Condos and failed financing-- sometimes it's not the buyer, but the building. Financing is the main reason any deal falls apart these days. And it seems that over half the time, it's not the buyer who fails to qualify, but the property they are buying.
This post focuses on how condos can fail to qualify for the ideal mortgage product. There are just as many stories about houses-- houses in declining market, houses with illegal improvements and houses that need a ton of work are just three examples. But stories about condos failing to finance are a bit more nuanced.
Here are some recent examples of condo deals that posed tricky financing challenges. Fortunately they all held together because we knew which lender would do the deal, or we recommended a mortgage broker who saw the red flags and knew how to respond:
- Condos in new developments with preferred lenders and lending associates: This is actually one of my older deals that still closed, but posed some challenges at the end because while BofA was an approved lender for this South Beach building, the BofA loan agent my clients wanted to use was not. When she learned that she was getting only a pittance for her labors, her efforts to close the deal ground to a halt. We had to seriously hustle up to get to get the transaction completed.
- Corollary to this problem: Until a new development closes on a certain number of units, only a few lenders who have formally approved the project are available to the buyers-- your preferred lender may not be one of them.
- Condos in recent conversions: When I put my client in escrow on a Haight Ashbury condo in a four unit building, that is just finishing condo conversion, I didn't know the property wasn't going to qualify for traditional fixed-rate financing. Fortunately the mortgage broker did. My buyer is still getting a fixed 30-year at a competitive rate, but she is having to pay an extra point.
- Condos in buildings with litigation: I have been unable to date to find a lender willing to do a fixed rate on a condo building with litigation (when they knew about it) and at most only two who are willing to do an adjustable. The last time I did a deal in a building with litigation in Mission Bay, there was only one bank prepared to do the loan-- a local portfolio lender who understood the building and was willing to take the risk.
- Condos in buildings with lots of tenants: If a development is more than 20% tenant-occupied, lending choices are again quite limited, and finding a fixed rate loan can be a challenge.
- Condos in mixed use buildings: I sold a condo last year in a building in the Mission District with eight units up and a small commercial space down. The developer had also retained and rented three of the units, so the property was suffering a double-whammy. Again a challenging property to loan against with only a limited number of lender choices available.
Lenders are simply extra-cautious, and trying to reason with them about these restrictions will more often than not be like talking to a wall. I have occasionally seen expert loan reps get exceptions from their banks for certain deals, but you shouldn't count on it. Instead, have a "Plan B" in place in case your first choice for financing isn't available.
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