In a nutshell, condos are harder to sell right now primarily because they are harder to buy than houses or townhomes due to financing restrictions.
Looking at the historical chart below of months supply of inventory by property type in the Twin Cities metro area, you can see that condos have consistenly had the biggest supply in relation to buyers… even in 2005-2006, when all three types were very close and 0% down financing was readily available regardless of property type.
The condo supply grew in 2007, due at least in part to the rapid growth in new condo development and condo conversions… but it was in 2008, when 0% down financing went away and financing guidelines changed dramatically for condos and townhomes, that the months supply of condos, townhomes and houses also split so dramatically.
When foreclosures flooded the market buyers often chose houses over townhomes when they could get them for about the same price. As the big supply of fire sale priced houses sold off, townhomes became more attractive to buyers again… and the months supply of townhomes and houses have been virtually tied for about a year. The supply of condos, however, is still about three months more than that of townhomes and houses.
A significant part of the reason condos remain harder to buy and sell has to do with financing guidelines.
(1) FHA financing, which is possible with only a 3.5% down payment (which can be a gift), lower credit score and higher debt-to-income ratio, now requires that the entire complex be FHA approved. Spot approvals of a single unit are no longer allowed. FHA financing also allows sellers to contribute up to 6% of the sale price towards buyer closing costs. FHA is the preferred (or necessary) financing option for homebuyers short on cash… but they are excluded from the condo market unless the complex is FHA approved.
(2) Conventional financing now usually requires a minimum 10% down payment for condos, versus a typical minimum 5% down payment requirement for houses and townhouses. Usually at least 5% of the down payment must be the buyer's own money, while FHA will allow the down payment to be 100% gift funds. Conventional financing allows a maximum 3% seller contribution towards buyer closing costs.
(3) Both condos and townhomes have association fees, which are included in calculating the monthly payments for which a buyer is approved. Condos typically have higher fees than townhomes. Although the higher fees usually also include more services and utilities which are paid independently in other property types, including them in the qualifying monthly payments is enough to exclude some buyers.
(4) Buyer review of Homeowner's Association (HOA) documents, rules & regulations and financial statements sometimes causes a potential buyer to back out of the purchase. Some common areas of concern are high occurrence of special assessments, inadequate financial reserves for needed updates and rules about pets and rentals.
(5) Condo mortgage underwriting also frequently requires review of a Homeowner's Association (HOA) Certification form. Items which can sometimes derail underwriting include: percentage of rental units, percentage of units owned by one investor, percentage of units delinquent in HOA dues payments, low financial reserves, involvement in a law suit, HOA shared ownership of amenities. Sometimes the areas of concern for the underwriter are not of concern to the buyer when given an understanding of the specific circumstances; however, that does not matter to mortgage underwriters. I have known of cases where a 25% down payment has streamlined underwriting so this certification isn't even requested.
Sharlene Hensrud, RE/MAX Results - Email- Minneapolis Condo Realtor
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