SO WHAT’S A NON-WARRANTABLE CONDOMINIUM? 

In sum, it’s a condo with problems. A more formal definition is “any condo that doesn’t meet all of Fannie Mae or Freddie Mac’s qualified lending requirements” (because it has problems).

Fannie and Freddie have fairly strict limitations regarding investor concentration, financial stability and litigation (pending or present). Condos that fail to meet Fannie/Freddie guidelines are designated as “non-warrantable,” non-qualifying, or ineligible for financing. The other three major government lending channels employ the same standards as Fannie Mae and Freddie Mac. As such, VA, FHA, and USDA also deem these condominiums as “non-warrantable.”

AND WHAT’S THE NATURE OF THE “PROBLEMS”?

Broken Condo Projects: A “broken” condo exists when the builder cannot complete the condo complex or can’t sell all of the units. In an effort to salvage now and reap a profit later, they’ll keep the unsold units and convert them into rentals. This creates a higher concentration of investor owned units and limits financing options within the complex. Investor owned, tenant occupied units typically don’t perform as well because pride of ownership is usually lacking. In addition, the investor has a targeted Return On Investment percentage that drives their maintenance and upgrade decisions. If you’d like to buy a “broken” condo We Can Help You.

Condo Conversions: A condo conversion occurs when old apartments are converted to condos. At the outset the investor who purchases the apartments owns all the units and seeks to sell them retail one at a time. When the units were apartments there was no Homeowner’s Association and one owner held title to all the units and all the land under the units. As a result there was no legal infrastructure in place to facilitate Approval of the condo project. So now none of the units are FHA or VA Approved. 

The problem lies in the fact that the same solvency and concentration requirements are applicable. And since the developer owns the majority of units through the resale process, the sold units are usually non-warrantable, as are the unsold units. Let’s assume the developer bought 100 units consisting of 25 buildings, each containing a fourplex, and they’ve managed to sell 15 units so far to cash buyers. Under standard underwriting guidelines the 15 people who bought for cash can’t get a loan because 85% of the complex is owned by a single entity. Perspective purchasers face the same hurdle. No lender wants to loan in a project where 85% of the units are owned by a single entity. What occurs if that entity becomes insolvent or files bankruptcy. What happens if they’re now forced to sell the remaining units for 70 cent on the dollar. This can be a great opportunity, but you’re going to need a great source for capital. If you’d like to buy a condo conversion We Can Help You.

Heavily Investor-Owned Projects: Although a particular condo project may start out as “warrantable,” if a high number of investors subsequently begin to purchase units, it may lose its stamp of approval. This is particularly true in areas with high appreciation potential, like Miami or Los Angeles. It’s not uncommon to see investors flock to newly built projects in high opportunity areas. What once qualified for financing through traditional sources, may now be Non-Warrantable. It’s important that interested investors locate a private source of capital, such as Specialty Lenders Group, to finance these types of investments.

Low-Occupancy Complexes: Investment opportunities can arise in a multitude of fashions—new condo projects are no exception. One scenario could include a project where the builder is releasing properties in phases—meaning units go up for sale while construction is still going on within the development. This creates a non-warrantable situation for conventional lenders. Another low-occupancy scenario includes value-add projects which may have different maintenance challenges that led to loss of tenancy. Both scenarios can create great investment opportunities, and both scenarios create issues for conventional lenders, but not with Specialty Lenders Group. 

Litigation: Present or Pending Litigation adds an element of uncertainty to the lending environment, and it’s beyond anyone’s control. Think of jury verdicts, attorney fees, damage phase, penalty phase, specific performance, rescission of prior sales, lead based paint, asbestos, mold, failures to disclose, construction defects, clouded titles, you get the drift. Again, there could be a great opportunity here, but you’ll need a source for capital. We Can Help You.