Since I am getting so many questions these days regarding condos and condo-tels and since the secondary market for these properties, i.e. Fannie and Freddie, has all but disappeared, I thought I would try and clarify why a project will or will not fly. First, a condo-tel is not a new concept. It has always been a type of property designation we use along with single family detached, duplex, etc. The problem is that for many years, Fannie and Freddie did not adequately identify beach-front, resort-style condominiums for what they really were. So what makes a condo-tel? Actually, any number of things. I have heard many times that a project is not a condo-tel because it doesn’t have an on-site rental desk. While an on-site rental desk would classify a project as a condo-tel the absence of one does not make it immune. If they have a website that advertises rentals it is a condo-tel. If an owner is required to rent per the bylaws it is a condo-tel. If it has daily maid service it is a condo-tel. So if a project doesn’t have any of these things then it is okay with Fannie and Freddie and fixed-rate financing is available? Not necessarily.
There is another classification we use for condominiums and this is the term ‘warrantable.’ Warrantable refers to whether it can be warranted as sellable to Fannie or Freddie meaning it meets their criteria for an acceptable condominium project. So what makes a condominium ‘non-warrantable’? If the developer is still in control of the HOA it is non-warrantable. If more than 50% of the units are investor owned it is non-warrantable. If one entity owns more than 10% of the total units it is non-warrantable. If the project has pending litigation against it or if a large percentage of owners are delinquent in their HOA dues, or any number of other factors cited by the appraiser can lead to a project being classified as non-warrantable. Every once in a while we come across a project that we can warrant but they are rare to say the least.
Between a project having one or more condo-tel attributes or having one or more of the non-warrantable attributes, you can see that most every condo here on the beach has no secondary market financing available. This is why a few banks like Vision have developed alternative vehicles to get these properties financed. Our portfolio 3/1 and 5/1 ARMs are not a panacea. Yes, they carry a certain amount of risk and the rates are at a premium over the current thirty-year fixed-rates, but, in the absence of a secondary market, these ARMs are the best alternative for providing financing to the buyer while protecting the bank from interest rate risk and meeting our future capital requirements. It is our hope that in there will eventually be a thawing in the secondary market for condos and that our products can provide a bridge to that future. In the meantime, we will continue to lend on these properties because we have a vested interest in seeing them sell and we have a firm belief that the collateral is sound.
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