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Why get approved?

 

The bottom line: Condo approvals protect and increase the value of your condominium project.

 

Existing Condominium Projects


Over 80% of all condo buyers rely on a mortgage loan guaranteed by either the FHA, FNMA or VA. Having these guarantors approving your condo project means you have 100% of interested condo buyers considering your project instead of under 20%. That's four times more prospective buyers. The result is firmer prices, faster sales times, and a healthier resale market for condos in your project. The bottom line is condo approvals protect and increase the value of your condominium project.


Condo owners have a considerable portion of their personal net worth tied up in their condominium. For many, their condo is their most valuable asset. We've seen similar projects right next to each other where the non-FHA approved project was selling at 10% less than the FHA approved. When you multiply a 10% discount for each unit by all of the units in the project, the cost of not being approved is staggering. 


After the credit crisis in 2008, the federal government tried to save the mortgage and real estate markets by guaranteeing more mortgages. As a result, the Federal Housing Administration (FHA), the Federal National Mortgage Association (Fannie Mae), and the Veterans Administration (VA) stepped up their activity and now guarantee over 80% of all mortgages. To avoid losses and better protect taxpayer money, these agencies are now requiring condo projects become officially approved. Their approval process closely examines all facets of a condominium project and rejects those that don't meet their criteria. Each of these insurance guarantee providers has their own condominium approval program, but the bottom line is the same – a condo unit that is not approved by these programs can only be sold to either cash buyers or highly qualified buyers who can find a private lender. Condo projects that are not approved have dramatically lower demand for their units, and most owners have to reduce their price significantly to attract a very small set of buyers.

 

Imagine a 100 unit project that has 10 units sell each year. If the project is not FHA or FHMA approved (the 2 largest guarantors), they will only be able to sell to about 20% of the market, so they will likely only sell 2 units that year. The next year, they will then have 18 units for sale.Those that didn’t sell last year will likely drop their price 10%, and perhaps another 10% later as they get desperate. Suddenly, we have what looks like a place no one wants to live in because there are so many sellers and prices are dropping quickly. The truth is there’s nothing wrong with this fictitious project, except for one thing -- they don’t have the approvals that every buyer out there wants. The result is the equity the condo owners have had in their units has been wiped out. And once the “sales comp” of a sale at a lower price is established, it becomes very hard for the next buyer to pay 10-15% more than the last buyer just because the project is now approved. These lower comps can depress prices for years.


Several of our Homeowner Association (HOA) clients have been threatened with lawsuits by owners because of the HOAs inaction to get approved or recertified. The plaintiffs allege the HOA’s negligence in not getting approved has resulted in lower condo values and want compensatory damages. While we’ve not aware of an actual lawsuit proceeding, the point is understandable. The condo owners bear the cost of not having the approval.

 

Reverse Mortgages

 

Only FHA allows reverse mortgages and for condos that means the entire condo project must be approved in order for one reverse mortgage loan to be insured. Reverse mortgages, also known as a remortgage, is a special type of home loan available to seniors aged 62 or older and enables eligible homeowners to convert a portion of their equity into cash. Unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower either fails to meet the obligations of the mortgage or no longer uses the home as their main residence. There are five different ways a borrower can choose to receive payments: Tenure- the borrower recieves equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence. Term- equal monthly payments for a fixed period of months selected. Line of credit- unscheduled payments or installments, at times and in amounts of your choosing until the line of credit is exhausted. Modified tenure- combination of line of credit with monthly payments for as long as you remain in the home. Modified term- combination of line of credit plus monthly pyaments for a fixed period of months selected by the borrower. More information on reverse mortgages can be found on HUD's website here.


New Condominium Projects


Developers especially benefit from approval by enabling them to presell units, with some restrictions, to get the momentum they need to sell out their project. The result is faster liquidity, lower carrying costs, and a higher ROI. We strongly recommend developers fully understand the condo approval criteria before they file their legal documents because the newest rules are more restrictive and may make a condo ineligible for approval. The newest rules make it especially hard for condominium conversion developers. ACA can help you understand the issues and guide you through the approval process.