Condominiums seem like an obvious place to begin your flipping career. After all, they tend to come at a lower price point than single-family houses. Condos can be and are flipped on a regular basis. And some have done so with great success. But condominiums present a number of issues that may catch new investors by surprise.
First, the Federal Housing Administration puts some strict standards in place regarding the condos they are willing to back – and even tightened them in 2010. Not all condominium associations qualify: The FHA now requires that any associations with two units or more demonstrate the soundness of their properties as investments before they will back an FHA mortgage.
That wasn’t a huge consideration in 2005, when FHA loans represented less than 5 percent of the market. But now, with FHA comprising as much as 40 percent of the market, it is a crucial consideration. If the project is not FHA-certified, you will likely have a great deal more difficulty finding a qualified buyer. Consequently, you may not want to be paying anywhere near the same price for a non FHA-certified property that you would for a property that had the FHA seal of approval.
Some kinds of properties will not qualify for FHA financing at all:
- Any development with the words “hotel” or “motel” in the title.
- Any properties where 25 percent or more of the floor space is devoted to uses other than residential. That includes offices, retail and restaurant space, and hotels, motels and resorts.
- Projects that are managed as hotels.
- Projects that require you to either rent the unit or sign over control of occupancy to a management firm.
- Projects on coastal barriers as designated by the Department of the Interior.
Further, FHA will not finance new developments still under construction, or projects where construction was completed less than one year prior to the application.
Leasehold land must be on a lease of at least 99 years, with at least 10 years left on the current lease (this is a major issue in Hawaii, where a large percentage of available land is held by a few large landowners, such as the Bishop Estate, and leased out).
Some additional criteria:
- Reserves must equal 10 percent of the annual budget.
- All common areas must be completely built.
- 30-day assessment delinquencies cannot exceed 15 percent.
There are a large number of other requirements, spelled out in a 95-page PDF published by the Department of Housing and Urban Development. But you can quickly identify for yourself whether a given property has a Federal Housing Administration Certification by using the FHA’s search feature.
Be very careful with non-certified properties. The market for buyers is much more limited. There is, however, one possible opportunity where an alert flipper could unlock some value: FHA rules require construction on new properties to be complete at least a year before certification. An alert buyer may be able to buy a property at a discount shortly before the certification, and then sell in the much broader market after the property’s FHA certification comes through.
But in practice, though, this is very difficult to do: There are usually too many unsold, unoccupied units at that point in time, and so the competition for buyers in that property is too intense for the flipper to have much of an advantage. And there may not be much opportunity for renovations to add value to the property, since everything is new.
Further, a lot of condo associations will put restrictions on owners, such as a prohibition on renting for six months, or a cap on the number of units that can be rented at one time. This means plan B – renting the property – is problematic if you have trouble finding a buyer.
There are other issues that make condo flipping tricky, too: Most lenders won’t go outside of the development to pull comps if there’s any recent activity at all – which means all the comps are too comparable. And that means it’s very difficult to get a pricing advantage when you buy or when you sell.
Meanwhile, if you have trouble selling quickly, you have to pay costs of carry. But those costs aren’t limited to mortgage payments and taxes: You must also pay monthly management/association fees. These can represent 200 dollars per month or more – and frequently comprise a big chunk of total monthly outlays – especially at the lower price points.
In some volatile markets, such as South Florida, the condo market has become dominated with so-called “bulk buyers.” These are large investors who buy dozens of units at once. They get very large price concessions when they buy – and become your competition when you sell. It is very difficult to beat these guys on their home turf in the condo market. Some of them even have their own captive lenders, or very deep relationships with lenders, that you cannot match. Generally, you have a better shot in single-family homes, where each home is unique and where you have more opportunity to find and create unique values.
The Bottom Line
Yes, condos can be flipped. But they are extremely tricky – especially if you are new to condo ownership, and you don’t understand the ins and outs of FHA approval rules. Until you have had a lot of flips under your belt, or you have a remarkably eager seller at the beginning, I suggest passing on condominiums.
Jason Van Steenwyk is a veteran financial industry journalist who has been fighting to make the world safe for the retail investor since 1999. He lives at Ground Zero of the real estate bubble in Fort Lauderdale, Florida.