Business Magazine

Why Are Condos Harder to Sell Than Houses Or Townhomes?

Posted on the 11 April 2011 by Homesmsp @HomesMSP

In a nutshell, condos are harder to sell right now primarily because they are harder to buy than houses or townhomes due to financing restrictions.

Looking at the historical chart below of months supply of inventory by property type in the Twin Cities metro area, you can see that condos have consistenly had the biggest supply in relation to buyers... even in 2005-2006, when all three types were very close and 0% down financing was readily available regardless of property type.

Inventory supply by type 0211

The condo supply grew in 2007, due at least in part to the rapid growth in new condo development and condo conversions... but it was in 2008, when 0% down financing went away and financing guidelines changed dramatically for condos and townhomes, that the months supply of condos, townhomes and houses also split so dramatically.

When foreclosures flooded the market buyers often chose houses over townhomes when they could get them for about the same price. As the big supply of fire sale priced houses sold off, townhomes became more attractive to buyers again... and the months supply of townhomes and houses have been virtually tied for about a year. The supply of condos, however, is still about three months more than that of townhomes and houses.

A significant part of the reason condos remain harder to buy and sell has to do with financing guidelines.

(1) FHA financing, which is possible with only a 3.5% down payment (which can be a gift), lower credit score and higher debt-to-income ratio, now requires that the entire complex be FHA approved. Spot approvals of a single unit are no longer allowed. FHA financing also allows sellers to contribute up to 6% of the sale price towards buyer closing costs. FHA is the preferred (or necessary) financing option for homebuyers short on cash... but they are excluded from the condo market unless the complex is FHA approved.

(2) Conventional financing now usually requires a minimum 10% down payment for condos, versus a typical minimum 5% down payment requirement for houses and townhouses. Usually at least 5% of the down payment must be the buyer's own money, while FHA will allow the down payment to be 100% gift funds. Conventional financing allows a maximum 3% seller contribution towards buyer closing costs.

(3) Both condos and townhomes have association fees, which are included in calculating the monthly payments for which a buyer is approved. Condos typically have higher fees than townhomes. Although the higher fees usually also include more services and utilities which are paid independently in other property types, including them in the qualifying monthly payments is enough to exclude some buyers.

(4) Buyer review of Homeowner's Association (HOA) documents, rules & regulations and financial statements sometimes causes a potential buyer to back out of the purchase. Some common areas of concern are high occurrence of special assessments, inadequate financial reserves for needed updates and rules about pets and rentals.

(5) Condo mortgage underwriting also frequently requires review of a Homeowner's Association (HOA) Certification form. Items which can sometimes derail underwriting include: percentage of rental units, percentage of units owned by one investor, percentage of units delinquent in HOA dues payments, low financial reserves, involvement in a law suit, HOA shared ownership of  amenities. Sometimes the areas of concern for the underwriter are not of concern to the buyer when given an understanding of the specific circumstances; however, that does not matter to mortgage underwriters. I have known of cases where a 25% down payment has streamlined underwriting so this certification isn't even requested.

You Might Also Like :

Back to Featured Articles on Logo Paperblog

These articles might interest you :

  • Why Do You Wear That Tiara and Boa?

    Wear That Tiara Boa?

    I've been asked numerous times over the last several years, "Why do you wear that tiara and boa?" I often vary my answer depending on mood and context, and all... Read more

    By  Alizasherman
  • Why Gold is No Longer An Effective USD Hedge

    Gold Longer Effective Hedge

    Nothing lasts forever and over the past two years or so this inverse relationship has broken down significantly. The gold story is no longer simply a USD... Read more

    By  Phil's Stock World
  • Why Portfolio Schools?

    When I was in portfolio school, there were two girls who quit after the first semester. When I asked them a few months later what they were up to they both... Read more

    By  Happygrc
  • Why You Should Care What People Are Saying About You

    I live in a small town. It is hard to keep things “under wraps”. People talk, everything is known to everyone. People know people who know people. Stories trave... Read more

    By  2centsricher
  • The Reason is Why? Why Apple is So Innovative?

    Reason Why? Apple Innovative?

    "People don't buy WHAT you do, they buy WHY you do it" (@simonsinek) Many people say their product or company failed to win for the following reasons: Under... Read more

    By  Sharelomer
  • Why Guilt-Ridden People Make Better Leaders

    Guilt-Ridden People Make Better Leaders

    Hey, guess what? You don’t have to feel so guilty any more for feeling guilty!  A research study by Francis Flynn from Stanford’s Graduate School of... Read more

    By  Shrinkingthecamel
  • 10 Reasons Why Training Fails So Often

    Reasons Training Fails Often

    Millions of people in as many companies spend billions a day on training, in an attempt to improve on skills and competences, assimilate new concepts and... Read more

    By  Combi31