Condos becoming worthless

Tighter FHA lending standards are threatening the very existence of many condo complexes. Once a complex is not financable, values are quickly destroyed.

As of October 1st:

• No FHA loans if there is more that 25% of the space for commercial use
• No single investor (including the developer) can own more than 10% of the units…talk about a catch 22!
• Condo developments must be “primarily residential”, meaning than many mixed-use projects won’t qualify

These already tough rules still exist:

• 70% of the units must be occupied
• No more than 15% of the units can be 30 days or more late on their HOA dues

The Arizona Republic reports Experts: Plummeting prices have rendered condos nearly worthless

New federal loan-guarantee rules imposed to fend off future government losses from plummeting condominium prices have rendered condos utterly worthless, Valley real-estate experts said.

…

The new rules are a reaction to substantial losses on federally insured condominium mortgages in the past year, government officials have said. In Maricopa County, condominium foreclosures have outpaced condo-unit sales by nearly two to one since Jan. 1, according to real-estate analyst Zach Bowers of Ion Data in Mesa. According to Bowers, lenders foreclosed on about 8,200 condo units between Jan. 1 and Sept. 30, compared with about 4,900 units sold during the same period.

“It’s been pretty much consistent throughout the year that no one’s buying condos,” Bowers said. “The whole market seems to have stagnated.”

…

Hoogendyk said the FHA rules amount to a death sentence for the Phoenix-area condo market, which had only been kept on life support by the continued availability of FHA loans.

Creating a special restriction that only applies to one type of housing is discriminatory, local critics said, and it punishes existing condominium owners by making their properties nearly impossible to sell.

“They’ll lose everything,” Hoogendyk said, “And quite honestly, they’ll move just because they’re afraid to live there.”

Bowers said there are Phoenix-area condominium projects in which only a handful of buyers purchased individual units. The only viable use for such projects would be renting the unsold units as apartments, which many condo building owners already have been doing.

However, most have continued trying to sell units, hoping to eventually sell out as the real-estate market recovers. Because of the new rules, local and national experts seem to agree that owner-occupants in half-empty condo buildings are now practically doomed to foreclosure.