Changes in Condo Financing Requirements May Increase Demand For and Increase Value of Condos.

Purchasing a condo in Florida is a great investment, but I believe that the road to recovery for condos in Florida is beginning to happen and the window of opportunity you have to pick up one of these properties for a bargain is getting smaller.

If you remember correctly, I wrote an article a while back talking about why purchasing a condo in Florida might be a very smart investment.  If you did not happen to read that article, I will give you a summary of what I talked about.

A few years ago, Fannie Mae, Freddie Mac and The Federal Housing Administration (who own or back the majority of mortgages in the United States) made sweeping changes to the financing requirements for condominiums in the state of Florida.  They made the financing requirements for condominiums in Florida extremely strict to the point that financing for the majority of condominiums in Florida is flat out unattainable.  These changes that were made to the financing requirements that I am talking about do not apply to town houses, detached single family homes, mobile homes or any other residential property.  These changes that were made only apply to condominiums in the state of Florida.

Some of the changes that were made to the financing requirements for condos in Florida by FHA include requiring that at least 50% of the units in a condominium complex must be owner occupied,  a single owner can't own more than 10% of the units in a condominium complex, and no more than 15% of the owners in the condominium complex can be delinquent on their condo dues.  Freddie Mac's and Fannie Mae's loan requirements for condos in Florida were made even more strict than FHA's loan underwriting standards for condos in Florida.  For instance, Fannie Mae requires that at least 60% of the condos in a condominium complex must be owner occupied.  I can tell you from experience that the vast majority of condominium complexes in Florida don't have 60% of it's units occupied by the owners of the units.

The reason that these changes to the loan underwriting standards for condos in Florida were changed was because when the real estate market took a turn for the worst, condo owners were defaulting on their condo association dues in Florida by the droves.  When this happened, condo associations could not maintain the condominium complexes anymore because they could not collect enough condo dues from owners to do so.  When this happened, the value of the condos (which served as collateral for the banks who made the loans on the condos) started to decrease.  When Fannie Mae, Freddie Mac and FHA realized what was happening, they issued these new underwriting standards in Florida to stop the bleeding which pretty much brought condo financing in Florida to a halt.

You are probably asking yourself "well why can't I go down to my local bank and get a loan on a condo?"  The reason for this is that when your local bank makes a home loan, they sell that loan to a lender in the secondary mortgage market (such as Fannie Mae or Freddie Mac).  They don't keep the loans.  Because of this, they have to underwrite loans in accordance with standards set by companies in the secondary mortgage market so they can sell your loan after they initiate it.  If a bank can't sell a loan to a company in the secondary mortgage market, they usually won't make the loan to you.  In this case, it meant that almost no lenders would make loans on condos in Florida.

Since these sweeping changes to the loan requirements for condos in Florida were made a few years ago, both the demand and the prices of condos in Florida dropped like a rock!  The plummet of the prices and demand for condos in Florida was much worse than the rest of the real estate market as a whole.  For instance, in Tallahassee the average price of a condo decreased by 54% from the second and third quarter of 2006  to the second and third quarter of 2012.  The value of houses, townhouses, and mobile homes in Tallahassee only decreased by 23% from the second and third quarter of 2006 to the second and third quarter of 2012.  So this means that in Tallahassee condos decreased 31% more in price compared to other residential properties in Tallahassee.  This trend also holds true in the rest of Florida as well.  This is because financing for houses, townhouses and mobile homes continued to be attainable while condo financing was largely unattainable.

My point in my last article was that this huge drop in the prices of condos created a tremendous buying and investment opportunity for buyers who could come up with the cash to buy these condos.  Condos are a smart investment not only because you can now pick them up cheap, rent them out and earn a high return from the rental income, but also because there is a good chance that these condos will regain a lot of their value when the financing requirements begin to ease up.  When the financing requirements for condos in Florida ease up, demand for condos will come back and prices will go up.  As I said before, the financing for condos in Florida will come back.  The only question is when.  Well, it appears that is starting to happen now.

FHA just announced changes that it has made to the financing requirements for condos in Florida.  While these changes are small, they are also huge because it's the first sign of the easing of financing requirements for condos in Florida that we have seen since the real estate bust began.  Some of the changes made are as follows.

• Under previous FHA rules A condominium complex can't be FHA loan eligible if more than 15% of the condominiums in that complex are delinquent on their condo dues. This still holds true,  however, FHA has changed the definition of delinquent from being 30 days late on payment to being 60 days late on payment.
• Under previous FHA rules, in order for a condominium complex to be FHA eligible no single investor could own more than 10% of the condos in a condominium complex.  Now a single investor is allowed to own up to 50% of the units in a condominium complex 
• Finally, FHA now allows up to 35% of the space in a condominium development to be used for commercial purposes, where as before they would allow up to only 25% of the space in a condominium complex to be used for commercial purposes.  

As I said, these changes are not mind blowing changes.  However, they are the first sign of financing for condos in Florida becoming easier to come by.  I will put my money on the fact that I strongly believe we will see the secondary mortgage market begin to ease up on it's financing requirements for condos in Florida which will continue to increase the demand and the prices of condos. When this does happen, all of those people who snagged up condos for dirt cheap in the last couple of years will see the values of their properties increase, and they will look back upon their decision to buy their condo(s) and they will smile, because they know they made a solid decision.  

At the moment though, condo prices in Florida are still suppressed, and their are still opportunities to pick up really great deals on condos here in Tallahassee and the rest of the state.  Banks are starting to release more foreclosures onto the market again, so their are some deals to be had.  For instance, I know of a condo here in Tallahassee that was built in 2003 that is in great shape that can rent out for $1050 a month, and it's only $67,000! If you are in the market to buy a good investment property, I would suggest thinking about buying a condominium in Florida.  If you have any questions about condos or buying investment property, please feel free to contact me.