It doesn't sound like there's a credit crunch when Paul Watts describes the financing package he'll have when he closes on a Chicago condo at year-end.
Since the developer of the Printers Row condo is offering a "three-two-one" buy-down, Watts say, "I figure I'll be saving about $18,000 in interest the first three years."
Because tighter lending standards promise to aggravate a slowed market, buyers are more apt to find such options. Besides buy-downs, other incentives include payments of closing costs, or taxes or assessments for a period, notes Gail Lissner, vice president of Appraisal Research Counselors, Chicago.
Indeed, there are two sides to purchasing and financing a condo these days.
On one hand, the perks can be rich.
But on the other, it may be tougher to qualify for a mortgage. What's more, condo developers are having loan approval trouble.
It all adds up to an environment where buyers can look for beneficial pricing and financing, but should also be aware of how their credit profile and particular purchase will look to a lender. Moreover, it's also prudent to take a critical look at the health of the developer for new projects or conversions.
In Florida, for instance, plans to build some complexes never got off the ground because the developer didn't meet pre-sale targets, says Jack McCabe, a Deerfield Beach, Fla., real estate consultant.
Many lenders now want half or more of all planned units be sold before construction begins. So, McCabe says, some precontruction buyers are getting their deposits back.
The Chicago market hasn't seen the big ups -- and downs -- of Florida markets, says Lissner. "We are tracking 12,000 units in various stages of development downtown. I know of only one project where the developer decided market demand wasn't there [and ended pre-sales]."
Still, pre-sale buyers should make sure their deposit is held in an interest-bearing escrow account, so it can be safely returned if necessary, says McCabe.
While some Florida pre-sale buyers are getting their deposits back, other buyers wish they could, McCabe says. "They're hiring lawyers to figure out a way out of their contract, because the price they agreed to pay now seems too high."
In the Chicago metro area, prices have remained flat, notes Joe Wallace of PF Appraisals, Chicago. Still buyers have no guarantees that what they pay in a pre-sale won't look pricey a year or two down the road when they take possession, he notes. But the best way to protect themselves is to study how many condos are on the market in the area and how long they are taking to sell. Price declines are most likely in areas with a big backlog of properties for sale, he notes.
As an added protection, pre-sale buyers want to make sure they can get their deposit back if construction hasn't started by a certain date, adds Wallace.
Because so much is unknown about complexes under construction, lenders define the risk of unfinished projects as "warrantable" or "non-warrantable." The latter is the riskier, with more unsold units or sales to investors, not owner-occupants.
It's still usually possible to get a mortgage in a non-warrantable project, but you can expect a higher interest rate, says Kathe Doremus, loan consultant with Community Bank Wheaton-Glen Ellyn.
Even in the "warrantable" category, there are sub-categories of risk, adds Doremus. For instance, a completely constructed project with 50 percent of the units owner-occupied can be considered less risky than an unfinished project with 70 percent of the units pre-sold.
A borrower's profile also weighs into the mortgage approval, says Mary Glavin, a loan officer with Professional Mortgage Partners, Downers Grove.
Though lenders are more discriminating than they were a few months ago, it's the condo purchaser who doesn't want the unit as his primary residence who's really affected by the stricter lending environment, says Glavin.
The overall lending climate is tighter, but each borrower is evaluated individually. Factors such as a large down payment can compensate for weaker factors.
Indeed, condo buying is ultimately an individual endeavor in the context of overall market conditions. Watts, for instance, moved to Chicago from Britain where he was a real estate buyer. Now living in Peoria, Watts is a rarity on today's real estate scene: an investment buyer who plans to rent.
But he says his research on rental demand, plus attractive financing, gives him confidence.
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