From a great distance off, the Kiddie Condo program that FHA has offered for quite some time looks great.  Parents can purchase a condo close to the university of their children’s choice and reap the rewards as values appreciate and equity gets paid down during the students collegiate experience.  It’s particularly appealing because it’s basically the only low money down option for parents who don’t have a lot of cash that they can tie up in a property investment.  So what’s the problem?
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The problem isn’t simply finding borrowers who qualify, the problem is finding properties that qualify!  In order for the FHA to loan money on any condo, it has to be “warrantable”.  You can read the previous blog posting to understand more fully what a warrantable condo is.  In most university areas you have a high percentage of investor owned properties.  Campus area condos have long been a safe place for property investors to piece together portfolios due to consistent renter pools and high rental income.  The closer to campus the more appealing the property is to a student, thus to an investor who is concerned with demand for his property.  If any single property has more than 50% of the units recorded as investor owned, the property doesn’t qualify.  So in a 10 unit condo complex, if 6 of them are listed as investor owned, it doesn’t qualify.  The second nail in the coffin is percentage owned by a single investor which can’t exceed 10%.  So, in this same 10 unit complex, if a single person owns 2 units, it doesn’t qualify.  In a 5 unit complex, a single investor-owned unit would make up a 20% thus eliminating eligibility.
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Of the hundreds of potential condo projects that surround the University of Texas in Austin, there is seldom more than a couple that manage to qualify.  To make matters worse, these ratios are constantly changing as investors flip properties in and out of their portfolios and students graduate resulting in their parents selling the condo.  There is no way to know which properties qualify at any given time without a great deal of investigation into each property’s home owners association who tracks which units are owner occupied Vs. investor.

 

In the end, the program gets an E for “effort” but fails in functionality and its ability to adapt to the true university market.  There is an opportunity here for private money to step up and fill in the gaps.