Category Archive: Condo

Jul 02

Condo vs Un-Condo, cont.

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:

  1. The property must be horizontal, no units stacked on top of each other.
  2. It requires an 80% vote of the owners in favor of un-condo.   
  3. The utilities must be separately metered.
  4. Each unit must contain separate mechanical systems, heat, air, water, etc.
  5. Probably requires individual ingress and egress (your own front door).
  6. Requires a survey with individual lots for each unit.
  7. Must provide for maintenance of all common areas, roads, club house, etc.
  8. Will require approval of the new subdivision plan by planning and zoning.
  9. Deeds from the HOA to the individual owners.
  10. Revised HOA and By Laws if there are common elements or maintenance.

I will add to this list as we uncover other requirements.

Why Un-Condo?

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.



Jun 28

Condo Approvals Not Required

Why is it Hard to Finance a Condo?

Financing a condo has always been tricky. In the last few years it has become almost impossible. Conventional and FHA guidelines have both changed the approval process to get a condo community approved. The irony based on my personal experience is that all of my loan applications in the last year from people buying or trying to refinance a condo is that they all had top-tier credit profiles. If I separated all of my applicants based on the type of property without question those attempting to finance a condo were by far better credit candidates, not even a close call.

So if this is true with other loan officers why is it so difficult to get a condo community approved for a traditional mortgage? The answer lays in the mortgage guideline changes I mentioned above. 

First let’s look at FHA. For as long as I can remember once a condo was FHA approved it was good to go, the approval never expired. That changed drastically last year, now all FHA condo approvals must be renewed every two years. That means someone local associated with the property must fill out paperwork, gather documents, figure out some ratios and then send all of this junk to FHA and do it every 24 months. By the time you finish one cycle it is almost time to start getting ready for the next review.

Second, the conventional review process can go two directions; one covers the entire development and makes the approval status available to any lender and the other is lender specific. The full-blown approval process is very expensive therefore seldom used in our area. The second method is  CPM which I believe stands for Condo Project Manager and it is basically free or I should say lender funded in most cases. CPM is preferred by the consumer or the Home Owner’s Association because it is free. But it is a constant source of trouble because every unit and every mortgage application requires running CPM. What a pain.

The third problem is most board members serving on their Home Owner’s Association are doing so voluntarily. They are just normal people like you and me but are trying to manage their community. Few, if any, have experience managing a multi-family project. Well-meaning attempts to balance a large budget can cause the best run HOA’s to pass by-laws that will cause their property to wash out of the mortgage approval process. One wrong answer during the CPM process will cause a property to be declined.

A Solid Solution for Some Condos

I had calls last week by board members from two different communities asking for help sorting out the mystery of financing a condo. For a year I have predicted that new developments will shift away from being condos to fee simple title similar to row houses in Boston or Chicago. The new communities could still have HOA’s for taking care of common elements like a club house, pools, sidewalks, etc. The difference is in how title is held, my idea is for the owners to actually own the land under their unit instead of just owning the interior of their unit. Of course this requires no upper units, only one unit to a footprint.

So while brainstorming with one board member I asked if their community had any upper units, nope, all ground level. But no one could get approved for traditional financing, FHA or conventional. So I tossed out the idea of not being a condo, Un-Condo is what we decided to call it.

This solution is something they had not thought of but I thought it was a resolution to their problem. If their community is not a condominium development is does not need a condo approval to get financing for a unit. No condo, no condo approval needed.

I was a zoning commissioner in a previous life so looking at development ideas and preliminary plans is nothing new. But it is always a good idea to bounce a new idea off someone you trust. I tossed it out to a couple of other loan officer and they gave it thumbs up. Next I ran it past another mortgage banker and got another thumbs up.

Next stop was legal, ran it past a couple of attorneys that are experts in mortgage matters. Not only did they agree but one said a recent law in Kentucky addresses this very subject,

I read the Kentucky Statute and not only does it tell how to do it, but it says the move does not require a unanimous vote.  Only 80% of the home owners need to vote for the proposition to make it happen.

This post is continued here.

Feb 25

New Condo Resource Added

Five out of the last six condo loan applications I have processed were rejected because the property did not make it through the system.  This is a serious problem for people that want to buy or sell a condo.  Being a slow learner it took a few rejections for me to wake up and see the need to increase my knowledge on the subject.

The core of the problem is that in order to finance a condo the process requires an additional approval beyond the normal appraisal.  To complicate it even more there are different approval process for the different types of loans a borrower may want to use.

This is important to both buyers and sellers because it can have an impact on the value of the individual condo unit.  Nothing is more frustrating for a loan officer than having a willing buyer and seller only to have the property rejected!
I want to help eliminate this problem!

So I took some training on financing condominiums.  It prompted me to add a section in the Resource Center about condos.  I am going to expand this section to include the information learned in the training class that will help HOA’s keep their communities approved for different forms of financing.  This is going to be a long term project and I am currently working on the financing section.

Buying a property in Kentucky and want to be pre-approved  for a mortgage? Visit my online application site or print and use this simple form to get started. If you prefer we can do it over the phone, call my direct line during normal office hours, (502) 753-4127.