Condo Buyers and Sellers…You Should Know This

(Riverside, California…Westcoe Realtors)…The rules and regulations regarding available financing in today’s real estate market change more often than Brittany Spears’ hair styles…and often with the same logic applied.  Today I wish to inform you of some new changes regarding financing condo sales, but it comes with a caveat…BEWARE, TODAY’S REGULATIONS ARE LIKELY TO BE FOUND IN TOMORROWS TRASH BIN, SO PROCEED ACCORDINGLY.  All we can say is that the following is applicable as of today, but that does not mean it will be valid or apply tomorrow.

We have mentioned before on this blog about Fannie Mae and Freddie Mac…the two largest providers of loan funds to our banking system.  To briefly refresh, these two giants buy the majority of the notes and deeds of trust generated by banks when the bank makes real estate loans in your area.  Your local bank or mortgage lender makes a loan (trading their cash for your note, or promise to pay) and then they sell the note to one of the above two entities, in which case the local lender gets more cash to loan again to someone else.  So…when Fannie or Freddie sets new guidelines, all local lenders pay attention, or  they will have no place to sell these newly generated real estate notes.

 So why is any of this relevant to you, a possible condo buyer or seller?  Because there are now new guidelines being set for anyone who is involved with a condo purchase.  Guidelines that affect both the buyer and the seller.

For the buyer, the main change is regarding the down payment percentage.  You will now need a minimum of a 10% down payment, and even that may not be good enough if the zip code you are purchasing in has been designated a “declining” market.  If that is the case, you may have trouble purchasing at all (the reason for this is very detailed and very boring, so simply ask your lender).  If you can muster a 20% down payment, then you will be OK…provided you have really good credit and FICO scores (a credit rating score that someone thinks is an indication you will actually make your payments).

For the seller, it can be even worse.  Fannie and Freddie are very concerned about condo projects, because so much of the desirability of the entire project is connected to the appearance and financial health of the association that controls the project expenditures.  For example, if the association is broke, and just skimping by, then perhaps there is not enough money to pay for proper landscaping…or new trees…or a new roof…all of which can greatly affect the pricing of an individual unit.

So much of what an association can do is dependent upon all the condo owners paying their monthly association fees, and Fannie and Freddie want to make sure that they are not lending on a unit that is in a project that is headed downhill…and you can see their point.  It is different than a single-family home, where only one person (the homeowner) is responsible for maintenance.  In a condo, one unit owner could be paying his monthly dues, but will still suffer from poor maintenance if many other unit owners are not paying theirs. 

SO…Fannie and Freddie have now instituted new guidelines for making a loan in a condo project.  Now, before they will make a loan, they want to see all legal documents pertaining to the condo project, the association budget and current financial statements, and what percentage of condos are owned by investors, and what percentage of units that are delinquent on paying their monthly association dues….and the problem is that not all this information is readily available.

This brings up a host of potential problems.  Who is really to know if a unit is occupied by an owner or a tenant…and how do you verify this…go door-to-door?  Also, what is an acceptable percentage of owners to investors?  And how about the delinquency rate?  Is that monthly…quarterly?  And what is the acceptable ratio here as well?  As with most federal guidelines, there is simply many more questions than answers at this point.

In the end, all we are trying to do is acquaint you with some of the changes that are currently taking place in our real estate arena.  My guess is that some of the regulations outlined above will be changed since they place an undue burden on the seller or local lender to verify facts that are simply not available…but changes, if any, will take time to implement.  For now, we go with what they ask…for if we don’t play by Fannie and Freddie’s rules, they will simply take their ball (money) and go home and we won’t have a game at all.  Sorry…don’t shoot the messenger.