‘But the listing agent said that there was condo financing,’ they said in a distressed tone.
‘For you…but not for your buyer.’
Stated in its most simple form, the risk for a buyer of a condo is on exit and not on entry. In many of the articles which have been written for the RichmondVACondos.net site, the issue of lending (and more specifically – WARRANTABILITY) has been the topic. While what defines being ‘WARRANTABLE’ and what affects it are important, understanding why it matters is often misunderstood.
It matters for the following reason: when you buy your condo from the developer or builder, you need to make sure that the same (or better) type of financing is available to the person who will buy it from you when it is your turn to sell.
In order for a mortgage lender to do a loan for a condo project, the project needs to meet many criteria. The questionnaire requested by your lender that is filled out by the management company checks number of units sold, numbers of units rented, amount of money going into the reserve account and the amount of space within the condo dedicated to commercial purposes (plus about 15 other measurements.) If any one of these questions is answered incorrectly then the project is considered ‘NON-WARRANTABLE.’ Being non-warrantable means that conventional mortgages are not available to a purchaser.
Miller and Rhodes project on 6th and Broad Street…
The project was developed as a combination of hotel + condo with over 100 units of condos to sell. Through use of private financing, cash sales and lenders willing to offer a small number of mortgage-esque products for buyers, the developer was able to sell about 25 of the units before pulling the plug. The question now for those who bought is not only who will buy it from them, but how and at what price? The most common buyer at M/R was the medical student or resident. Many of these were sold with cash or debt provided by a local lending institution (who no longer makes loans at this project.)
So…where does a buyer go to get financing now? The real answer is that they cannot get any.
So…what kind of demand would you expect there to be for a property with no financing available? The real answer is, almost none.
When a condo project becomes a rental project, conventional mortgages are no longer available and values fall by somewhere between 30-50%. The only loans that are available are at far higher rates, far lower leverages and for far shorter terms…this has a very powerful negative impact on values.
To summarize, the developer may have arranged for mortgages to be available you when you buy, but not for the next round…the market needs to supply those. If your project is not considered warrantable at the time you go to sell, the market for your property will be considerably smaller. Understand why this could occur and you will be a far sharper buyer.
