Monday, April 27, 2015

Knowing The Difference Between Warrantable vs. Non-Warrantable Condos

If you are interesting in buying a condo then this information is very important to you.
Knowing the difference between the two can save you money in the end. If you are a Realtor and your market area consist of condo projects, you need to educate yourself to better assist your buyers and help them better understand the difference between the two types.

A Warrantable Condo means the condominium project meets the guidelines and can be sold to Fannie Mae and Freddie Mac. Lenders feel that these projects features are protected from future hazards that could threaten the value of the units. These loans are less risky.

A Non-Warrantable Condo means the condominium project does NOT meet the guidelines and cannot be sold to Fannie Mae and Freddie Mac. Therefore many lenders will not lend on these condo projects. They are considered risky, this doesn’t mean there is no financing available for this type of condo but you can plan on paying more in rate/fees and down payment requirements will be higher.

Now you are probably asking ok, what are the guidelines right?
Warrantable guidelines;

Occupancy is important if you are buying as an investor at least 51% of the unit must be owner occupied or be second homes. If you are buying and intend to occupy your unit there is no requirement for owner occupancy.

On an existing or established project at least 90% of the units must be sold, project is complete including all units and common elements, not subject to additional phasing and the control of homeowners association has been turned over to the owners.

On a new or currently converted project 70% of the units must be conveyed or under ratified contract to
Owner occupied and second home owners, non-owner occupied (investor) may not be included towards pre-sale.

Owners more than 30 days delinquent on HOA dues cannot be more than 15%

No more than 10% of the project can be owned by a single entity.

No more than 20% can be used for commercial or non-residential use.

The HOA budget must have at least 10% designated for replacement reserves

There are insurance requirements and more budget conditions but generally specking these would get you started. To be sure of the condo project you or your client is looking at is warrantable, you will want to see if their condo docs include a Condo Questionnaire or Lender Disclosure form. This document is normally completed by the managing agent for the association and must be dated frequently and must be dated within 90 days of underwriting a loan, many management companies have it on hand and ready. Most will charge a fee for this document. Some lenders will require a custom form be completed also at a cost to the buyer. It’s good to get this done prior to spending money on appraisals and other inspections. 

In order to find out if your condo is warrantable you will need to know what type of condo project you are looking at because there are several different types that require different types of guidelines for review requirements and appraisal requirements; have I lost you yet? Crazy right?

A condominium is defined as a real estate project in which each unit owner has title to a unit in a building, an undivided interest in the common areas of the project, and sometimes the exclusive use of certain limited common areas. A condominium unit is a one (1) unit dwelling located in a condominium project. A low-rise condominium is defined as one-to-four units. Agency guidelines apply. A high-rise condominium is defined as five or more units. Agency guidelines apply and would require a Full Leader Review.

Condo Property Regime (CPR); this means the property is a condo and will have some condo elements, like HOA and condo documents. CPR homes can be single family (detached condo) and some are attached. Condo projects that consist of solely detached dwellings (site condo) may use a Uniform Residential Appraisal report 1004 in lieu of the 1073 condo report. This type is also only subject to a limited review.

There are more types; 2-4 unit condos, attached and detached. 

Now let’s talk about NON-Warrantable Condos and what would cause a project to not be eligible to be sold to Fannie Mae or Freddie Mac.

Developer is still in control of the homeowners association.
Project is still subject to additional phasing or add-ons which have not yet been completed.
All common elements and amenities are not fully installed or completed and in operation
At least 70% of all unit must have been sold or legally obligated to close.

It is also safe to say that just because a condo project is non-warrantable at one point doesn't mean it couldn't become warrantable at a later time.

Non-Warrantable property types;
A condominium hotel (or condotel) is defined as any project that is managed and operated as a hotel, resort, motel, inn, or lodge and, therefore, is not a residential project, even though the units are owned individually.
 A project with any one or more of the following characteristics is considered to be a condotel:
  • Rental pooling agreements, either mandatory or voluntary, that allow or require the unit owners to either rent their units or to give a management firm control over the occupancy of the units.
  • Maid service, 
  • Room service, 
  • Shared revenue, 
  • Units that do not contain full-sized kitchen appliances, 
  • Nightly/daily occupancy units, 
  • The project is marketed as a hotel including, but not limited to, projects with units that are available to be rented on a daily basis or projects with names that include the words “hotel,” “resort,” “motel,” “inn,” or “lodge,” Advertising rental rates, Zoned commercial/residential, Square footage of a unit is less than 600. (See the note below.)
  • Reservation services desk, if not part of commercial space, 
  • Declarant control of the condotel exceeds 10 years, 
  • Central key systems,
  • Franchise agreements, 
  • Units are marketed for sale based on the availability of short-term rental rates, a significant level of hotel-type services,
  • Restrictions on the owner’s ability to occupy the unit.
  • Restrictions on interior decorating, 
  • Non-incidental business operations owned or operated by the owner’s association such as, but not limited to, a restaurant, and an interconnecting phone system.
Note: When square footage of a unit is less than 600, it should be reviewed in detail to ensure that the project is a condominium versus a condotel,
  • Cooperative projects, 
  • Timeshare or segmented ownership projects, 
  • Houseboat projects
  • Multi-dwelling unit condominiums, 
  • Condominium projects that represent a legal, but non-conforming, use of the land, if zoning regulations prohibit rebuilding the improvements to current density in the event of their partial or full destruction, 
  • Any project for which the owner’s association is named as a party to current litigation or, for any project that has not been turned over to the association, for which the project sponsor or developer is named as a party to current litigation that relates to the project, 
  • Note: Projects where the homeowners’ association is named as the plaintiff in a foreclosure action, or as a plaintiff in an action for past due homeowners’ association dues, are not considered ineligible projects. 
  • Condominium projects with residential leases, 
  • Investment securities, 
  • Common interest apartments or community apartment projects, 
  • Projects with non-incidental business operations owned or operated by the owner’s association such as, but not limited to, a restaurant, spa, health club, etc., 
  • New projects where the seller is offering sales/financing structures in excess of Fannie Mae’s eligibility policies. This includes, but is not limited to, special incentives to purchase (i.e. paid HOA fess, Club memberships, automobiles, principal and interest abatements and/or builder/developer contributions not disclosed on the HUD-1 settlement statement.)
I hope this information has helped you to understand some of the complexity of condos lending and how they are looked at by the lenders. I would like to add that financing is available to both Warrantable and Non-Warrantable condo, but it’s very important to know at the get go what a particular condo is and most importantly prior to deciding what type of loan will be needed to satisfy the buyer. Due diligent is highly recommended. Being in the know will save the buyer money, as a Real Estate agent you will want to protect your buyer against unnessesary fees. Also knowing prior to opening escrow will save much valuable time. All condos as you can see are not created equal.

I welcome all questions and comments, thank you for taking the time to read my blog post. Be sure to follow my blog from Google or Facebook. You can also subscribe to my Newsletter on right side of blog, get weekly updates on the changing markets. Thank you

Roxy Redenbaugh
ACMC Loan Consultant
Certified Mortgage Coach
Branch Manager
NMLS #269926