Buyers who stretch their imaginations and are willing to investigate sources for financing other than large conventional lenders are finding success in buying condos in San Francisco.
What are some of the common issues that cause conventional lenders to say no?
- More than 50 percent renters in a building
- More than 20 percent commercial space
- Litigation on a building
- Inadequate HOA reserves
- One owner owning more than 10 percent of units in a condo building. In a building with less than 10 units, an owner may own no more than 1 unit.
It is important to keep in mind that with time a building’s financing issues may be resolved.
In today’s seller’s market, condos that are more difficult to finance have taken on new value that sellers could only dream of until recently.
Today condos that don’t meet the financing requirements of conventional lenders are finding buyers who will spend the extra time and money to qualify for alternative financing. This does not mean getting involved in something shady or risky. First Republic Bank for example is actively financing properties that get a no vote from conventional lenders. Their business model is different from conventional banks.
Even though it is clearly noted in MLS listings that there is litigation on a building, you would be surprised how many buyers don’t read through a listing. They search the Internet or get a short list of open houses from their Realtor and come to an open house because the condo is in a great location and fits their budget. Other issues may be noted in MLS listings in “Agent Remarks,” but are not visible to buyers online.
An easy question to ask the agent hosting an open house is: Are there any issues with this condo affecting getting a loan?
A common myth about buying a condo in a building with litigation is that buyers must have cash. For example, the Beacon is a 595-unit building at 250-260 King Street that has ongoing litigation. Recently I was involved in two sales that were both financed. I can say with authority that it is possible to obtain a loan on a building with litigation.
The bad news in any of the situations where conventional financing is not available is that the loan will cost more. Not astronomically more, but it will be more. There are also fewer choices of lenders. At the Beacon, agents who work there regularly have developed a list of lenders who have successfully approved financing for Beacon buyers. Most, but not all, of these lenders require 30 percent down, and many buyers — especially first-time home buyers — are immediately eliminated for lack of down payment or because they are not able to afford the higher interest rate or loan origination fees.
The good news is that the listing price of a condo will be lower than a similar building without any lending issues. In today’s real estate market, when there are so few properties for sale, buyers are mobbing any property whose list price is lower than average in their target group. The higher cost of financing may look like a small inconvenience compared to what you get for your money.
Still, buyers need to take the time to investigate the impact of the litigation on their investment before making an offer. There is no substitute for reading the disclosures and asking your agent and the HOA questions about anything that you don’t understand or you feel may affect your investment. If you are one of those buyers just too busy to deal with the mountains of documents, ask a real estate attorney to review
To be successful, buyers today need to be prepared not only with a pre-approval letter from their lender, but to know the limits of their pre-approval. Before starting out, ask your mortgage broker or lender to explain the conditions that must be met for final loan approval. No one wants to spend time and emotional energy making an offer where the loan will not be approved.
Buyers who want to be ready for all possibilities should consider researching alternative lenders. I have had successful buyers working with two lenders, ready to jump in whichever direction became necessary when they were ready to write an offer.
Finding a home in San Francisco today has become more competitive than ever. When a seller’s agent meets a buyer with their financing options in place, they know the buyer is serious and intends to be successful when they make an offer. When it comes to closing a deal, the smart seller knows there is more to an offer than the price. Knowing both the buyer and their lender are committed to the sale can make the difference between success and falling out of escrow because a loan was not approved. No seller wants to go back on the market saying: “No fault of the property.”
Buyers must do their homework and find the money before they can buy a home.
Real estate is never boring! Happy house hunting!