In today's real estate climate, sellers and REALTORS alike have to pay more attention to details. Getting buyers financing can be, sometimes challenging however, more importantly, is making sure the property for sale is financeable.
I recently ran into a situation with a four family rental property that is being converted to condominiums. I have two of the four units actively on the market and shortly the other two will become available. I will tell you there is no shortage of buyers walking through the property! There was an offer submitted on one of the units and another coming in for the other. Sounds great doesn't it! But, the reality is the buyer(s) will not be able to secure financing for these two units. The buyer with the first offer, has been pre-approved with a 10% down payment. Well, guess what? The unit doesn't qualify for 10% down financing! If the buyer wants to proceed he/she has to come up with an additional 10% down.
Why you ask is this happening? It's a bit complicated, so let me explain. As you know, the property is being converted to condominiums. Because its being converted, no "unit ownerships" have been created. When a buyer goes out to purchase any property, their down payment determines if the bank/lender will required PMI (mortgage insurance) as part of the mortgage. If he/she/they have less than 20% to put down on the property, then PMI will be required. PMI protects the bank from a loss if property value is less than the loan amount if the buyer can't pay back the loan. PMI requires that a condo"complex" have some sort of Owner Occupied percentage for the property to qualify. Since there are no Owner Occupied units, PMI will not insure the loan and in turn the lender will not write the mortgage for the buyer. The buyer does have the option to put down an additional 10%; but, lets face it, they don't always have more money to put down!
As yo can imagine the seller is in a bit of a pickle. He was told by the "bank", who loaned him the money to purchase the building, that they would finance the first two units knowing they were going to be the toughest to sell, as long as the buyer would qualify for the mortgage. The kicker is, to have the buyer qualify, he/she/they have to put down 20% because of the PMI issue. Its a vicious circle. There is an alterative options available using creative financing. This option can be complicated and involves the buyer borrowing and securing a 2nd mortgage from the seller for the additional 10% down payment, and the bank/lender agreeing to allow this 2nd mortgage to be put on the property.
I know in the end these units will sell. The lesson, if there is one, is to remember to do your home work when buying or selling. PAY ATTENTION TO CURRENT LENDING PRACTICES. My seller is a very seasoned investor/contractor and he underestimated this problem.
Kenneth Brown
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