Real Estate Roundup with Sharon Alva: The condo alternative
Often the way for first time buyers to jump into the real estate market is to buy a condo or town home. A condo or town home allows the buyer with little money down, or even little monthly payment, to buy a property. There are definite pluses and minuses to this approach, especially in this turbulent market.
FHA loans allow first time buyers who have saved only 3.5 percent of purchase price to buy a property. The problem with condominiums is that some may not be FHA approved. Some loan products will spot authorize a particular condominium building or complex, but that’s become less likely over the last two years as FHA has approved loans only on buildings and complexes that have been approved already and are on the FHA list.
Without an FHA loan the buyer will need 20 percent down, or to qualify for a conventional loan and private mortgage insurance (PMI). PMI criteria are very high right now and it is not a slam-dunk that if a buyer qualified for the loan they will also qualify for the PMI, and yet every loan that is greater than 80 percent of purchase value requires PMI.
Loans following Freddie Mac and Fanny Mae guidelines have other criteria. Units falling within a Home Owner’s Association (HOA) must have 50 percent owner occupancy, and no more than 15 percent of the association’s units can be delinquent on their HOA dues. In Alameda I have not encountered any HOA that does not conform to these guidelines, but HOAs in surrounding municipalities often do not, and therefore securing a loan for purchase is challenging.
If you have 20 percent to put down or the complex is already FHA approved, this may be a great opportunity. There is a ready supply and one that’s far less expensive than a detached single family home.
Condos and townhouses appreciate less and have certainly fallen harder than single family homes. In fact, the town homes in Bay Farm Island have seen the greatest decline in value. There are two sides to this coin.
This is an incredible time to buy a condominium in Alameda, or even better, a town home. The loss in value makes them appealing. With 10 percent down, a town home is less expensive to purchase than to rent at this point. Two bedroom condominiums are selling for less than $300,000, and renting a similar unit would cost $1,400 a month.
But the rate of appreciation as things turn around may be slow and the purchase should be seen as a medium- to long-term investment. Five years is an unlikely time frame in which to see a sufficient enough rise in value to be able to recoup closing costs on both ends of the transaction, and growth in equity to put something down on the next purchase. Buying a property that is unlikely to suit a buyer’s needs long term may not be a good investment in the long run.
If you are considering buying a condo or town home, have your real estate agent gather information about the HOA, whether it’s FHA approved, and if there are any other barriers to getting a loan approved.
Sharon Alva is a real estate agent with Alain Pinel Realtors, living in Alameda. You can reach her at firstname.lastname@example.org.