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Boston Real Estate Blog

From Boston Metro Real Estate Broker, Bill Patterson

By Bill Patterson | Broker in Boston, MA

So, You Want to Buy a Just Converted Condo? Good Luck With That

Fannie Mae, or Fannie (Freakin') Mae as it seems to be known as these days, has upped the ante on financing new condo conversions. Now, getting a 'Conforming Loan' on these condos will be even harder than it was already. If you recall, Fannie significantly raised the restrictions on condos just a year ago following the bailout.

NEW CONDO CONVERSION, What is it?
Fannie Mae is not referencing new construction with the new restriction, it is addressing older property that was a multi-family and was converted into condos. For example, you go out and buy a 3 family home and decide to sell one, two or three of the units. You have a new condo conversion. However, if you do a gut renovation before selling then Fannie says you have new construction.

THE NEW REQUIREMENTS
  •  All projects are subject to a site inspection
  •  All rehabilitation work involved in a condo conversion must have been completed in a professional manner
  •  A current reserve study prepared by a qualified, independent professional company, accompanied by an engineer's report, or functional equivalent, must comment favorably on the structural integrity of the project and the remaining useful life of the major project component
  •  The project budget must contain line items for 1)reserves to adequately support the costs identified in the reserve study and 2) a utility contingency of at least 10% of the previous year's utility costs if the utilities are not separately metered
  •  Funds to cover the total cost of any items identified in the reserve study or engineer's report that need to be replaced within five years from the date of the study must be deposited in the HOA's reserve account, in addition to the amount stated immediately above
  •  The developer must provide a detailed description of the work proposed or already completed in order for the project units to be ready for sale
  •  Generally, at least 70% of the total units in the project or subject legal phase must have been conveyed or be under a bona fide contract for purchase to owner-occupant principal residence or second home purchasers. (Fannie Mae may consider a more flexible presale percentage on a project basis)
  •  Up to 30% of the units in projects that are subject to rent regulations, which protect tenants from eviction (if they have chosen not to purchase their unit), will be permitted
  •  Phasing of projects (single building or multiple buildings) will be considered on a project basis.
  •  The project sponsor or developer must provide a comprehensive sales and marketing strategy
Seems the general strategy of the fed is to make sure that these new condo conversions are of a certain build quality. New construction, or gut rehab, will have to be inspected by Town Inspectors before work is allowed to continue. This attempts to close a loop-hole that is left when multi-unit buildings are flipped into condos where building permits would not be needed.

If you are buying a unit that is a new conversion, make sure to give the proper amount of time to close. Getting through this checklist is sure to be time consuming.

Comments

By Mark D. Strickland,  Thu Apr 7 2011, 11:24
Bill, this is an excellent article. I have some clients to share this with. Thank you very much for sharing.

Mark Strickland, Realtor
http://www.TopBostonRealEstate.com
By Bill Patterson,  Thu Apr 7 2011, 15:49
Thanks Mark!
By Bill Patterson,  Thu Apr 14 2011, 21:43
UPDATE!!! Fannie Mae has just announced that they are excluding 2-4 family conversions from the “special” Fannie Mae review of newly converted non-gut renovations.
By tomgodbout,  Wed Jun 4 2014, 18:29
Bill, can you clarify if a full gut condo rehab (resulting in two units) needs to have an architect/engineers report, or "functional equivalent" I am being told by the lender that we do, but real estate attorneys are saying we don't.

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