Halpern says an engineering report flag doesn't always mean what it looks like, and knowing the difference is where the opportunity is
Brokers and lenders are finding both challenges and opportunities in South Florida’s condo market. Demand is hot for real estate in the area, but brokers working deals have different challenges to navigate.
Financing is taking on additional challenges following new regulations by Fannie Mae and Freddie Mac set to start in August. In addition, five years after the partial collapse of Champlain Towers South, legislation addressing concerns with that incident also adds a layer of challenges to those looking to finance condos.
Engineering reports mandated under Florida's post-Champlain Towers legislation have become a major friction point in the market, but for lenders willing to read them carefully, they are also a source of competitive advantage.
Foundation Mortgage has built a condo team for that very reason, bringing on a specialist who previously ran condo operations at Sprout and has involvement in Fannie Mae advisory processes.
Marc Halpern (pictured top), CEO of Foundation Mortgage in South Florida, said understanding those engineering reports gives educated brokers and lenders an advantage.
"We're going to go ahead and get an engineering report," Halpern told Mortgage Professional America. "So they're going to basically tell you that the building's falling down because there's one little piece of exposed rebar. So what we're able to do is really drill into exactly what's going on in the building and make the right lending decision."
Finding the right opportunities
The approach requires underwriters willing to look past the headline findings of an engineering report and understand what they actually apply to, Halpern said.
"For instance, if a building has balcony issues, and our unit is not specified in that report, we're going to lend on that unit," he said. "We know condos, and we're going to roll up our sleeves. We have the relationships with the takeouts to be able to have that conversation with them. If we feel, ‘It's a 50/50. What do you guys feel about this?’ We're able to reach out to them because we don't want to get stuck with a loan that's not sellable."
Halpern sees a separation in the market. At the entry end, older lower-dollar condos in interior Miami neighborhoods are struggling to find conventional financing.
"Those condos are going to have problems," he said. "I've even been reached out to for private money from these associations because they can't go get bank financing to do the repairs that are necessary."
At the luxury end, the picture is different, Halpern said. High-end buildings are trading even with disputes involving Chapter 558 of the Florida Statutes, which is a mandatory pre-suit process for construction defect claims. He cited one high-profile building where a developer cut significant corners on construction quality.
"There's 558 litigation on every single building that's turned over," he said. "It's just common practice. But you know, that was obviously a very high-end building where after the fact the developer cut major corners. There are still trades that are happening in there, but I know that had slowed down."
A changing landscape
More non-QM lenders, like Foundation Mortgage, could become more involved in condo lending thanks to new regulations.
Fannie Mae and Freddie Mac changes taking effect in August will eliminate streamlined limited reviews, require full project reviews, and raise reserve funding requirements, changes the National Association of Mortgage Brokers (NAMB) has been opposing. NAMB president Kimber White called the changes “a slap in the face for affordability in the United States.”
Halpern said the middle of the market is where activity has stalled. This part of the market has buildings with unresolved structural issues, and it has caused activity to stall.
Short-term rental condos in the Miami World Center area are a segment Halpern is watching carefully. The condotel model has a track record in South Florida dating back decades, but Halpern said the investment math has become harder to justify for buyers primarily focused on return.
"I don't think that it's a wonderful model to actually make money," he said. "Unless you're out of town and you really feel you're going to come down here and you want to say I have a place and rent it out when you can."
Even with some of the headwinds present, Halpern said the market will sort itself through supply and demand.
"If it's a hot building, it's supply and demand, and it's going to trade," he said. "The marketing time is going to take longer, but it's not a tremendous cause for concern."
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
