Why are condos hard to finance?
In the last post we discussed three of the primary reasons it is hard to finance a condominium. In addition to those issues I have always been told the percentage of mortgages that default is higher for condos than it is for a standard single family residence. However, I was unable to find supporting evidence while researching the subject for this post. I found a massive amount of information broken down by the type of loan, length of the terms, etc. But there is nothing that distinguishes a condo from any other form of ownership when it comes to mortgage default ratios.
It stands to reason if condos are harder to finance they are going to be more difficult to sell. If they are harder to sell the default ratio will increase. But try to prove it!
There is such a big void on the subject it seems peculiar. Oh well, maybe that is just the conspiracy buff in me coming out. Surely no one is trying to hide something from us.
Update on Un-Condo
Many more calls about my Un-Condo idea. It seems the concept is appealing to both buyers and sellers. There are several unfinished developments in the area that would benefit greatly from this procedure. It will not work for every property but the Kentucky Condo Law makes it relatively easy for some properties.
Here is what we know so far:
- The property must be horizontal, no units stacked on top of each other.
- It requires an 80% vote of the owners in favor of un-condo.
- The utilities must be separately metered.
- Each unit must contain separate mechanical systems, heat, air, water, etc.
- Probably requires individual ingress and egress (your own front door).
- Requires a survey with individual lots for each unit.
- Must provide for maintenance of all common areas, roads, club house, etc.
- Will require approval of the new subdivision plan by planning and zoning.
- Deeds from the HOA to the individual owners.
- Revised HOA and By Laws if there are common elements or maintenance.
I will add to this list as we uncover other requirements.
It eliminates the approval process required to mortgage an individual unit, this fact alone is reason enough to consider the proposition if the property lends itself to the procedure.
Eliminating the mortgage approval process makes a unit easier to finance. Properties that are easier to finance are typically worth more than those that are not easy to finance.
Conventional financing for condos have higher interest rates than other homes. Higher interest rates impact the number of buyers that qualify for the required loan amount.
The size of the pool of buyers that qualify for a particular loan amount increases as the interest rate decreases. This also has a positive influence on the value of a property.
Easier to finance + lower interest rate + more qualified buyers = Higher Value
What are the disadvantages?
Good question. In a condo you own from the paint on one wall to the paint on the opposite wall. After the Un-Condo process you own the land under your unit, the air rights above your unit and the outside of the unit. This means if your unit needs a new roof that is your problem, not the home owner’s association. Guess what, if the HOA doesn’t have the required cash reserves to put on a new roof it is still your problem. Under funded HOA’s are common in our area.
Pooling funds for outside maintenance gets a better price on repair contracts, right? Maybe, unless you live in the same development as a friend of mine, funds are missing from her HOA and now she can’t sell or refinance her unit.
What about yard work, not required in a condo, neither is it if you Un-Condo, keep a limited version of the HOA to take care of that if desired.
This idea isn’t for every property or property owner. But it is an AWESOME idea for most of the properties that lend themselves to the concept.
If you have questions or comments or would like for me to review your property please call me direct, (502) 753-4127.