Finance rules make condo sales difficult

Brian J. O'Connor / Detroit News Finance Editor

If you’re looking to buy or — more importantly — sell a condominium, new rules from the FHA as well as the quasi-governmental firms that guarantee mortgages may make financing the sale nearly impossible.

Starting at the end of 2009, the Federal Housing Authority put new rules in place designed to protect taxpayers from bearing the brunt of bad condo loans. Some of the rules are less strict than old ones, but others are tough enough that many of the 5,535 condos for sale in Southeast Michigan won’t qualify for an FHA-insured loan.

The result, say Real Estate experts, is that condo sales are taking longer, getting more expensive or falling through altogether.

“If a buyer wants to buy one of these darn things, putting roadblocks up makes their ability to buy impossible,” says Bob Taylor, president of the Michigan Association of Realtors and an agent in the Birmingham office of Coldwell Banker Weir Manuel. “Many complexes have an inability to sell anything because you can’t get anybody to fund the loans.”

Since the Real Estate crash and the resulting credit crunch, the FHA — along with Fannie Mae and Freddie Mac, the quasi-governmental firms that buy and resell mortgages — are financing more than 90 percent of the country’s home loans.

The lion’s share are being guaranteed by the FHA, which backed $375.79 billion in mortgages last year, according to Inside FHA Lending. That’s a 48 percent jump from 2008.

It means mortgage lenders — and most buyers who want a loan — need to play by the FHA’s rules, and those rules are a lot tougher than they used to be.

Pre-approval now reality

The FHA insures home loans made by private lenders. If a borrower defaults on an FHA-approved loan, the agency covers the lender’s loss. Without that guarantee, lenders require bigger down payments and limit loans to the most credit-worthy buyers, which constitute a dwindling pool of condo customers in this economy.

The FHA’s primary role is to encourage family home ownership. Condos present a problem, because some units are purchased as investments or turned into rentals, and the FHA’s role doesn’t include backing purchases in developments where many units are investments instead of homesteads.

That’s why the new rules focus on the number of rentals and investor-owned units in a condo development. The FHA guidelines also limit the number of other FHA-approved loans in a single complex and require that most condo owners be current on their maintenance and fees and that the condo association makes minimum additions to reserve funds.

Most importantly, the guidelines also require a condo to be pre-approved by the FHA for a loan to be considered, a process that can take several weeks or longer. According to the FHA website, 808 condo projects have approved status in Michigan.

“It can be a challenge if the building is not FHA-approved,” says Austin Black II, a broker and president of City Living Detroit Real Estate brokers. “I work with a lot of condo buyers and sellers, and the FHA rules are a big thing.”

Before last December, buyers could be “spot-approved,” which involved filling out a checklist that was sent to the lender. “Now the entire project has to be FHA-approved and the process is a lot more complicated,” Black said. “I’ve seen deals fall apart because the buyers thought the condo already had been approved.”

Black says he’s helped condo developers work up a checklist and step-by-step instructions to apply to the FHA, but the process takes at least six weeks. While that was going on for the Centurion Place condos on Ferry Street in Detroit, developer Joel Lerman waited to begin selling.

“We just put up a sign with ‘FHA Approved’ in big letters,” Lerman said after getting the FHA’s OK. “We held back on marketing until we knew it got approved.”

Paperwork and red tape

Nick Wuest, president of Bankers Home Loan, the in-house lender for Coldwell Banker Weir Manuel, says many condo associations likely qualify, but don’t know how to navigate the process.

“A lot of associations that could’ve gotten FHA approval just didn’t know how to weed through the new system,” he says.

Potential condo buyers need to weigh just how much of a hurry they’re in when looking at properties — and not fall in love with a unit that might not pass muster with the FHA.

“The first thing we do is find out if a condo is FHA-approved before we even quote an interest rate,” Wuest says. “They can still get it but in normal cases they’d have to put 20 percent down before I could touch it, which puts a lot of buyers out of the market.”

Condo associations and developments that are in compliance just have to plow through the paperwork, which can take several months if anything is missing or incomplete. But there’s less that can be done for developments that simply won’t qualify because too many desperate owners are renting units out to make their payments or too many owners have defaulted on maintenance fees and assessments. In other cases, banks and lenders who have foreclosed on units may not be paying dues or the payments may be tangled in red tape.

“We’re Michigan,” Wuest says. “If owners aren’t paying the association dues on time, how is the association to fix that? It’s forcing a lot of the associations to look at fixing their situation, but it’s kind of a Catch-22.”

Even in the case of condos that do get FHA approval — which is good for two years — lenders still will check on each loan to make sure the development has remained within the limits. Many lenders are charging fees of as much as $250 for such reviews.

“When someone goes to buy a condo, it’s more expensive all the way around,” Wuest says.

But if the FHA limits are causing problems for buyers, is the approval requirement also making trouble for sellers?

“It sure is, oh boy,” sighs Gerry Miller of Real Estate One in Clinton Township. If a condo isn’t approved, “It forces a cash sale,” Miller says. “When you limit the sale to cash buyers you eliminate a very large percentage of buyers, and that drives the prices down.”

From The Detroit News: http://detnews.com/article/20101011/BIZ/10110345/Finance-rules-make-condo-sales-difficult#ixzz129pHRj1h

G.P.B.R. – Government Affairs Chairman

M.A.R. – Public Policy Committee

 

There is no doubt that the lackluster Michigan economy has had a negative effect on home values in Michigan. But what about the Pop-up Tax, how has that impacted house prices?  

 

Homes, like cars, are now purchased based upon monthly payment, not total price. When a buyer meets with a mortgage lender, they determine what the buyer can spend per month on housing expenses (that is principal, interest, taxes and insurance.) The total loan amount, and hence the purchase price that they can pay, is merely a by-product of the interest rate and the monthly payment that they can afford. Since Real Estate taxes are a component of that monthly payment, any increase in taxes reduces the amount available to pay interest and principle. This reduction in the amount available for the mortgage payment means a smaller loan amount, which in turn reduces the amount that a buyer can pay for a home. A $300 monthly tax increase reduces a buyer’s purchasing power by $50,000! That means buyers get less house for the money and sellers get less for their homes.

 

Where does all of that extra tax money go? From the Government’s point of view, the answer is nowhere. As a new homeowner, the Pop-up Tax will subtract thousands of extra dollars from your wallet, but won’t add a penny to the budgets of your city, county or state. With the small exception of a few extra dollars to the Michigan Education Fund, the rest of those dollars are “washed away.” In fact, your hefty tax increase actually acts as a subsidy to lower the increases of your neighbors’ property taxes.

 

While this was certainly not the intent of the legislature, it is a fact in scores of Michigan communities whose tax revenues are capped by the Headlee Amendment.

 

The Headlee Amendment requires that a Municipality’s total tax revenues from existing properties may only increase at a rate equal to the increase in the Consumer Price Index. Since under Proposal A, the Taxable Value of all existing homes, and hence each homes tax bill, is already adjusted for inflation in the same manner, the extra taxes collected on the homes that changed ownership create an excess. The Headlee Amendment requires the municipality to eliminate the excess created by the “Pop-up Tax” by rolling back their overall millage rate. Thus, the large extra taxes paid by a few new homeowners effectively create tiny rebates for all of the other property owners.

 

Since this was clearly not the intent of Proposal A, how do we fix this mess? The answer is surprisingly simple and significantly more fair than the existing system. It is also revenue neutral and maintains the current cap for those who chose not to move. 

Because property values appreciate at different rates in different areas, each community has a different ratio of total taxable value (TXV) to total State Equalized Value (SEV). Rather than bring all sold properties up to the maximum ratio of 100% of SEV, the objective should be to bring everyone to the average ratio of all sales in that community that year. Thus at the time of sale, homes that have been taxed at below market levels will increase to the average and homes that have been taxed at higher levels will experience a decrease to the average. If you choose not to sell your home, you will continue to enjoy the benefits of an inflation rate cap on your Taxable Value.

 

This ratio is simple to calculate and would be available from your local assessor. The ratio of TXV to SEV in the Grosse Pointe Park last year, for example, was 70.1%. Thus, if you purchased a new house there last year, your Taxable Value would be set at 70.1% of the current SEV rather than 100% as is currently the case. This would result in an average tax savings of 30% to the new homebuyer with no decrease in funds available to the City, County or State.

 

This method is fair to both buyers and seller. It continues to protect existing homeowners. Over time, it brings everyone toward the middle, rather than polarizing tax bills at the high and low end. It does not discourage home sales. It will actually raise transfer tax revenues to the county and state by re-energizing the Real Estate market. And, lastly, it is revenue neutral.