Q: Why are banks so reluctant to lend on a condominium sale unless the buyer puts 25 or 30 percent down? There are more renters than owners in this 24-unit condominium complex. Several people have tried to sell their units to potential owner-occupants, but the lenders want so much cash down that buyers go elsewhere for units with better financing. How can we convince the lenders that there would be more owner-occupants in this particular building if they would allow people to buy with only 10 percent down. This is a well-maintained building, not some fixer-upper. – M.H., Arlington
A: This is a classic Catch 22: Buyers cannot get a low down payment, market interest rate mortgage to purchase a condo unless the building has more owners than renters. But because the prospective buyers cannot get those kinds of loans with the low owner-occupancy rate in the condo complex, few condo units are sold and the number of owners in the building remains low. It can be very frustrating to the owners.
So why do mortgage lenders make it so difficult for people to buy condos in buildings with low owner-occupancy levels? Because they are worried about their collateral on the loan. Lenders worry that renters living in the condos will not take care of the property as well as owners because they have no financial stake in it. If the majority of the occupants are renters, it is much more likely that the property will deteriorate than if the majority of the occupants are owners. Another lender concern is that potential owner-occupant buyers will be scared off by renters who may not be as clean and quiet as resident owners.
Now, I realize these are generalizations. As you pointed out, it is possible to have a condo complex with a low owner-occupancy ratio that is clean and well maintained. But mortgage lenders are conservative by nature and have lost lots of money in the past when condominium projects essentially turned into apartment buildings – substantially reducing the resale value of the individual units.
As a result, Fannie Mae (Federal National Mortgage Association) underwriting guidelines require that at least 60 percent of the condo units be owner-occupied. FHA and VA loans require an owner-occupancy ratio of 51 percent.
When the owner-occupancy ratio is below 50 percent, the financing options are limited. Freddie Mac (Federal Home Loan Mortgage Corp.) does not have a minimum owner-occupancy requirement for condos if you are purchasing your primary residence or second home. But the condo complex must be an established building that has been controlled by the homeowner’s association for at least a year. If it meets that requirement, you can purchase a condo with as little as 10 percent down.
So your best bet is to find a mortgage company or bank that does Freddie Mac loans if you want to purchase a condo in a complex that has an owner-occupancy ratio of less than 60 percent.
However, be aware that banks and mortgage companies have their own underwriting guidelines, and they may not be willing to loan you 90 percent of the purchase price on a condo complex with a low owner-occupancy ratio, even though Freddie Mac guidelines allow it. So you may have to shop around.
Another option is to find a seller willing to finance your purchase with a 10 percent down payment and a private contract to carry the balance of the purchase price. Seller financing is not unusual in these kind of condo complexes because conventional financing is so hard to get.
You can also find mortgage lenders that will allow a combination of seller financing and a conventional loan. For example, when I purchased the condo I mentioned above with the 33 percent owner-occupancy ratio, I got an 80 percent bank loan, a 10 percent seller second mortgage and I made a 10 percent down payment.
Yet another option is to work with a portfolio lender who does not sell its loans on the secondary market. They can be more flexible because they don’t have to go by the strict Fannie Mae or Freddie Mac underwriting guidelines.
Condos in buildings with low owner-occupancy rates can be a good long-term investment, because they are undervalued. As soon as the owner-occupancy ratio rises above 51 percent, the value of each condo unit instantly increases. However, this is a gamble. You must have good reason to believe that the owner-occupancy trend is going in the right direction. Otherwise, you will find yourself in the same position as the current owners – stuck with a condo unit that is difficult to finance, and therefore difficult to sell.
In general, I recommend that the average condo buyer concentrate on buying in condominium complexes that have an owner-occupancy ratio of at least 70 percent, so there is some extra margin in case the owner-occupancy rate drops in the future. These condos are more expensive than the condos in low owner-occupancy complexes, but they tend to appreciate faster and are easier to sell in the future.
But watch out for complexes that appear to be on a downward trend, with an increasing number of renters. Once the owner-occupancy ratio drops below 50 percent, your condo value will drop significantly.
Mail your real estate questions to Steve Tytler, The Herald, P.O. Box 930, Everett, WA 98206. Fax questions to Tytler at 425-339-3435, or e-mail him at economy@heraldnet.com
Steve Tytler is a licensed real estate broker and owner of Best Mortgage, Inc. You can visit the Best Mortage Web site at www.bestmortgage.com.
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