Say your buyer is interested in a condo. That’s great. But are they reliant on financing insured by the Federal Housing Administration (FHA)? If so, that’s going to be a problem.
Demand for condos in California has surged during the past year. In fact, condo price increases have quickly outpaced that of single family residences (SFRs), according to Trulia.
Annual change in condo prices | Annual change in single family home prices | |
| Los Angeles | 8.7% | 6.8% |
| San Diego | 4.1% | 1.8% |
| San Francisco | 12.7% | 9.0% |
Data courtesy Trulia
Editor’s note — Trulia defines condo as any unit in a multi-family structure. Thus, a detached condo is considered an SFR even if it is governed by a homeowners’ association (HOA) or common interest development (CID). The FHA’s definition differs, below.
Condos are more significant to today’s recovery than previously. In today’s market, more households prefer living in dense, urban areas close to hubs of employment versus suburbia where detached SFRs are most common.
However, not everyone can qualify to jump into the booming condo market.
The FHA does not insure a mortgage to finance a condo unit unless the master condo project where the property is located is first approved. Projects fall under the FHA’s temporary condominium project approval guidelines through August 31, 2016. [U.S. Department of Housing and Urban Development Mortgagee Letter 2014-17]
The FHA considers a residence part of a condo project if it meets any of these criteria:
- the home is partially or completely attached, including shared garages, archways or breezeways;
- the home is encumbered by condominium covenants, conditions and restrictions (CC&Rs) or similar condominium oversight;
- the home shares air space or common areas with other homes;
- insurance and maintenance costs are shared with other owners;
- common assessments are collected for amenities outside of the home’s footprint. [Mortgagee Letter 11-22]
The full guidelines for condo project approval can be found here. But for a taste at the many rules each project is to follow, these guidelines include the following rules:
- there needs to be at least two condo units in the project [FHA Condominium Project Approval and Processing Guide Chapter 2.1];
- non-residential portions of the project cannot exceed 25% of the total project area [FHA Condominium Project Approval and Processing Guide Chapter 2.1.3];
- no more than 10% of the condo units can by owned by a single investor (this does not include unsold units owned by the builder) [FHA Condominium Project Approval and Processing Guide Chapter 2.1.4];
- no more than 15% of the project’s HOA dues collected from owners can be more than 60 days past due [FHA Condominium Project Approval and Processing Guide Chapter 2.1.5];
- the condo project needs to be covered by adequate hazard, flood and liability insurance, as required by state or local condo laws [FHA Condominium Project Approval and Processing Guide Chapter 2.1.9];
- at least 30% of the condo units need to be sold prior to the FHA granting any FHA-insured mortgages in the project [FHA Condominium Project Approval and Processing Guide Chapter 3.4];
- at least 50% of the condo units need to be owner-occupied [FHA Condominium Project Approval and Processing Guide Chapter 3.5]; and
- the percentage of FHA-insured mortgages cannot exceed 50% of condo units in a project. [FHA Condominium Project Approval and Processing Guide Chapter 3.6]
There are various exceptions and intricacies to these rules, which may further deter buyers relying on FHA-insured financing to even consider a condo purchase. To help your buyers find FHA-approved condos in your market area, visit the FHA’s search tool.
If the condo market is going to become more accessible, the FHA isn’t the only one that needs to change its rules. Fewer zoning regulations in urban areas will quell today’s high demand, low inventory situation. Too often, the most desirable areas to live are roped off so that only those wealthy enough to buy an SFR are able to live there. In turn, less affluent homebuyers are forced out of the city and into the suburbs.
Let builders do what they do best: build to meet homebuyer demand, be it vertical or horizontal subdivisions.
Call it condomania! When, due to overarching economic conditions, the populace begins to crowd back into dense urban areas, that means less “freedom of action” for the people, as urban residents live under infinitely more rules and restrictions, taxes, fees, and overbearing police forces than do typical rural or suburban residents.
And, that is the government’s end game—crowd everyone into urban areas where they can be more easily monitored, policed, spied upon, and controlled, even if it means having them live in 300 square foot cubicles like the Hong Kongers.
In China, as well, one of the central government’s main objectives is to empty the land of peasants and herd them by the tens of millions into newly constructed cities. This is causing immense societal pressures and resentments there, and it will do the same here, as more and more people are unwillingly forced–due to economic pressures– to forfeit a more wholesome suburban life where their kids at least have a yard to play in, for life in crowded and crime-ridden urban jungles.
Sure, the cities offer cultural benefits, but suburbanites had a short drive into the center city if they wanted that, and could still exit back out to their homes in quieter and less congested areas.
Now, only the well-heeled will be able to purchase homes in cities, and anyone else forced to migrate into one by economic pressures will be stuck with life in layered cubicles with little privacy called condos—paying a more and more exorbitant price even for those, only to own the “insides” of the space and not even be allowed to paint a deck if they so chose.