Expert: Diann Tonnesen - 1/26/2010

Question
Hi Diann :)

I'm wondering if you could provide a little insight into the process the government uses to approve banks/projects so that they may go ahead and close sales.

We made our offer on a condo in a brand new development (construction IS finished) in Nov. %26 were approved as buyers right away. Our initial closing date was scheduled for Dec. 22nd., but a few days before then, we were told that the development was filing an extension good through the end of Jan. because the 'government had asked for some more paperwork.' We haven't really heard any different news since then, but through my own research, I found the project on the government's HUD site where they list what's been approved or rejected using HRAP/DELRAP and it said "Rejected" as of 12.18.2009. If the project was rejected once, what are the chances of it getting approved once the additional paperwork is submitted? I've read a bit about the new guidelines (must have over 50% sold was a main one they told us about) but am by no means clear on everything.

Additional details: the group of buyers submitted for Phase I were 18 of 34. The project has a total of 109 units, but we were told that it was perfectly acceptable to break it into phases to reach their sales goal of 50+%.

I guess somewhere in all of that rambling, my main question is: should we be holding out hope that this is going to work? Or is it more likely to fall through?

Thanks so much.
~Steph in Seattle

Answer
Hi Steph,

I take it that you are getting a government loan (either FHA or VA) for this condo? The HUD condo guidelines are very strict, and the project has to meet their requirements for number of units sold to owner occupants, not investors, before they will receive final approval. (I suspect the delayed paperwork has to do with this provision.) Even if you aren't gettting a government loan, if the project is unable to be approved for government financing it will be a lot tougher for the developer to sell units to only conventional buyers. And if they don't get enough buyers you could end up in a project that is unable to finish completing their amenities.

That said, you only have a few more days left until the end of January. If the project does not receive HUD approval by then you may want to consider finding something else. In a resale project you want a condo development with really strong financials. If there are a lot of owners not paying their association dues, you could get hit with quite a substantial increase in monthly dues down the road. And they need to have enough allotted to their reserve accounts to pay for regular maintenance of the common facilities.

In a brand new project typically the developer is responsible for the HOA dues on unsold units. But if the developer runs into financial difficulty and declares bankruptcy, again you could find yourself in the position of paying additional HOA dues to make up the shortfall. How much do you know about this developer's financial stability?