If you have purchased real estate over the past few years, you are aware that many of the lending guidelines have changed. One of the biggest areas of change falls on purchasing condominiums. The actual process of making an offer is the same, but there have been an increasing amount of problems after the offer is accepted. The biggest areas of concern regard the appraisal, the number of owner occupied units and the amount of insurance needed for lender approval. Unless you specifically mention these to your lender, they would otherwise be neglected. Accordingly, these aspects are responsible for ruining more deals than you may think.
Appraising a condo is not an easy task. Due to the close proximity and the likeness of the units in the complex, one sale can have a huge impact on every future sale. If there is one distressed sale or one sale where the unit needed work, the value is lowered on every other unit. If you have one in the complex that is superior to every other sale, it may not be reflected in the value. Even if both parties agree to the sales price, the unit may not appraise high enough for the lender. If the value comes in low the buyer can still move forward, but it would have to bring the difference to the closing or have the seller agree to lower their price. Neither option is very realistic.
Lenders also have strict guidelines on the number of owner occupants and the amount of insurance the association must have. The owner occupant number should be at least 70% owners. However, in complexes with fewer units, all it takes is a few non-owner occupied units to throw the ratios off. There are a few extenuating circumstances where a lender would may an exception, but those are truly the exception and not the norm. In regards to the insurance, most lenders want to see at least a million dollars’ worth of coverage. All it can take is one slip and fall lawsuit or one accident by the pool to wipe the association out and deem it insolvent. Lenders are pretty strict with this. If the insurance is not updated or increased, it will not lend on any exceptions.
The surest way to avoid delays or problems is to ask for a copy of the resale package from the association. If you really want to be on the safe side, you can get this before you make an offer. You should definitely ask for it before you spend the money on the appraisal. Your realtor will give you a good idea of everything that has sold in the complex over the last 90 days, so you have some idea on the value you are looking at. The appraiser is independent and will come up with their own value, but you may be able to fight it with good comparables that are similar to the subject property.
The sooner you know any potential issues, the sooner you can deal with them. Ask for the resale package right away and ask your lender or broker what the potential snags could be on the financing side. Purchasing a condo in today’s market is certainly not as easy as it was just a few years ago.
