Residential Realities July 2011
July 19, 2011: Co-op Envy--Why some condos miss the point...
The Urban Country Club
One inescapable conclusion to be drawn from Julie Satow’s article from the Sunday Times, “Condos Steal a Page (or 20) from Co-ops”, is that New York is a town with an insatiable thirst for exclusivity and status. The condo is an incredibly flexible entity for buying, selling and refinancing real estate. Yet despite the most challenging climate for real estate in decades, some would prefer to morph that entity into a co-op, one of the most restrictive real estate ownership vehicles in the country.
The World We Live In Today
After 9/11, many things changed in New York. Yes, it is important for co-ops, condos and rentals to have a better sense of exactly who will be residing in those buildings. Establishing a buyer or renter’s bona fides in a reasonable manner certainly makes sense…but a 67-page application? At the end of the day, despite all of the additional precautions that are taken to insure that the “right” people are buying in the more restricted condo, I wonder whether the default rate is materially different from the default rate in co-ops.
If You Can Fog A Mirror…
The idea that anyone can buy a condo (which is certainly the case with new construction developments) does not resonate for some in the pressure cooker we call Manhattan. Yet the ability to freely trade one’s apartment, without interference from the bean counters and gatekeepers, will only increase the value of those apartments that have not been co-op’ed.
July 11, 2011: A Co-op and Condo Conundrum--When the buyer is qualified but the building isn't...
Sometimes the rest of the country seems about as far away from New York City as Mars. Yes, New York City is working its way through the national residential real estate recession, but it’s more of recession-lite than supersized (think Phoenix or Vegas). That being said, the pain being inflicted by Fannie Mae’s tighter lending requirements, applicable to co-ops and condos, is finally catching up to New York with unpleasant surprises.
The Bumps in the Road
Over the past year, there have been a number of articles outlining the stricter lending guidelines imposed by Fannie Mae, resulting in a number of co-ops and condos either not qualifying for Fannie Mae approval or having that approval lapse. Without Fannie Mae approval, even if the loan is non-conforming (such is the case with jumbo loans), many lenders will not provide financing in a building that does not meet the intensified guidelines. Owner occupancy thresholds, insurance compliance, higher percentage contract deposits, sponsor litigation and a variety of other issues are on track to slow down residential lending at a time when such financing is desperately needed. As I recently experienced, the “maintenance reserve” requirement is particularly troublesome.
An Often Ignored Budget Line Item
As pointed out in an article by Lynnley Browning in the Times from January of this year, Fannie Mae requires buildings to maintain a reserve equal to ten percent of operating expenses in order for the project to be “approved”. So even though the buyer is qualified and the appraisal requirements are satisfied, if the building does not comply with the maintenance reserve threshold, lenders may not finance in that building. All too often, lenders raise this issue at the end of the underwriting process and not at the beginning. For those interested, Fannie Mae does provide a current list of approved buildings in New York.
When the Condo Needs a Waiver
It is possible for a project to obtain a waiver from the maintenance reserve requirement, depending upon the “nature and circumstances”, so says a Fannie Mae spokesperson quoted in Browning’s article. In fact, 1700 waivers were approved for New York buildings by Fannie Mae in 2010. With so many co-ops and condos operating with slim reserves, however, lending in buildings with marginal finances will become more and more of a challenge, and in some cases, will not impossible. Once again, additional headwind slowing down the real estate recovery.
Another Query for the Due Diligence List
Whether a building is Fannie Mae approved is a question brokers and buyers should be asking before the contract gets signed. Even in “all cash” transactions, a buyer should want to know whether a future sale could be impacted by a building’s failure to keep Fannie Mae happy. As the regulation of consumer lending continues to impose greater limitations on the availability of financing, apartments in co-ops and condos without Fannie Mae approval will continue to experience roadblocks on the road to the closing table.