Is achieving FHA approved condominium status worth it?

6 Replies

From the handful of areas I have looked at, the vast majority of condominiums (condos) that had achieved FHA-approved status have allowed their approval status to expire. I am trying to figure out if having a unit in an FHA (or VA) approved condo is a significant benefit for buying and/or re-sale or if it really doesn't matter much. Please post if you have any insight.

Here is the HUD site to do a condo lookup using a variety of attributes, including what I used, which was by city and state: https://entp.hud.gov/idapp/html/condlook.cfm

@Chris Martin my crude understanding is that without the approval any buyer cannot get FHA financing. This may possibly mean that most of the secondary market will not buy the loan. That may make the property unsaleable accept to a cash buyer. That is not a risk I want to take.

I am by no means an authority here but I just posted to possibly help you understand what the issue is. @Chris Mason @Russell Brazil

Originally posted by @Ned Carey :

@Chris Martin my crude understanding is that without the approval any buyer cannot get FHA financing. This may possibly mean that most of the secondary market will not buy the loan. That may make the property unsaleable accept to a cash buyer. That is not a risk I want to take.

I am by no means an authority here but I just posted to possibly help you understand what the issue is. @Chris Mason @Russell Brazil

Thanks for the tag Ned.

It is an interesting question, because a friend of mine @Marc M. actually uses this in one of his flipping strategies. He is a manager of condo associations, so he has insight on how to get this done. But when he is flipping a condo, in addition to rehabbing it....if the building is not FHA approved, he will go through the work of getting the association back up to speed, whether its delinquent accounts, or what not, get it back to approved status so that by doing so the value goes up.

Originally posted by @Russell Brazil :
Originally posted by @Ned Carey:

@Chris Martin my crude understanding is that without the approval any buyer cannot get FHA financing. This may possibly mean that most of the secondary market will not buy the loan. That may make the property unsaleable accept to a cash buyer. That is not a risk I want to take.

I am by no means an authority here but I just posted to possibly help you understand what the issue is. @Chris Mason @Russell Brazil

Thanks for the tag Ned.

It is an interesting question, because a friend of mine @Marc M. actually uses this in one of his flipping strategies. He is a manager of condo associations, so he has insight on how to get this done. But when he is flipping a condo, in addition to rehabbing it....if the building is not FHA approved, he will go through the work of getting the association back up to speed, whether its delinquent accounts, or what not, get it back to approved status so that by doing so the value goes up.

Worth noting that Marc does not personally live in the developments that he gets on the FHA approved list. Worth also noting that not having FHA approval typically merely means your buyers just have to use conventional financing -- if they can.

FHA loans are disproportionately used by people from traditionally marginalized communities. "Chris, do you mean that _____ disproportionately use FHA?" -- yes, I mean _____, whatever _____ is that you are thinking of. Single parents, persons of color, poor whites from underdeveloped rural areas, and so on. All of the above.

If Sally's life was a little or a lot harder, for whatever reason, and Sally is a perfectly average person, meaning she doesn't fully overcome those difficult early life circumstances (most people born poor die poor, most people born rich die rich, most people born Baptists die Baptists, most people born left handed die left handed, lots of people born out of wedlock have babies out of wedlock, and so on), then there's a really good chance your loan originator is going to look at her work history, her FICO score, how much she has saved up, and so on, and conclude that the FHA loan will have the lowest interest rate and lowest monthly payment, of all the commodity mortgage products out there, in her particular circumstances. In fact, if that LO does the side-by-side showing the rate/payment advantage of FHA (particular to her), and suggests to Sally that she should consider the conventional loan with (for her, due to aforementioned reasons) the higher interest rate and higher monthly payment (to open the door to more condo developments, to make it easier to have her offer accepted, etc), there's a very good chance that Sally will suspect that the LO is out to get her, or nefariously upsell her, possibly over those very same things (whatever that might be) causing her to have had a harder life (ask me how I know). 

So, I suspect there is a little bit of elitist "what's the rush to get our development FHA approved? That's just going to let the riff raff in" going on. And it's certainly not economic rational self-interest. As Russel hinted at when mentioning his friend Marc, FHA approval means a broader pool of potential buyers, which means more people to bid, more significant bidding wars, etc, which will tend to drive values up (the inverse is also true, nothing kills values in a condo development faster than NO ONE being able to get ANY vanilla mortgage on it, which happens when the HOA leadership totally drops the ball).

Originally posted by @Chris Mason :
Originally posted by @Russell Brazil:
Originally posted by @Ned Carey:

@Chris Martin my crude understanding is that without the approval any buyer cannot get FHA financing. This may possibly mean that most of the secondary market will not buy the loan. That may make the property unsaleable accept to a cash buyer. That is not a risk I want to take.

I am by no means an authority here but I just posted to possibly help you understand what the issue is. @Chris Mason @Russell Brazil

Thanks for the tag Ned.

It is an interesting question, because a friend of mine @Marc M. actually uses this in one of his flipping strategies. He is a manager of condo associations, so he has insight on how to get this done. But when he is flipping a condo, in addition to rehabbing it....if the building is not FHA approved, he will go through the work of getting the association back up to speed, whether its delinquent accounts, or what not, get it back to approved status so that by doing so the value goes up.

Worth noting that Marc does not personally live in the developments that he gets on the FHA approved list. Worth also noting that not having FHA approval typically merely means your buyers just have to use conventional financing -- if they can.

FHA loans are disproportionately used by people from traditionally marginalized communities. "Chris, do you mean that _____ disproportionately use FHA?" -- yes, I mean _____, whatever _____ is that you are thinking of. Single parents, persons of color, poor whites from underdeveloped rural areas, and so on. All of the above.

If Sally's life was a little or a lot harder, for whatever reason, and Sally is a perfectly average person, meaning she doesn't fully overcome those difficult early life circumstances (most people born poor die poor, most people born rich die rich, most people born Baptists die Baptists, most people born left handed die left handed, lots of people born out of wedlock have babies out of wedlock, and so on), then there's a really good chance your loan originator is going to look at her work history, her FICO score, how much she has saved up, and so on, and conclude that the FHA loan will have the lowest interest rate and lowest monthly payment, of all the commodity mortgage products out there, in her particular circumstances. In fact, if that LO does the side-by-side showing the rate/payment advantage of FHA (particular to her), and suggests to Sally that she should consider the conventional loan with (for her, due to aforementioned reasons) the higher interest rate and higher monthly payment (to open the door to more condo developments, to make it easier to have her offer accepted, etc), there's a very good chance that Sally will suspect that the LO is out to get her, or nefariously upsell her, possibly over those very same things (whatever that might be) causing her to have had a harder life (ask me how I know). 

So, I suspect there is a little bit of elitist "what's the rush to get our development FHA approved? That's just going to let the riff raff in" going on. And it's certainly not economic rational self-interest. As Russel hinted at when mentioning his friend Marc, FHA approval means a broader pool of potential buyers, which means more people to bid, more significant bidding wars, etc, which will tend to drive values up (the inverse is also true, nothing kills values in a condo development faster than NO ONE being able to get ANY vanilla mortgage on it, which happens when the HOA leadership totally drops the ball).

Spot on Chris.... where Marc does this....is generally in locations where the primary pool of buyers is FHA buyers, so lower credit score....so yes, where there is a more marginalized group of people with lower incomes. In the higher income areas, FHA doesnt even come into play.

Originally posted by @Russell Brazil :
Originally posted by @Ned Carey:

@Chris Martin my crude understanding is that without the approval any buyer cannot get FHA financing. This may possibly mean that most of the secondary market will not buy the loan. That may make the property unsaleable accept to a cash buyer. That is not a risk I want to take.

I am by no means an authority here but I just posted to possibly help you understand what the issue is. @Chris Mason @Russell Brazil

Thanks for the tag Ned.

It is an interesting question, because a friend of mine @Marc M. actually uses this in one of his flipping strategies. He is a manager of condo associations, so he has insight on how to get this done. But when he is flipping a condo, in addition to rehabbing it....if the building is not FHA approved, he will go through the work of getting the association back up to speed, whether its delinquent accounts, or what not, get it back to approved status so that by doing so the value goes up.

Thanks for tagging me, Russell! Yes, doing this has paid off substantially for me, as well as for the other owners, where I've done it. In one case, I was able to raise property values about 20% over the course of a year by getting them FHA approved. It's not necessarily easy or straightforward, and requires the cooperation of the management company and Board of Directors to do but where it can be done and makes sense, it's a worthwhile strategy.

The two big metrics, one of which Russell pointed out already, are the delinquency ratio and rental ratio. The latter has been loosened a bit recently but is usually harder to correct. The former can be easier to resolve, depending on how out-of-control delinquencies are, but can be a bear also. Happy to chat if you have any questions about this.

Originally posted by @Chris Mason :
Originally posted by @Russell Brazil :
Originally posted by @Ned Carey:

@Chris Martin my crude understanding is that without the approval any buyer cannot get FHA financing. This may possibly mean that most of the secondary market will not buy the loan. That may make the property unsaleable accept to a cash buyer. That is not a risk I want to take.

I am by no means an authority here but I just posted to possibly help you understand what the issue is. @Chris Mason @Russell Brazil

Thanks for the tag Ned.

It is an interesting question, because a friend of mine @Marc M. actually uses this in one of his flipping strategies. He is a manager of condo associations, so he has insight on how to get this done. But when he is flipping a condo, in addition to rehabbing it....if the building is not FHA approved, he will go through the work of getting the association back up to speed, whether its delinquent accounts, or what not, get it back to approved status so that by doing so the value goes up.

Worth noting that Marc does not personally live in the developments that he gets on the FHA approved list. Worth also noting that not having FHA approval typically merely means your buyers just have to use conventional financing -- if they can.

FHA loans are disproportionately used by people from traditionally marginalized communities. "Chris, do you mean that _____ disproportionately use FHA?" -- yes, I mean _____, whatever _____ is that you are thinking of. Single parents, persons of color, poor whites from underdeveloped rural areas, and so on. All of the above.

If Sally's life was a little or a lot harder, for whatever reason, and Sally is a perfectly average person, meaning she doesn't fully overcome those difficult early life circumstances (most people born poor die poor, most people born rich die rich, most people born Baptists die Baptists, most people born left handed die left handed, lots of people born out of wedlock have babies out of wedlock, and so on), then there's a really good chance your loan originator is going to look at her work history, her FICO score, how much she has saved up, and so on, and conclude that the FHA loan will have the lowest interest rate and lowest monthly payment, of all the commodity mortgage products out there, in her particular circumstances. In fact, if that LO does the side-by-side showing the rate/payment advantage of FHA (particular to her), and suggests to Sally that she should consider the conventional loan with (for her, due to aforementioned reasons) the higher interest rate and higher monthly payment (to open the door to more condo developments, to make it easier to have her offer accepted, etc), there's a very good chance that Sally will suspect that the LO is out to get her, or nefariously upsell her, possibly over those very same things (whatever that might be) causing her to have had a harder life (ask me how I know). 

So, I suspect there is a little bit of elitist "what's the rush to get our development FHA approved? That's just going to let the riff raff in" going on. And it's certainly not economic rational self-interest. As Russel hinted at when mentioning his friend Marc, FHA approval means a broader pool of potential buyers, which means more people to bid, more significant bidding wars, etc, which will tend to drive values up (the inverse is also true, nothing kills values in a condo development faster than NO ONE being able to get ANY vanilla mortgage on it, which happens when the HOA leadership totally drops the ball).

I agree with the vast majority of this. in the 100+ associations I've managed, I can't say I've ever had a Board opt not to get FHA approved where they've been able and haven't heard this argument made, even during some very frank conversations. That said, I'm sure it's possible somewhere but the reality is that being FHA approved really only helps the association and its members and the Board has a fiduciary responsibility to maintain, preserve and enhance the value of the association.