** 6/20/2013 – I should note that since this article was written, Nolde Bakery began a sales effort of the remaining developer owned units. I had labelled Nolde as ‘avoid at all costs’ but that may no longer be the case. If the developer has made the commitment to sell the remaining units and a ‘warrantable’ financing situation can be attained, then Nolde will become a viable project in the marketplace and the danger of HOA non-compliance is mitigated. Buyers should still be cautious and ask many questions.
As 2008 taught almost all of us, real estate is not guaranteed to appreciate. While we collectively reaped the benefits of sustained home price appreciation from 2000 – 2007, we never imagined a day when values would drop 30-40% in a 3 year span.
Lost in the pundit’s debate about who was at fault and why, is a much more subtle debate about how the rules of finance affected the ultimate outcome. The changes in lending practices and underwriting affected different segments in different ways. The changes in mortgage insurance, as an example, affected housing targeting newer families more than it did housing in mature neighborhoods. As another example, the removal from any ALT-A products (loan products for those with some credit ‘challenges’) decimated the affordable housing segment and largely stopped redevelopment in its path.
As it relates to condominiums, the removal of many loan products and shifting underwriting guidelines meant a change in several properties from the realm of ‘Warrantable’ to ‘non-Warrantable (for a more in depth of discussion of ‘Warrantable,’ see UNDERSTANDING LENDING). This shift meant that projects where conventional financing was available suddenly found themselves no longer eligible for FHA, Fannie Mae or Freddie Mac backed loans. Once people began to figure out that having no ability to get a loan themselves also meant that when selling, only cash buyers were the market. That is a BIG problem.
The following is a list of properties that are still registered as condos but offer no ability to be conventionally financed and a brief description of why. If you see these periodically for sale, I would think long and hard about buying, despite the price.
Avoid AT ALL COSTS:
- Miller and Rhodes – 100+ units attached to a hotel
- The Presidential – largely investor owned
- Eagle Mill Tower – great location but dangerously high level of investors
Ask a LOT of questions:
- Fan Square – one owner owns greater than 10% (Fannie and Freddie don’t like this)
- Nolde Bakery – largely investor owned **
- Old Manchester Lofts – high investor density
- The Prestwould – HOA dues are extremely high
- 6 N 6th Street – convoluted ownership structure + high degree of investor owned units
Probably OK but do some homework:
- Riverside on the James – always teetering on the 50% owner/occupant threshold but the Reynold’s North Plant project is very beneficial to the area
Overall, the issue of whether or not the project is ‘warrantable’ has largely replaced the more important issue of being well conceived/designed/constructed as the sole determinant of success or failure. Understanding the effects of financing on the entire process is integral to making a good and risk mitigating decision.