Jumping off the condo bandwagon

Flickr image by footloosiety.

I have to admit the recent sales numbers for condominiums from the National Association of Realtors had me scratching my head.

According to a May report (published in June), existing condominium and co-op sales increased 6.1 percent to a seasonally adjusted annual rate of 520,000 units in May from 490,000 in April but nevertheless were 8.9 percent below the 571,000-unit level in May 2008.

What surprised me was the amount of volume left in the condo market, especially when it's so difficult to get financing for one of these. Indeed, in some places like South Florida, it's probably easier to climb through the eye of a needle than to get a lender to offer a mortgage for a condominium.

So what's a potential condominium investor to do?

About the only condo sales moving quickly to fruition these days are all-cash deals. Maybe that's because NAR also reports that the median existing condo price had deflated to $173,800 in May, a 21.9 percent drop from a year earlier. That means much more condo product appears to be cheap enough to self-finance from a middle-class investor perspective, i.e., a buyer with stabilized employment, savings and who didn't lose money speculating in the real estate markets between 2002 and 2007.

Despite busted condos, homeowners associations going bankrupt and other bad news, condos are still fairly well liked by buyers. It's the lenders who have turned on the product. Fannie Mae and Freddie Mac don't really want the paper, and according to some insiders, there is an unofficial blacklist of certain condo projects -- meaning units from those buildings will never, ever see financing by a major bank.

Your local lenders, even if they like you, can't make a condo loan because they no longer keep mortgages on their books but instead sell them to the big, failed and now taxpayer-owned GSEs (government-sponsored enterprises) -- Fannie Mae and Freddie Mac -- which have gotten very restrictive.

Fannie Mae, for example, won't guarantee mortgages in a condo development where fewer than 70 percent of the units have been sold (it used to 51 percent); where 15 percent of more of the occupants are behind on their homeowners association dues; or where an individual investor owns 10 percent or more of the units. Freddie Mac is expected to implement similar restrictions.

In April, the GSEs unveiled new loan-level fees: a conforming mortgage secured by a condo with less than 25 percent equity would have closing fees of up to 0.75 percent of the loan.

"In Florida and Las Vegas, many newer condo developments are only 20 percent occupied, more than 15 percent of projects are not paid up on their homeowners association dues, and 30-40 percent of units are in foreclosure," says Jack McCabe, principal in McCabe Research & Consulting LLC in Deerfield Beach, Fla. ...CONTINUED

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