Real estate in Florida certainly has taken a beating over the past half of a decade. There is no doubt about this. We have seen prices dip as much as 30%-50% (depending on the specific area) since the peak in 2006. Out of all of the real estate in Florida though, condos have probably been hit the hardest. Before the real estate market tanked a few years ago, financing for purchasing a piece of property was much easier to obtain than it is now. Whether you were looking to purchase a townhome, a detached single family home or a condo, if you could fog a mirror, you could probably get a mortgage.
Well in today's market if you are looking to buy a single family detached home or a townhouse, financing is not as easy to come by. Your credit score must be stellar, you must be able to document a couple years worth of income from steady employment, and you must have an adequate downpayment. However, while it may be tough to get financing for a townhome or a detached single family home, you can still get financing. When it comes to condos in Florida though....financing is pretty much non existent
A few years ago, Fannie Mae, Freddie Mac (which alone currently account for purchasing about 90% of home loans made) and other companies in the secondary mortgage market stopped buying condo loans in Florida. The secondary mortgage market consists of companies that buy mortgages from lenders who originate mortgages. If companies in the secondary mortgage market stop buying condo loans in Florida, that means that lenders in Florida who originate the condo loans will have no one to sell those loans to. This would mean that lenders who originate the loans would have to keep those loans that they created. Well, the vast majority of lenders won't make a home loan if they can't sell that loan to a lender in the secondary mortgage market. It's simply too much risk. For this reason, home loans for condos in Florida are very hard to come by.
There are two exceptions to this. If the condo community is approved by the Federal Housing Association (FHA) than you can get an FHA backed home loan on a condo. Only owner occupants can get FHA loans though, and there are not that many FHA condo approved communities out there. If you are buying the property as an investment, you can't get an FHA loan no matter what. The other exception is if a lender is willing to make a loan on a condo in Florida and keep the loan on their books. This type of loan is called a portfolio loan. It's given that name because the lender keeps the loan in it's own "portfolio." If a lender will do a portfolio loan for a condo in Florida, than they will usually charge a higher interest rate than normal so they are compensated for the extra risk that comes with keeping the loan on their books. The number of banks who will do a portfolio loan on a condo in Florida though are very far and few between. For example, in my own town of Tallahassee, I only knew of 1 lender who would do a portfolio loan, and they have now stopped doing the portfolio loans.
Even with the availability of FHA backed loans on condos in approved communities and portfolio loans, it's safe to say that loans on condo's in Florida are pretty much extinct like the dinosaurs. So while this is unfortunate to most would-be buyers out there, this situation creates a great opportunity for some. Enter the cash buyer!
For the cash buyer this situation creates a great opportunity to make some money. Let's think about this for a second. Without the availability of home loans to purchase condos in Florida, the pool of buyers available to purchase these condos goes way down. This means that demand goes way down. When demand goes way down, prices go down as well. The only person that can buy these condos are people who can purchase them out right with cold-hard cash, and there are not too many people out there who have that much cash. So this means that these people that do have the available cash can snatch these condos up for bargain basement prices.
While the prices of condos in Florida may have declined more than say a townhouse, the amount of money you can get for rent has not declined more than what you can rent a townhouse for. Example, let's say you have two properties. Both properties are 1200 square feet, are built in 2000, have 3 bedrooms and 3 bathrooms and are in a similar area. One property is a townhouse and the other is a condo. The townhouse might sell for $80,000 and rent for $1000. The condo will also rent for $1000 a month, but it will only sell for $60,000. This means that you will make a better return on your money if you purchase the the condo.
These two properties are the same pretty much except for the fact that one is a condo and the other is a townhouse. The renter does not care whether it's a condo or a townhouse. The renter cares about things like how many bedrooms and bathrooms the property has, the location of the property and the condition of the property. For this reason, both properties will command the same rent. However, there is a larger pool of buyers to purchase the townhome as an investment property, so this higher demand drives the price of the townhouse up. Only people with enough cash to purchase the condo out right can purchase the condo, so this decreases the size of available buyers, decreases demand, and decreases the price. For the cash buyer, this also increases his return on his investment.
I know what some of you are saying right now. "Well condos have high monthly association fees that decrease return." This may be true, but it's been my experience that the increased return that you get from the reduction in price due to the fact that the property is a condo more than offsets the decrease in return that you experience from paying the monthly condo fee. Plus, you do get something for the monthly condo fee that you pay. The condo fee will usually pay for insurance on the exterior of the building, so your monthly homeonwers insurance will cost you less on a condo than if you were to buy a townhouse or a single family home because the coverage you would have to purchase would not have to cover as much with a condo. Also, the condo association usually takes care of things like maintaining the grounds, maintaining the exterior of the building, and they usually will have a termite bond on the property. So the condo fee that you pay monthly is offset somewhat because you don't have to spend as much money on the items just mentioned.
Here is another thing to consider about purchasing condos that most people don't consider. Currently Fannie Mae, Freddie Mac and other companies in the secondary mortgage market are not purchasing condo loans in Florida. However, do you think this will be the case forever? I don't think so my friend. Once the real estate market starts picking up again, these companies in the secondary mortgage market will most likely start purchasing condo loans in Florida again as well. Here is why.
These companies in the secondary mortgage market stopped purchasing condos in Florida because they viewed condos in Florida as a risky investment. The reason they viewed them as a risky investment is because (mostly in South Florida) during the real estate boom people payed way too much money for these condos. Once these people realized they could not afford these properties they stopped paying their mortgages and also stopped paying their condo dues. When people stopped paying their condo dues, the condo associations lost money. When the condo associations lost money, they could not properly maintain the condo community the way they were suppose to . When they could not maintain the condo community the way they were suppose to, the condos in the community began to lose value as a result. When the lenders in the secondary mortgage market realized this was happening in a very large scale in Florida, they said "Well looks like we made a bad decision with buying all those condo loans in Florida. They are losing value as we speak, so we better not buy anymore of those condo loans. They are way too risky." BOOM! Just like that, no more condo loans in Florida.
However, what is happening now is that people with cash are coming in and buying these condos up for dirt cheap, and these new owners can afford to pay their condo dues since they got such a good deal on the property. Now condo associations are starting to collect more and more dues in these condo communities which means that they will be able to start properly maintaining the communities again. Once companies in the secondary mortgage market realize this is happening, they will no longer view condos in Florida as a risky investment, and they will start buying condo loans in Florida again. How long will this take? I don't know. It could be 2 years, it could be 4 years, it could be 5 years. It will happen though. When it does, this will be more good news for the investor who purchased their condo in Florida with cash.
When people can get financing for condos again this will increase the buyer pool for condos in Florida, it will drive up demand for condos, and it will drive up the prices. This means the cash buyer's condo increase in value. So now not only is the cash buyer getting a good cash flow return from the rental income, but they are also increasing their return since the property value has appreciated.
So there you have it. If you have a bunch of cash available that you want to invest into real estate, think about purchasing a condo here in Florida. You'll make a great cash flow return from your rental income, and when companies in the secondary mortgage market start purchasing condo loans in Florida again, your property will most likely appreciate a lot in value.
If you have any questions about condos, if you are interested in purchasing a condo, or if you just have any general real estate related questions, please don't hesitate to contact me.
Amac Real Estate Company