The condominium hotel trend has been much ballyhooed, so why are lenders sitting on the fence in regards to consumer mortgage financing? Here are 3 simple reasons:
1.) The secondary markets (FNMA, FHLMC) haven’t seen enough condo resort paper to benchmark the risks/rewards of the proportionately new asset class.
2.) Condo hotel is someplace between a commercial hotel loan and a residential moment home/investment property consumer mortgage, so they don’t fit neatly into present portfolios/guidelines.
3.) The yield/interest rate that a well-healed condominium hotel purchaser is willing to pay on a 30-year mortgage is a lot lower than timeshare and other vacation ownership rates.
Many of the new condo hotel offerings are much more challenging to mortgage in market interest rates and provisions, because they are smaller compared to 600 square feet in size, don’t have kitchens, include FF&E chattel in the sales cost, and may be in projects which include combined usage and timeshare/fractional components. Every one of those items withstand conventional mortgage guidelines.
Yet even given these challenges it’s apparent that creditors are closely watching the growth of the condo hotel market. With each high-net worth, personal banking customer who buys a condominium hotel, bankers are being asked,”Why won’t you lend me a conventional mortgage on this piece of real estate?” And lenders are being forced to get up to speed on this asset class.
As interest rates have risen, and the property markets generally have cooled, the lending community has been confronted with greater capability to lend. Lenders have begun to seek out new market opportunities to fulfill their appetite for return and loan quantity, condo hotel mortgages present a unique opportunity that’s time may have come.
High Credit Quality
The normal condo hotel purchaser is a high net worth consumer who’s looking for a quasi-vacation house with hassle-free rental property benefits and investment potential. Just like the majority of mortgages, these borrowers sign personally for the debt, and generally place 20% or more in down payment. Underwriting guidelines for most of the existing condo hotel mortgage products require a borrower to qualify for the debt without any credit for the potential rental income from your property. A cash-flow loss isn’t a loss in any way, in the event the hotel should fail to provide any rental income. If they’re truly purchasing with a goal to utilize and enjoy their condo hotel unit as a second home alternative, this consumer will be obtaining a luxury holiday condo for a fraction of the conventional condo ownership expense.
The best threat to consumers and lenders at condo hotel ownership is from the sales strategy and intent of the purchase. Is the consumer purchasing a investment property or a holiday condo substitute? If throughout the actual estate sales procedure the earnings potential was highlighted, the customer is going to have a claim against the developer/Realtor who represented what could be regarded as a security. The SEC issued a’no action’ letter that discourages these practices, but many sales operations find it debatable to remain completely away from the topic of leasing income when a customer directly asks such disclosure and data. You can envision a debtor who adores cash every month, but enjoys their ownership experiences and is very delighted with his condominium resort. Or an investment minded consumer who tires quickly of the condominium resort when they’re constantly writing checks rather than receiving them from a condo he never visits. The value of amenities, service and condominium proprietor has never had more importance to property value. know more YouTube Channel
The continuing hotel management is another risk that’s foreign to conventional home mortgage lenders. Lenders entering this market are often unfamiliar with all the metrics and cyclical nature of the hotel company, and will need to accept condominium hotel projects with an eye to the long-term viability of the resort, not only the credit quality of the consumer. If the resort is mis-managed, replacement reserves are grossly under funded, or if the viability of the hotel market is deteriorating the customer’s ownership experience will suffer, and mortgage default risk rises rapidly.