built from 2005-2008 in the last boom were purchased either at the top of the price curve and/or were bought with challenged loans or borrowers. This has meant some buildings having 50% (or maybe more) of their units go back to the bank. When that happens you have underfunded associations with expenses well above income, small or non-existent reserves and prices spiraling down.
In single family homes, if there are foreclosures around yours you will see some effect on your value but often it can be partially mitigated by your property’s unique characteristics and condition. Additionally, an appraiser can also search the rest of the neighborhood for comparables to yours.
When you are in a condo building, most of your comparables are the others in your building. When you have only a few floor plans in a building and units that are only a few years old, it is very hard to argue that there is a huge difference between your “traditional seller” owned home and a bank owned REO. With each additional sale prices fall further and more and more owners become upside down on their mortgages, which may lead some to simply walk away from their mortgage and lead to even more foreclosures.
Often these buildings become almost impossible to finance. For many of these buildings, cash is the only way to buy them. With FHA eliminating spot approvals for condos and further tightening lending guidelines, more buildings are about to become cash-only financing. If you look at the financial landscape of buyers, most are taking out a loan to purchase. Without a financing option, the pool of potential buyers shrinks even more and we see prices further decline and investors swooping in to pick these units up on the cheap.
I have seen quite a few condos that could be financed with payments well below equivalent rents – meaning these units are DEALS. Unfortunately even though they’re good deals now (some down 40% – 60% from their peak) if they can’t be financed they aren’t an option for the majority of buyers.
Once these buildings have gone through foreclosure and are owner-occupied again, budgets and the overall health of the association will likely improve dramatically. But until we can secure financing for owner-occupant buyers, what are we to do?
Just-before-print update: Fannie Mae Relaxes Condo Funding Rules in Florida