Bulk condo buying strategies evolve over the life cycle of a new development. As the developer sells more units, they face different incentives when it comes to negotiating with buyers.
In this article, we outline the benefits for buyer and seller at each of the major stages of a building’s life cycle.
Every milestone provides a new opportunity, said Kael Goodman, co-founder and CEO of real estate data platform Marketproof. There is no point at which all the leverage belongs to the sponsor. On the flip side, the sponsor can always make the case that now is the right time to buy.
Before delving into each milestone, we’ll consider some basic market rules that affect when bulk condo buying becomes feasible. We’ll also consider COVID’s impact on condo lending and buying.
Fannie Mae’s rules
Fannie Mae is a government-backed mortgage company that buys mortgages from lenders. Lenders — banks like Chase or Wells Fargo — are hesitant to offer loans for condos that Fannie Mae won’t take off their hands. Thus, Fannie Mae’s rules sway to whom lenders lend and developers sell.
Fannie Mae’s rules tilt the playing field against bulk condo buyers and big-money investors. The federal housing company will only back mortgages for projects that meet two anti-investor concentration rules:
- No one investor can own more than 10% of units
- Investors, which means in this case buyers who will not live in the units themselves as primary or secondary residences, cannot own more than 50% of units
If a developer breaks the first rule, Fannie Mae will probably not insure loans for their project. If they break the second rule, Fannie Mae will definitely not insure loans for their project.
The upshot is that developers typically will not sell apartments to bulk buyers until they’ve sold 50% of units. At this point, they can be sure that selling to investors will not tank the project’s Fannie Mae eligibility.
What’s more, investors themselves will typically steer clear of buying condos before the 50% mark. This is because investors also want Fannie Mae to back loans for the building. That means they can more easily sell the units in which they invested in the future. Rather than buy units, investors may turn to investing in the capitalization of the building itself.
But what about luxury buildings ineligible for Fannie Mae backing?
It is true that Fannie Mae only backs mortgages below a certain price: The conforming loan limit for NYC is about $822,000 in 2021. Anything above the conforming loan limit is called a jumbo loan, and Fannie won’t back it.
Thus, you might be wondering if the rules above apply to luxury NYC condos, where many, if not all, the units in a building may sell for more than $1 million. Isn’t Fannie Mae irrelevant to luxury buildings?
Not quite. Prior to COVID, lenders would lend on the jumbo side based on their own risk parameters and guidelines. But the pandemic has made lenders much more risk-averse, changing the way they operate, said Orest Tomaselli, CEO of National Condo Advisors.
Now, lenders are adopting the strictest guidelines for condo lending and buying in the country: Fannie Mae’s. In fact, many lenders are adhering to Fannie Mae’s more risk-averse guidelines even in luxury developments. This means the limits on bulk condo buying apply to even buildings with very expensive units.
The COVID effect
COVID doesn’t just mean limits for bulk condo buying. It is making it harder for everyone to get loans because lenders are more wary about a project failing, even if an individual mortgage buyer’s financials are solid, Tomaselli said.
In more favorable economic times, lenders would sometimes provide mortgages when 20% of the units in a building were sold. Now, they may wait to lend until a project hits the 50% threshold. Some banks are also limiting mortgages to 70 or 75% LTV (loan to value) instead of the usual 80%. In addition, they’re assessing buyers based on project-specific factors such as sales velocity in hopes of figuring out whether a project is likely to succeed. Usually, they would be less likely to back off a loan due to project considerations, focusing instead on the buyer’s potential down payment and credit.
The life cycle of a new development
Before offering declared effective (0-15%)
A condominium declaration can be recorded when the sponsor has sold 15%. Before this milestone, risk is the highest, and the buyer can likely get the highest discount possible.
The risk for the buyer is high at this point because the developer can walk away from the project before the offering is effective. After that, jumping ship becomes much harder for the developer. In addition, sponsors want to meet this milestone because it signals the success of their project to the market. In turn, more buyers and lenders are likely to embrace the project. That boosts the chances of its overall success.
Therefore, buying at this critical early moment can be a win-win for seller and buyer. It means lower prices for the buyer and kick-starting the project for the seller.
However, as we discussed above, bulk condo buying is rare at this stage. That is because it could prevent Fannie Mae from backing the project.
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Portfolio lending (35%)
Before an offering plan is declared effective, most lenders will not back a new development. Risk is high, and federal agencies will not guarantee loans at this stage. Thus, there’s still a very high incentive for the sponsor to offload units.
When the sponsor sells 35% of units, the portfolio lending stage begins. Portfolio lending means banks give out loans to buyers but hold onto them. In other words, lenders do not pawn their loans off on Fannie Mae or other federal insurers.
Consequently, 35% is a milestone for sponsors, but it’s still not the sweet spot for finding new buyers. This means buyers may still be in a good position to negotiate prices down at this stage. Still, bulk condo buying is tricky due to concerns about Fannie Mae.
Fannie Mae eligibility (50%)
When the sponsor sells 50% of units, their confidence in the project may increase considerably. That is because at 50%, Fannie Mae will buy mortgage loans, taking them off lenders’ hands. In turn, lenders are more willing to hand out mortgages to new development buyers.
But this does not mean there is no opportunity at this stage for bulk condo buying. On the contrary, this is when developers will typically open their doors to investors. Bulk condo buyers can quickly push a project from the halfway point toward the finish line. And at the 50% mark, developers gain Fannie Mae eligibility and do not need to be worried about investors buying up more than 50% of the project, assuming the developer has mostly avoided investors until the midway point.
Also, market conditions vary. If sales are slow, the sponsor could use a boost. So, for this and other reasons, there is still plenty of opportunity for bulk buyers to strike a deal after the sponsor has sold 50% of units.
Once the sponsor has sold 80% of units, those remaining are typically less desirable. They may not have great views, be next to the gym or playroom, or just have less desirable floor plans, Goodman said.
Thus, all other things being equal, the opportunity for bulk condo buying rises a bit at this point. Bulk buyers can help a sponsor get their project to the finish line.
Sponsor wrap-up (90-100%)
This is when the sponsor aims to sell out their last few units. Obviously, the prospect of a bulk buyer closing out the project has its appeal.
Sometimes, the sponsor will hold onto apartments for rentals. But other times, they want to move on. Enter the bulk condo buyer.
Who participates in bulk condo buying?
Often, bulk condo buyers are hedge funds or private equity funds. But they may also be family offices or individuals with excess cash. They could even be groups of people who pool their resources to buy a few units. Overall, then, this type of buyer varies from speciality financial vehicles to people with some extra cash.
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Top photo courtesy of The Towers at the Waldorf Astoria.