Condo: the affordable first-time home owner option

The downturn in real estate has hurt Seattle area condos more than single family homes. Because of the shared ownership of the “common” areas, condos have always been more difficult to finance than homes.  At the same time, condos were, and still are, the affordable entry level to first-time home ownership.

Condos and the changing FHA loan process

The low down payment requirement — currently 3.5 — make FHA insured mortgages the favorite forms of financing for first-time buyers.  Lenders bear less risk because FHA will pay the lender if a homeowner defaults on the loan. However, borrowers must meet specific FHA requirements to qualify for FHA insurance.  For condo buyers there is another hurdle:  the condo complex has to be FHA approved.

Until recently a lender could obtain a so-called “spot approval” for a specific condominium unit in an otherwise not FHA approved condominium complex.  The criteria for such an approval were complex and the outcome uncertain. Still, it could be done.  Now, new rules are in place.

What’s HRAP/DELRAP?

HRAP stands for HUD Review and Approval Process,  DELRAP for Direct Endorsement Lender Review and Approval Process.  In short,  either process requires that a condominium project must be approved before applications for FHA mortgage insurance can be processed for individual units.

Luckily, there is an official  HUD website where you can find out if a condo qualifies for FHA insured mortages.  Click on the help link to learn about how to use the online form.

Strangely, the site does not operate 24/7.  “Your request could not be processed at this time. Please try again later.  Normal hours of operation are from 8 am to 9 pm Eastern time Monday through Friday.”  (Dont forget to turn off the the web site!)

Good news for Kirkland Springs condo sellers and buyers.

Using the form during the hours of operations I found out that Kirland Springs in Juanita is now an FHA approved condo complex (since January 8, 2010).  More good news is that my condo listing there has found a new buyer. We have reached mutual ageement. Unlike the first two buyers who qualified for financing under the old spot approval FHA rules and ultimately were unable to purchase, this  one is using conventional financing.

Final Call for $8,000 and $6,500 buyer tax credits

The deadline for the buyer tax credit program (first-time and repeat buyers) is fast approaching. The transaction must close by April 30, 2010 to qualify.  Go to my website for the details and get moving.

Not so fast, I say. It’s an OK time to buy if you do not have to sell first. It’s a good time to buy if you don’t have to sell first and have good credit. It’s a great time to buy if you don’t have to sell, have good credit and have saved up for this very purpose.

If you are young, have a well-paying job and would find another job in greater Seattle with relative ease, this is your day to go house hunting — eh, make that condo hunting.

Know what you want; then make a list.

Condo hunting — that’s just what I did with a young man who fits the above profile. Beginning about a month ago, we started to look around, first online, then in the real world. Shawn had a pretty good idea of what he wanted. He made a list for me:

1. Must Have (maximum 25-minute no-transfer bus ride to work),
2. Would Like (lots of light, neighborhood feel),
3. Don’t Need (amenities like pool, gym) and
4. Cannot Have (previous owner with pet — allergic).

Do yourself and your real estate agent a favor and make your own list. In the end, we found a condo that met 3 of the 4 criteria. The seller has a dog but there are no carpets; just hardwood floors and a central vacuum system. We made an offer and, after some back and forth, we arrived at a mutual agreement on price and conditions.

Imagine a day in your life.

What I tell all my buying clients is to imagine how they spent their time. What do you do after work? Cuddle up with a book or go bar hopping? Do you like to have friends over for meals or rather go to a restaurant? What do you do on weekends? In Shawn’s case one such lifestyle consideration was where his friends lived. Some live on the eastside some south of downtown Seattle. The chosen condo put him right in the middle.

Eastside or Seattle?

We started on the eastside at the southern edge of Bothell with lots of condos within walking distance to the Brickyard Park & Ride. Shawn took the bus from work in Seattle to meet me there — the commuting test. We saw about half-a-dozen condos that late afternoon and early evening. In the following week I picked up Shawn with my car after work and we looked at condos in several Seattle neighborhoods — Fremont, Maple Leaf, Sandpoint, Lake City to name a few.

If you are wondering about the number of condos currently on the market, here’s the count from the Northwest Multiple Listing Service (NWMLS).

1-bedroom condos between $150,000 and $200,000

• Seattle (city limits): 67
• Kenmore, Bothell, Mountlake Terrace, Mill Creek: 33
• Kirkland, Bellevue, Redmond: 24

2-bedroom condos between $200,000 and $250,000

• Seattle (city limits): 64
• Kenmore, Bothell, Mountlake Terrace, Mill Creek: 48
• Kirkland, Bellevue, Redmond: 42

Online real estate is like reading a menu; you can’t “taste the place.”

What Shawn learned from looking at over a dozen condos was that you can’t tell by the pictures what a place is really like. What I learned again is that pricing real estate is at least as much art as it is science. Too much depends on the owner’s motivation to sell. Residential real estate is not entirely rational. The web is full of information but the smell of a place is something else altogether.

What’s your take?

What’s holding you back from owning your own place? What’s your idea of the ideal condo? What’s your preferred neighborhood and why? Have rising gas prices changed your mind as to where you would like to live? Your thoughts and comments are welcome.

So, what’s the big deal, you ask.

Big deal because you, too, are a “Potential Distressed Home Owner” if you

1. Are at risk of loss for non-payment of property taxes,
2. in default under a mortgage,
3. 30 days behind on mortgage — OR
4. believe that you could default on your mortgage within 4 months and tell your lawyer, real estate agent, lender, mortgage or credit counselor, etc.

The bill has many flaws,

such as point 4 in the list above, vague wording, and sweeping definitions, but there are two major flaws worth noting. To be a Potential Distressed Homeowner you must be

1. occupying the property,
2. the property must be your primary residence, and
3. this property has from 1 to 4 residential units

Anything missing here?

Yep, the Distressed Property Law does not cover any building with more than 4 units, which excludes almost every condominium complex.

What makes this an important flaw, you ask? Well, the purpose of HB 2791 is to protect residential property owners in Washington from those shady characters who are preying on the distressed home owner. It is to protect them from con artist who “skim equity” and “steal homes”.

Since a good number of first-time-buyers buy condos and since some of them financed their dream with questionable mortgages this leaves a whole lot of targets for the scam artists to pursue.

The other major flaw

of the bill is that it does not exempt real estate agents. (In other states that passed similar legislation, real estate agents are exempt,) It is not that real estate agents are necessarily better than the average person, but they are already covered under other legislation, namely RCW 18.86 which governs real estate practice.

The bill creates a whole new profession: the “Distressed Home Consultant.” That new label was meant to apply to legitimate foreclosure specialists and scam artists. It now also applies to real estate agents. The bill does exempt others equally likely involved in real estate transactions: lenders, mortgage brokers and lawyers.

These two flaws may be major but this one beats both.

Each bill that becomes legislation includes a “Fiscal Note” which states the estimated Fiscal Impact of the bill — that’s the impact on the budget, I suppose. And since that budget is paid for by our taxes that means the fiscal impact on you and me. According to the math wizards in Olympia, the Distressed Property is estimated to have “No Fiscal Impact.”

No Fiscal Impact? Let me count the ways.

The bill has resulted in numerous rewritten and newly printed real estate transaction forms. It has already created and will create more confusion and waste of time for anyone involved in buying and selling a home. That includes all the aforementioned potential distressed home owners. The worst and most costly impact of this bill will be this: Every sane real estate agent will stay miles away from anybody suspected of harboring thoughts of being a potentially distressed home owner. The potential liability to be sued is simply too great. Ultimately, this bill may achieve the opposite results of what was intended: more foreclosures and more bankruptcies. The shady characters meant to be deterred by this bill will find other ways to ply their trade. Most condo owners remain unprotected and should watch out.

Much has and will be written about this law.

Here’s how a real estate foreclosure specialist (now becoming my Distressed Home Consultant colleague) views this bill. Your comments are welcome.

(Note: this is an update of an article I wrote more than a year ago for my website GNADE.com .)

Although the Seattle real estate market has cooled off since 2006, condo conversions are still an attractive option for first-time home buyers. With good reason because often it’s the only affordable option.

Over the past four years, developers have plucked one eastside apartment complex after another from the Seattle eastside landscape and created new real estate for sale. Some of the more recent conversions are in or near downtown Redmond, such as the Riverwalk at Redmond — built originally in 1983, The Boulder (1985), and the Bella Vista (1981). A conversion in progress is the Champagne (1969) in Bellevue near 148th on NE 8th Street.

Option packages and earnest money

First, the dollar figure advertised is usually just the “base price.” Option packages can add anywhere from three to ten percent. Some sellers ask for half of the option package price to be paid at the time the buyer and the seller have a “signed-around” purchase and sale agreement . This option package down payment is often not refundable. The earnest money itself can be steep, especially at the beginning of a conversion project.

Potential hurdles

The tenants (lessee) rights are protected by their lease contract and they will usually vacate the premises at the end of the lease. This means that a complex is not necessarily being converted in the most logical fashion.

In the current credit market it is hard enough to find a lender. The number of lenders for conversions is already limited because the condos are “non-warrantable” with the Department of Housing and Urban Development (HUD). Often, the seller advertises a preferred lender and, in addition, offers other financial incentives for buyers using that lender.

Find out the details; then get involved.

The conversion usually involves the gutting of the interiors, new flooring, new interior build-out, new doors, painting, trim, finishes, fixtures and appliances. Because in a condominium complex a buyer also buys a percentage of the common areas , it’s important to know exactly what’s being improved or converted .

I recommend to my clients to join the Board of the Home Owners Association at least for the first year. That way they can play a role in revising the initial rules of the association, such as allowing pets and designating visitor parking.

Buyer Beware!

Given the special circumstances of condo conversions is precisely why a buyer should be represented by an agent . In the more buyer friendly market of 2008, some developers/sellers are now advertising “agent friendly,” meaning we “need you to bring the buyers.”

Investing in conversion condos

The many condo conversions have contributed to increasing rents in the Seattle area . So buying a unit in a condominium conversion project with the idea of renting it out may be a sound investment. The number of non-owner occupied is usually limited; so it pays to check first.

What to do?

Call the management company. I am still waiting for a call back but I’m not holding my breath. Scour the web, looking for “name of condo + lawsuit” or similar, but to no avail.

You want the information? Make an offer!

To get this elusive information the buyer must make an offer and the seller needs to accept the offer — i.e., the two parties must reach mutual agreement. Only then will the buyer receive the RESALE CERTIFICATE (from the condominium association or authorized agent) The buyer will have a specified number of days to review it. Based on the review the buyer can decline to move forward with the purchase (and get the earnest money back).

What is a Resale Certificate?

Contrary to what some condo owners, condo associations and even condo management companies believe, the Resale Certificate is much more than a form consisting of a few questions and statements. According to the Revised Code of Washington (RCW 64.34.425), it is to include among other information:

“A statement setting forth the amount of the monthly common expense assessment and any unpaid common expense or special assessment currently due and payable from the selling unit owner and a statement of any special assessments that have been levied against the unit which have not been paid even though not yet due…”

“A statement of any anticipated repair or replacement cost in excess of five percent of the annual budget of the association that has been approved by the board of directors…”

“A statement of any unsatisfied judgments against the association and the status of any pending suits or legal proceedings in which the association is a plaintiff or defendant;”

For my clients and your convenience I’ve prepared a PDF file of the complete Resale Certificate requirements as published on the Washington State website. Answers about condominium laws and rules and much more can be found on this Washington State Labor and Industries website.

Floor plans are common when they are a necessary part of marketing. When the new condo complex exists only on paper or is still under construction, the “showroom” sales office displays 3d-models and the brochures include floor plans. So do the websites such as the one for the Gallery in Seattle’s Belltown neighborhood where one of my clients purchased a one-bedroom unit. (I’ve started a file with new condo and home brochures to have the floor plans for re-sales down the road.)

Manuals for appliances and cars but not for homes
If I remember correctly, in Germany, were I grew up, the purchase of a home included all plans with every addition and alteration. In any case, this is how it should be. It would make everything easier: inspections, appraisals, say nothing of planning a move and deciding what piece of furniture should go where.

This isn’t asking too much. When I sold a 1984 Mazda the new and fourth owner received the car with a detailed manual and a complete record of all repairs. When I was looking to buy a similar-vintage stereo system on craigslist the owner offered a complete manual in pdf format. In fact, there are several websites dedicated to product manuals dating back several decades.

Plans on a Stick
Considering that homes cost much more than most cars and a multiple of any appliance it’s amazing how little about them is documented. In the age of digital communications it isn’t asking too much for the builders of new condos and homes to hand each new owner the keys on a key ring that includes a USB stick with all floor plans and specifications.

Selling at a rate of about 10 per Year.
Today, one of my clients asked me about two of the six condos currently for sale. What did they sell for three or four years ago? How long have they been on the market? I looked at the numbers from 2004 to the present. Surprisingly, the number of condos sold per year does not vary much by year: 8 in 2004, 11 in 2005, and 10 each in 2006 and 2007. There may have been a few more, but those are the ones listed at the Northwest Multiple Listing Service (NWMLS) which was my source for all the data presented here.

Today, They Take Much Longer to Sell.
The greatest difference from year to year has been the average number of days it took to sell. The chart below makes that clear. (I should add that for this chart and the average price graph I did not count the sale of the penthouse unit in 2004 because the 1.5 million selling price and the 250 days on market skewed the statistics disproportionately.)

The currently active listings (six) average 150 days since first listed for sale. That’s about three times as long as it took to sell the 10 condos each in 2007 and 2006.

While prices are still going up the rate of increase has slowed down considerably.

What Sellers Ask and What They Get.
Perhaps most telling about the current market is the difference between Original Listing Price, Reduced Listing Price, and Selling Price. In 2004, only one of the eight homes that sold, was moderately reduced in price. The average actual selling price was 1% above list price. In 2005 that statistic changed slightly in favor of the buyer. In 2006, the average Reduced Sales Price was 3.5% less than the Original Sales Price and the Selling Price another 1.6% less for a total of 5.1%. In 2007, the sellers did worse, selling their condos on average for 5.4% less than originally listed. The trend continues into 2008: the currently listed six condos have already been reduced by an average of 5.2% which means that they will probably sell for 8 to 9 percent below original listing price.

The Portsmith condos are still desirable but sellers need to get more realistic about pricing. Buyers, especially those that are financially healthy, have the edge.

98033 Zip Code: Condos Sold (2007) and For Sale (01/02/2008)

Starting at twelve-o-clock, the green segment represents the 124 active listings as of January 2, 2008 at 9 am; and the following lavender segment the 28 homes “in Escrow” (Subject to Inspection, Pending) at the same time. Starting with the orange segment begins the year 2007 with 29 homes sold in January.

The idea behind this pie-chart is to examine the “absorption rate,” i.e., how long will it take to absorb (sell) the homes currently for sale. Taking a look back it would take about three months to sell all but 10 of the homes for sale at the beginning of 2008. That’s if we assume the same number of sales as in the first three months of 2007 (114 homes sold).

Declining condo sales in the last three months of any year are normal. Usually condo sales pick up again after the new year. Will 2008 repeat that pattern? What if the drop in sales toward the fall and winter of 2007 continues in to the first months of 2008? Then it will take nearly five months to sell those same 124 condos.

98034 Zip Code: Condos Sold (2007) and For Sale (01/02/2008)

The 2007 Kirkland condo sales pattern for the 98034 zip code is similar to the 98033 zip. And, it represents the same question? Will we see the same January-sold jump as in 2007?

Note: the source for these graphs and related bar graphs is the Northwest Multiple Listing Service (NWLS). The translation of the data to graphs is mine and so are any errors.

98033 Zip Code Kirkland Condo Sales

Sales in this more expensive and, thus more prestigious, of the two zip codes peaked in March and dropped off considerably after July. This is not abnormal but the arrival of the first bad news about the sub-prime mortgage surely played a role in the rate of the drop in sales.

98034 Zip Code Kirkland Condo Sales

In the 98034 zip code, sales show an unusual three 4-month cycle with the first peak in March (normal) and a second peak in Augusts — perhaps the “last hurrah” for the year. After September, the mortgage malaise, real or imagined, put sales in a steeper than usual decline.

More of the same for Kirkland Single Family Homes to follow.