Selling condos and co-ops as opposed to freestanding homes is practically a whole other profession. Rosser Thistle provides one peculiar example.
“Center City condos and co-ops attract buyers sometimes looking for a creative need, like owning and using the parking spot while renting out the unit,” she says. “In 2011 I bought a co-op mostly for the parking spot, with no regrets. The spot is one block from my office, and no renting is allowed in the building I live in. The value of a parking spot in Center City is about $100,000.”
That transaction is typical of the complex condo/co-op realm, so different from the simple single-family house with a 30-year fixed-rate mortgage. Agents working with condo/co-op clients must dig deeper into each building’s details to properly educate buyers on what’s presently required monetarily…and what may be soon as well.
Attaining a mortgage for a condo or co-op can also be more problematic. Financial institutions will not just be judging a potential buyer’s creditworthiness. They will be eyeing the building’s financial wherewithal as well.
The financial aspects for a condo or co-op differ significantly from a single-family standalone home. Buyers must be schooled in the many important details that will impact them apart from a standard mortgage. While many agents nationwide are not likely to even have condos/co-ops within their purview, the future may change that, so understanding all the many differences from standard home sales is important for them to comprehend and be able to explain to buyer clients.
“There are a few differences if you are buying a co-op or a condo versus a single-family home,” advises Melissa Cohn, regional vice president at William Raveis Mortgage. “The credit underwriting is the same for both, as the guidelines relating to income, credit, assets, etc., don’t discriminate due to the property type.
“However, the bank will require that the building association’s financials be vetted and approved as well. Banks generally follow the FNMA (Federal National Mortgage Association) guidelines for building approval. This includes what percentage of the building is owner-occupied, the financial health of the building and to ensure that there is no litigation. The strength of the buyer is immaterial to a bank if they can’t approve the building itself.”
Additionally, condos are usually easier to finance since the owner will have an actual property they can use as collateral. That also helps condo buyers, who can often make a lower down payment, depending on their financing.
Co-ops, on the other hand, are shares of the corporation that owns the property. Getting a loan can be more difficult or not doable at all if the co-op board forbids financing. Lenders usually only offer loans for market rate co-ops in specific markets since it almost always ensures that the buyer will build equity as they make payments, protecting the investment.
John Walkup, co-founder of real estate analytics firm UrbanDigs, said there are insurance and special assessment aspects of condos/co-ops that many buyers likely would not know.
“Many new condo and co-op buyers don’t realize that insurance goes beyond just an off-the-shelf homeowner’s policy,” he says. “To begin with, the building and mortgage lender may have more stringent liability requirements. In addition, many new owners are surprised to learn that in the event of a serious problem (fire, flood, etc.), the building’s insurance may only be required to provide a basic box, with any costs needed for interior work (new floors, new appliances, etc.) borne by the owner.
“For assessments, new buyers often don’t realize that when they buy a condo or co-op, they’re also buying a slice of the building’s financial health. So when capital improvements or repairs are needed, these costs can be massive and not necessarily absorbed by the building’s reserve fund, which means the owners have to pay on demand and out-of-pocket. This is why the due diligence phase of any purchase transaction is so critical, as it can hopefully identify potentially expensive assessments before they become a devastating surprise.”
Going straight to the source to get the lowdown on buildings is an absolute must for potential condo/co-ops buyers, stresses Lydia Wiley, director of sales and marketing at Freshwater Development, a Michigan-based real estate development company.
“It’s essential to review association meeting minutes and budgets to assess upcoming capital projects and the financial health of the HOA before purchasing,” she says. “The seller might not even be aware of any upcoming projects the association has planned, so it’s crucial for the buyer’s agent to contact the head of the HOA during due diligence to find out if there are any projects that would require owners to pay out of pocket to fund.”
“Also, pay attention to the overall condition of the building,” adds Sia DiMaggio, a broker/owner with RE/MAX Real Estate Professionals in Brooklyn, New York. “A well-maintained property with proactive management and healthy reserves is a strong indicator of long-term stability and fewer surprises.”
And there’s this buyer beware from Debbie Lang, an agent with Berkshire Hathaway HomeServices (BHHS) Fox & Roach, REALTORS® in Princeton, New Jersey and BHHS Florida Realty in Boca Raton, Florida: “If the building doesn’t meet Fannie Mae/Freddie Mac guidelines (e.g., high investor ratio), it might be harder or more expensive to finance. Most lenders have an approved list to reference.”
Rosser Thistle puts a bow on the financing quirks of buying residences that are not freestanding single-family properties.
“More often than with homes, condo buyers are cash buyers,” she says. “In fact, some condos do not match with mortgage financing. The ratio of owners to renters, or one person owning a high percentage or a commercial component to the building can make financing difficult. Or the reserves may not be robust enough.
“To start, the lender will provide the association with a condo questionnaire to assess the ability to provide a loan. I always explain to buyers that it is the building, not you. Here agents are familiar with lenders who know how to do a loan in certain buildings. Sometimes, there is only one.”
