FHA Condo Arbitrage

6 Replies

So there is word going around that the FHA is changing their UW guidelines for condos starting in October. Currently in order to get an FHA loan on a condo the whole association needs to be approved by FHA. The condo's for sale in associations that are not FHA approved, or unable to get FHA approval, tend to sit on the market longer and sell for significantly less than their FHA approved counterparts. It's simple supply and demand, the supply is the same, a 2 bedroom condo is a 2 bedroom condo but the demand is different since not everyone can get financing on a non FHA approved association. And from my experience even those can go conventional worry about marketability when they go to sell or just may not want to put more than the 3.5% down for various reasons.

However, Starting in October FHA is changing their guidelines so they will be able to just approve the singular unit for FHA financing without dealing with the whole association. So what I'm wondering is if someone were to go out over the next few months and scoop up a bunch of the condos that are sitting on the market that can't get FHA financing today, rent them out for positive cash flow and then sell them as FHA approved units in 6 months would that work?

Just to give perspective, a FHA approved 2 bedroom condo in the area I am looking sells for ~$200k, their unapproved counterparts ~$170k (15-20% difference). The plan would be to offer $150k (less repairs) on a bunch of them and try to scoop up a few that would generate at least $150 cashflow if rented out. Doing a transaction like this for just 1 door wouldn't normally excite me but the potential upside in such a short period of time with very little work makes this much more attractive to me.

Am I missing something? Will this not work for some reason that I am missing?  

Well, of course you have transaction costs, both on the buy and the sell.  With more “fha approved” competing condo units available, the “premium” for the currently approved condos will shrink of course....but how much of that will be the non approved ones rising in value and how much of that will be the currently approved units units decreasing in price due to now more “approved competition”.

Interestingly enough I have a friend who is a flipper...and sort of his niche is buying properties in non-fha approved associations, then working to get the association fha certified so that his end ARV is higher.

@Wayne Brooks I didn’t think of it the other way as in the new guidelines impacting of the fha approved condos. Thank you for that perspective I’ll have to think about that.

In my market the amount of unapproved condos is pretty low in my area. I’d say less than 10% of the condo market. I’m not sure how much of an impact that will have on the other 90% but definitely something to keep an eye on.

Sorry to revive an older thread, but I feel like I'm missing something. Are FHA loans completely different on Condos than they are on single and multi-family homes? Isn't one of the requirements of qualifying for an FHA loan that you live in the property as your main residence?

If no, what are the differences? 

Yes living in the home is one of the requirements but Condo's have additional requirements like % of condo's rented out in the building, and % of sq footage that is commercial vs residential (think of businesses first floor with condo's above). In addition they like the see the Association being managed by a professional property managed and they don't typically like condo association that are being self managed or managed by an individual owner. 

There are other restrictions as well but in my experience those are the ones that I tend to run into when trying to get condos qualified with FHA. I hope that helps :)