In the last of a three-part series on the state of the condo market, we look at the recent difficulties developers face in selling and transferring vacant condo units.

If the FHA starts to officially enforce a little-used clause that requires a building to allow the transfer of units in order to stay on the list of FHA-approved buildings, condo developers worry that it could harm their ability to sell units.

Developers and industry consultants say that in two of its four regional offices, the FHA has started enforcing this long dormant rule, which prohibits restrictions on transferring a unit. If a complex places restrictions on transferring individual units, it will be removed from the list of FHA-approved buildings, according to Darryl R. Moss, an attorney with Atlanta-based Weissman, Nowack, Curry & Wilco, a law firm that represents real estate clients.

“The vast majority of units have leasing restrictions in place limiting the number of non-owner occupants in a building,” Moss says. “The FHA has probably approved thousands of properties with those criteria.”

The problem, of course, is that to comply with FHA rules that limit the number of rental units in a property to no more than 50 percent, developers must limit the transfer of units, so that investors don't own more than half of the total units available.

“If the FHA begins to truly enforce that guideline, you’re going to have to make the choice,” says Kevin McDaniel, senior vice president of condominium operations of the Atlanta-based Novare Group. “Do you want to take all restrictions out and play to the FHA? Or do you leave them in?”

News reports indicate that the FHA has taken steps to pull buildings off of its approved lists. For instance, The Chicago Tribune reports that in Illinois, 61 buildings since August “were denied FHA approval for reasons that ranged from outstanding litigation to the use of more than 25 percent of the building for commercial purposes.” FHA had not responded to requests for an interview as of press time.


Only Game in Town

The main problem for condo developers may not be that the FHA could possiblly change the rules of approval but that the FHA’s decision could potentially carry so much impact. Quite simply, it’s because other banks haven’t stepped up to compete with what the agency offers.

In some markets, the need is especially acute. “Without cash and government stimulus and financing, there is no real estate market in Florida,” says Jack McCabe, founder and CEO of MR&C, a real estate consulting firm based in Deerfield Beach, Fla. “That’s plain and simple.”

Peter Zalewski, a principal with  Bal Harbour, Fla.-based real estate consulting firm Condo Vultures, says he can’t remember when he met with a South Florida condo buyer that was a primary user. “For the most part today, buyers are all-cash,” he says. “The challenge for a buyer with financing is that it’s so unpredictable that many sellers are more willing to take less and close fast than spread it out for 60 days.”

In other markets, things aren’t quite as dire. For a couple of years now, Novare has relied on MetLife to make loans in its buildings where it hasn’t reached Fannie’s pre-sale threshold of 70 percent of the total units (though there are sometimes exceptions to this rule). Of course, MetLife requires 20 percent down, while FHA only requires 3.5 percent down, and that weeds out a lot of potential buyers.

“We relied a lot on MetLife to come and agree to underwrite loans prior to reaching pre-sale requirements,” McDaniel says.

Outside of that, McDaniel sees other lenders starting to show interest in condo loans. “My opinion is that things have loosened up a little,” he says. “Two or three years ago, it was disastrous. From an underwriting perspective, I think things will continue to trend in that direction. But it hasn’t reversed course to where it was [in the mid-2000s], and I doubt that it ever will.”

And that’s probably a good thing.