Financing Your Resort Condo Purchase Written by Gene Carter, Resort Condo Specialist since 1985

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1 Financing Your Resort Condo Purchase Written by Gene Carter, Resort Condo Specialist since 1985 After extensive research, you and I have found a great oceanfront condominium with a strong onsite rental program, an oceanfront restaurant, indoor and outdoor pools and lots of other great amenities. You ve contracted to purchase and now all you have to do is go back to your hometown lender to arrange for financing, right? WRONG! Our hard won experience over 25 years and thousands of transactions is that a buyer in this scenario will face an approximately ninety percent probability of loan denial regardless of his strength as a borrower, the lender he chooses or the expertise and integrity of his loan officer. Worse yet, the problems typically surface at underwriting-the last step before loan approval and very close to the closing date. When this happens, a buyer usually has to start over with a local (Grand Strand) lender and extend the closing date. He may have already paid fees that can t be refunded and he will have to expend more time and effort to re-apply. If he chooses to not apply for a loan through a lender that can finance his property, his earnest money is also at risk because financing contingencies are usually based on the Buyer s ability to qualify for the mortgage. If the loan is turned down because the buyer chose a lender that doesn t have a financing program to fit the property even though local financing was readily available, this generally does not entitle the buyer to a refund of his earnest money. Buyers often turn to their hometown lenders because they have developed relationships with them and trust their judgment. Unfortunately, these lenders have usually had no experience with this type of property. When they say they don t think they will have a problem, they are telling the truth. They really don t think they will have a problem. As previously stated, approximately 90% of the financing attempts of this type that our company has witnessed have failed and they all had one thing in common: Every single loan officer, often a trusted friend or relative of the buyer, was truly sure he wouldn t have a problem right up until the loan denial. Another reason people choose lenders out of our area is that they think they can search the internet and find a better interest rate or better terms. The same pitfalls apply. These lenders are not familiar with our market or these types of properties and their failure rate is about the same. Financing a resort condominium, particularly if it is in an oceanfront property with an onsite rental management program, is very different than financing a primary residence. Financing is readily available through our experienced local lenders. Please listen to the voice of experience. Frequently asked questions concerning resort condo financing are answered on the following pages. Please read these carefully. 1

2 Q. What is a Resort Condo? A. We re using the term resort condo to include a broad group of properties which typically have one or more Hotel type characteristics. Typical features include an onsite rental office; onsite commercial space(s) such as restaurants, day spas, convenience stores, etc.; PBX phone system; numerous onsite amenities such as pools, lazy rivers, whirlpools, indoor water parks, exercise rooms, etc,; high-level guest services such as 24-hour check-in, golf packages, show packages, daily maid service, concierge, valet parking, etc. Q. Why is my choice of a lender to finance my resort condo purchase so important? A. It s important because in my 25 years of selling resort condos in the Myrtle Beach area, financing attempts through inexperienced lenders have caused more problems than any other single factor, resulting in loan denials most of the time. This is also important because it is the easiest problem to prevent. A financially qualified Buyer who uses a local lender with resort condo experience is almost always approved for a satisfactory loan. Q. Why can t I just find the best residential mortgage loan program I can and use it to finance my purchase of a resort condo? A. Financing is often property-specific and certain loan programs will not work for certain properties regardless of the strength of the borrower. This concept is alien to most residential lenders. The reasons for this have nothing to do with the quality or location of the property. It is almost completely dependent on the ease with which the lender can resell the loan. Q. Why do lenders resell loans and why does this make a difference in which loan programs they offer for different properties? A. The explanation for why available financing programs differ from one property to another requires a short history lesson. Before the 1920 s, homeownership was only for the rich. Since banks were very limited in how much they could lend, loans were short term-five years or less. The monthly payment amounts were prohibitively expensive for most people. To make home ownership affordable, quasi-governmental entities now known as Freddie Mac and Fannie Mae were set up to oversee a secondary loan market. Now banks were able to package and sell their loans, collect a profit and then write more loans. This enabled lenders to offer 30 year mortgages making home ownership far more affordable. The program was very successful and now almost 70% of Americans own their own homes. 2

3 The secondary loan market is set up for residential properties only-primary residences and second homes-and there are guidelines to determine what properties qualify. If a property doesn t qualify, the lender cannot sell the loan through one of these entities. Lenders can still make money on loans they can t sell (such as commercial loans). However, since they tie up assets for potentially long time periods, the returns (interest rates) generally must be higher to justify these. Problems arise with inexperienced lenders because many resort condos are somewhat commercial in nature. They have onsite rental desks, daily maid service (like a hotel), onsite restaurants, etc. These are considered by many buyers and most visiting vacationers to be positive factors. Unfortunately, secondary loan market guidelines may cause a property to be categorized as a condotel and therefore ineligible for the secondary loan market. This is what typically causes a residential loan on a resort condo through an out-of-area lender to be denied at the last minute. Q. Does this mean there s nothing really wrong with a resort condo or even a condotel? A. That s right! There is nothing wrong with resort condos just as there is nothing wrong with restaurants, hotels, office buildings or any other properties that could typically be described as commercial in nature. As previously stated, many of their characteristics actually may make them more desirable to a second home owner than a detached house. Q. Why can t my hometown lender just read the secondary market loan guidelines and then set me up with the best loan? A. The guidelines have changed through the years and in fact the accepted interpretation of the same rule can vary significantly from one month to the next and from one lender to another. Slight differences between one building and another can make a huge difference. It s a big commitment to keep up with this. The local lenders are attuned to these matters and can accurately advise a buyer as to the best available financing. Q. Are resort condo loans acquired through local lenders sold just like typical residential loans? A. Some of these loans are resold as residential loans. The local resort condo lenders, by utilizing the specially crafted loan programs they have developed along with their underwriter s familiarity with these types of properties, are sometimes able to package these loans so they can be resold on the secondary market. This allows these lenders to offer interest rates and loan terms more or less comparable to those for primary residences. There are some situations in which this is not possible but local lenders usually also have access to customized portfolio programs (in which the lender does not sell the loan). 3

4 Q. Are the same loan programs available for all resort condo buildings? A. No. Available loan programs can vary significantly from one building to the next. Relevant factors may include the service level and the precise location of the rental desk (inside the building or not, for example), the size and configuration of the individual condominiums and whether or not there are timeshare units in the complex, just to name a few. Also, if a buyer already owns another property along the Grand Strand, this could affect the loan. As noted previously, interpretations also vary over time and from lender to lender. Q. Do the local lenders have to start from scratch to see which loan programs are available each time they receive a loan application? A. No. Most local lenders have a list of pre-approved projects and pre-determined guidelines so they can usually give a quick response even if it is a project they have not previously encountered. This immediate response as to which loan programs apply is invaluable since potential problems usually arise only at the end of the loan process-a huge drawback with out-of-area lenders. Q. Are terms and interest rates the same for resort condo loans as they are for primary residence loans? A. Interest rates are sometimes slightly higher than rates for primary home loans and a larger down payment is sometimes required. Also, 30-year fixed rate financing is typically not available. The reason is that lenders consider these to be riskier loans than those for primary residences. If a borrower experiences financial difficulties, he will stop paying on his second home or investment loan before he stops paying for the roof over his head. Even more importantly, since these loans are typically not sold, any profit the lender makes is based on the spread between the interest rate charged to the borrower and the interest rate available to the lender. And since this is the case for the life of the loan, lenders want the rates to be able to adjust as prevailing interest rates change. Q. Will local lenders who specialize in resort condo loans have better condo resort financing programs than other lenders? A. Yes. Local lenders will almost always have the best available loan programs for these particular types of properties because they are in fierce competition with each other and with local mortgage brokers who constantly search nationwide for financing that will give them an edge. Their efforts are justified because resort condos make up a large part of our market (unlike out-of-area markets). (Note that there are quite possibly better programs for primary residences. This fact misleads many buyers when hometown or internet lenders promise programs that they can t deliver for resort condos). If it seems better than the local financing options, be very wary. 4

5 Q. Are local resort condo loan terms as good as those promised by my hometown lender (even if he can t deliver)? A. It depends on the situation but local financing is often better than the promised but undeliverable financing from out-of-area lenders. Most of the time, when my clients have had to start over locally after having their loans denied elsewhere, they ve been surprised to find that the local lenders had better terms anyway. Q. If a local lender can provide the loan I need, can I go to another branch (back home?) and get the same loan? A. No, most resort condo financing programs available through local offices are not available through out-of-area offices of the same lender. For example, Acme Bank in Myrtle Beach has specific resort condo programs set up and they have educated their underwriters about this type of property. Acme Bank in the Buyer s hometown, unfortunately, does not have these advantages and will run into the same problems encountered by any other out-of-area lender. Q. Are resort condo loans risky for the lenders that specialize in them? A. In our area at least, these loans have historically had very low default rates. Most of the Buyers are relatively affluent with strong assets and reserves. They also typically have good credit scores which they will go to great lengths to protect. Of course during times of hardship such as the recent recession, defaults increase as they do with other types of mortgages. Q. Does it matter which of the local lenders I choose to finance my resort condo purchase? A. Yes, not all of our local lenders can provide financing for all properties. Lenders, like most service providers, often specialize and some do not have programs for resort condominiums. Local lenders who do not focus on these properties may also promise financing they can t deliver just as hometown lenders will. Ask your experienced resort property specialist for a list of local lenders who can provide financing for the specific property you are purchasing. Q. Resort condos are obviously not as easy to finance as detached houses. Should I be worried that there won t be available financing when and if I try to sell my condo? A. In the twenty-five years I have been specializing in resort condos, there has always been reasonable financing available for qualified buyers although the lineup of the best local lenders has changed frequently. This is a lucrative market for lenders and with baby boomers expected to buy millions of second homes in the coming years, it is unthinkable that no lenders would choose to take advantage of that opportunity. 5

6 Q. Why do out-of-area lenders say they can handle a resort condo loan if they can t? A. They don t recognize that condo resort financing requires customized service. The main source of problems with these loans is that inexperienced lenders don t realize that they are specialty products. Matching a required customized service with a specialty product is something we all do everyday. We don t put the fine china in the dishwasher, we don t clean our business suits in the washing machine, we don t use a heart surgeon for a facelift and we should not use a residential loan specialist for a resort condo loan. Q. Why would my hometown lender turn down my loan request after he told me everything would be OK? A. Your hometown loan officer doesn t decide whether or not to lend on your resort condominium his underwriting department does. Underwriters who are not familiar with our market or the nature of resort condos see potential problems with almost every loan of this type. This goes beyond the issue of salability of the loan. Under-writers are trained to be risk-averse. The problem with out-of-area under-writers is that they tend to perceive anything they are unfamiliar with as an un-acceptable risk. We ve seen many loans for perfectly sound projects turned down because of frivolous concerns. Q. Is there something wrong with my hometown lender if he can t finance a resort condo? A. There is nothing wrong with your hometown lender. Resort condos require specialized loans which lenders outside of our area have no reason to carry. Many hometown lenders react defensively when we suggest that a Buyer should use a Grand Strand lender instead of them. Even worse, when they run into problems, many out-of-area lenders then try to convince the Buyers that there must be something wrong with the property if they are having problems when, in fact, the transaction would have progressed smoothly through our experienced local lenders. To be fair, our local lenders might very well have trouble with a property in the buyer s hometown due to quirks in his hometown market. Q. Is it ever OK to use a lender who does not have resort condo experience? A. The scenarios listed below may give you good results but always check with your agent first: Signature Loan- In other words, your position with the lender is so strong that your signature will get you a loan regardless of why you re borrowing the money. Be sure the lender is treating this as a portfolio loan which it does not intend to sell. 6

7 Commercial Loan- Some buyers put down 20% to 30% and structure these as commercial loans. There still could be problems if the lender is not familiar with our market. 10%- Since 90% of our client s out-of-area loans for resort condos are denied, that means about 10% are approved. However, the buyers usually experience delays, require extra paperwork and often have to accept less favorable terms. Q. Why would I buy in a property that does not have conventional financing when others are available on the Grand Strand that are eligible for conventional financing? A. First, the very features that make these properties ineligible are attractive to many buyers (and renters). Onsite restaurants, extensive amenities, convenient on site hotel-type front desks, daily maid service, room service, etc. Second, rental incomes are often higher than with other properties, again due to these very features that create the financing difficulties. Third, the financing situation is already built into the price because the pool of buyers for these is smaller. Condotels often can be bought for significantly less than comparable condos in lesser developments that don t have these commercial-type features. Fourth, adjustable rate financing, isn t so bad. The rates are typically locked for the first three to seven years of the loan and then there are limits to how much they can go up or down per year and over the life of the loan. And rates don t always go up. Purchasers in the late eighties saw their interest rates drop substantially from their initial rates. Fifth, the average length of ownership for resort condos in our area is about 5 years minimizing or eliminating any interest rate change effect. People sell to up grade, sell for profit, sell because they move to another part of the country, etc. Sixth, many buyers of these properties pay off the mortgage before any interest rate changes can occur. Some borrow money against other assets with loans that allow for better terms (home equity, leveraged stock portfolios, etc.). Some pay them off with the proceeds of sales of other properties. In summary, a prospective buyer should weigh the benefits (price, amenities, rental income, etc.) against the drawbacks (less favorable financing terms). 7

8 Q. What if I carefully consider all factors and still decide I don t want Condotel financing terms? A. One solution is to simply buy in a property that IS eligible for conventional financing. There are plenty in our area. Ask me to help you find these properties. The rules are confusing and the list of eligible properties changes frequently as rules are periodically changed or as interpretations change. The other solution is to pay cash. This is not necessarily as difficult as it sounds. Many cash buyers actually just borrow against some other asset which gives them more favorable terms. Home equity loans, leveraged stock portfolios, etc. This strategy can be particularly useful in the toughest market conditions when financing is the most difficult because these are the times when prices are at their lowest. Q. Don t agents really just encourage the use of local lenders so they can get kick backs? A. No, agents do not receive kickbacks from local lenders. An agent encourages their use because it drastically increases the likelihood of the completion of the sale that he, the buyer, the seller, and the other agent have worked hard to put together. Remember that sales agents usually work on a commission-only basis so if a sale does not close, the agents receive no pay at all. Q. Are all Grand Strand real estate agents familiar with the financing issues involving resort condos? A. No. Most agents who do not frequently sell resort condominiums are not familiar with these issues. It s important to find an agent who specializes in the type of property you plan to purchase. Q. This sounds so complicated how will I learn all this? A. You don t have to. Your experienced resort condo agent can help you find the right lender. Since I specialize in the sale of resort condos, I am constantly monitoring the local competition so that I can properly advise my clients as to which lenders at any given time will best be able to serve you. I have specialized in the sale of resort condominiums for 25+ years. My Beach Pro Team and I are familiar with all resort properties in the Myrtle Beach area and would be happy to assist you in any way. Also, our website,, is loaded with detailed current information on our area and on dozens of resort properties as well as advanced search capabilities and services such as our Foreclosure Snapshot, Foreclosure Alert, and Listing Monitor options. 8