With real estate prices in the Miami area retreating to levels last seen at the beginning of this decade, we have seen increased demand from clients interested in purchasing a second home or investment property.  There are many great deals to be had, but the potential pool of attractively priced properties is much larger for the all-cash buyer as opposed to someone who wants to finance their purchase.

At the beginning of 2009, Fannie Mae changed its guidelines for mortgages backed by new and established condominium projects.  A condo project is “established” if 90% of the units have been sold, is complete and the HOA has been turned over to the owners.  A condo project is “new” if less than 90% have been sold, is not completed, is subject to phasing or if the HOA has not been turned over to unit owners.

Overview of Fannie Mae Condo Guideline Changes:

1. For new construction and newly converted condo developments, 70% of the units must be pre-sold (closed or under contract). This was increased from 51%.
2. No more than 15% of a condo project units can be more than 30 days delinquent on HOA dues. This is an existing guideline that is now being applied to new condo projects.
3. Fidelity insurance will be required for condos with 20 or more units, ensuring that homeowner association funds are protected. This requirement used to apply to new projects and was extended to include established condos.
4. A requirement that borrowers must now obtain a condo-owners insurance policy unless the master policy provides interior unit coverage; coverage may not be less than 20% of the assessed value. A condo-owners policy, known as an HO-6 policy, covers personal property, personal liability, and the physical unit from the studs and in.
5. No more than 10% of a project can be owned by a single entity.
6. No more than 20% of a project can consist of non-residential space.
7. The homeowners association must have at least 10% of its budgeted income designated for replacement reserves and adequate funds budgeted for the insurance deductible.

Guideline 1 makes many new condo projects in Miami ineligible for financing.  With regards to existing condo projects, Guidelines 2, 5, and 7 are the most common impediments hindering buyers from getting financing for their purchase.

Real estate prices are directly correlated with the availability and cost of financing.  In the boom years, condo prices soared due to the easy availability of financing at high LTV (loan-to-value) ratios (sometimes 100%) and low adjustable interest rate loans.  Currently, financing is not available for many condo purchases, and LTV ratios for Fannie loans are typically capped at 80%.

For example,  let's say an individual who has $50,000 in the bank, a good job, and stable credit who wants to purchase a condo.  If 90% financing were available, the individual would be able to purchase a condo worth $500,000, 80% financing = $250,000, 70% financing = $167,000, etc...  If no financing is available, the individual can only purchase a condo worth $50,000.  The availability of financing and the LTV ratio has a pretty dramatic effect on the price of the condo that he/she can afford.

In a "distressed" condo development, over 15% of the units are in pre-foreclosure or foreclosure.  When a condo unit goes into pre-foreclosure, the unit owner is usually around 90 days delinquent on their mortgage payment and/or HOA dues.  Unit purchases in these developments are ineligible for financing, according to Guideline 2.

Typically, several units are for sale in these developments, putting downward pressure on prices, but the lack of available financing for unit purchases has pushed prices even lower creating an incredible opportunity for the all-cash buyer.  For under $100,000 cash it is possible to purchase 2br units in North Bay Village with beautiful views of Biscayne Bay and for around $200,000 cash you can get a 1 or 2br unit in the heart of Miami Beach.

Coming to the negotiating table with an all-cash offer greatly increases your chances of having your price accepted by the seller, as he/she does not have to worry about your financing falling through, as is the case on many purchases today.  Due to the presence of foreign buyers, there are many all-cash deals happening in and around Miami Beach, and the best opportunities do not last long.

Tags: cash, condo projects, condominium projects, fannie mae, guideline changes, homeowner association, mortgage, new construction