Testing Constant contact Blog Post

Posted By Roger Grant @ Dec 9th 2020 7:59pm In: Real Estate


Grand Strand Real Estate News


November 2020


Volume 2020 Issue 10

If you would like to receive this monthly newsletter CLICK HERE


Greetings!


Summary

Happy Thanksgiving. Last month my research indicated that sales have been strong in recent months but uneven. Large condos in general and condos eligible for conventional financing have been selling better than smaller condos and condotels. One of the potential reasons for this discrepancy is the current unusually large gap in interest rates between conventional financing and condotel financing.

Here’s a short course on condos, condotels and conventional financing (much more detail below). Condotels typically have hotel type features and are therefore not eligible for conventional financing, which was set up by the government in the 20s to allow more people to buy “residential” properties. This was accomplished by establishing a “secondary market” to buy loans from conventional lenders. By the way, there’s nothing “wrong” with a condotel - it’s just not considered to be residential. 

Conventional loans are sold by lenders on the secondary market, drastically reducing their risk and cost. Since condotel 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 during the entire life of the loan. Therefore, to protect their investments, lenders want the rates either to be able to adjust as prevailing interest rates change or they want shorter loan terms - usually 15 years or less.

There can be good reasons to buy a condotel, even with the higher interest rates - extensive amenities, strong rental income, and the prices are often lower than comparable properties which are eligible for conventional financing.

Condotel interest rates are always higher than conventional rates for the reasons stated above and, since 2014 at least, the rates tracked each other with the condotel rates staying 40% to 50% higher. Over the past 18 months, however, conventional interest rates have been dropping at a much faster pace. Now, even though condotel rates are the lowest they’ve been in 6 years, they are still over 90% higher than conventional rates. This has certainly contributed to the strong condo sales and relatively slow condotel sales. There are two charts included below which illustrate this.

Buyers: It’s a great time to buy condos eligible for conventional financing. Take advantage of these historically low interest rates. They won’t last forever.

As for condotel buyers, as mentioned, interest rates are the lowest they’ve been in 6 years. Also, there are some bargains that can be purchased right now. Good time to buy for someone who is planning to pay cash anyway or do a 1031 exchange.

Sellers: It’s a good time to sell for the same reason it’s a good time to buy. Low interest rates are attracting lots of buyers and enabling them to buy more expensive properties.

As for condotel owners who want to sell - people are still buying. Lots of cash purchasers and 1031 exchanges. I'm expecting activity to pick up early in the new year.

Check out all our usual Grand Strand Market Reports, Sales and Listing Updates, new Beach Pro Team review, and my Best Buys.


Greetings from The Grand Strand!

As always, I hope you and your families are doing well. Happy Thanksgiving but be especially careful this year. My family is staying close to home and keeping it simple.

Marshwalk at Murrells Inlet 11-22-20

Last month we took a look at the different segments of our market for resort condos and my research indicated that sales have been strong in recent months but uneven. Large condos and condos eligible for conventional financing have been selling better than smaller condos and condotels. One of the potential reasons for this discrepancy is the unusually large gap in interest rates between conventional financing and condotel financing.

Before getting into the data I collected on this, here’s a short course in the differences in “condos” (eligible for conventional financing) and “condotels” (must use specialized condotel financing).

Condotel: These buildings typically have one or more “Hotel” type characteristics such as an onsite rental office, onsite commercial space(s) such as restaurants, day spas, convenience stores, 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. Condo buildings often have some of the same types of amenities but generally not the services. 

Conventional Financing: This type of loan is the one most familiar to many people but it is actually different from any other type of loan. An explanation for how and why “conventional” financing” came into being requires a short history lesson. Before the 1920’s, homeownership was only for the rich (around 5% of the US population). Since banks were very limited in how much they could lend as well as the amount of risk they were willing to accept, 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. Banks were now 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 has been very successful and now aout 65% of Americans own their own homes. 

Why don’t condotels qualify for conventional loans? The conventional secondary loan market was always intended for residential properties only - primary residences and second homes - and there are guidelines in Fannie Mae and Freddie Mac to determine which properties qualify. If a property doesn’t qualify, the lender cannot sell the loan to 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 the risks. 

Is there anything wrong with condotels? No, just as there is nothing wrong with restaurants, hotels, office buildings or any other properties that could typically be described as “commercial” in nature rather than residential and also don’t qualify for conventional financing. As previously stated, many of their characteristics actually may make them more desirable to some second home owners than condos or detached houses.

Interest rates for condotels vs. condos (see below for current comparison): Condotel rates are always higher than rates for condos and sometimes a larger down payment is required. Also, 30-year fixed rate financing is typically not available for condotels. The primary reason for the difference in interest rates is that, since condotel 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 during the entire life of the loan. Therefore, to protect their investments, lenders want the rates either to be able to adjust as prevailing interest rates change or they want shorter loan terms - usually 15 years or less. 

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 condotels 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. For this reason, condotels can often be bought for significantly less than comparable condos in developments that don’t have these commercial-type features. I’ll cover this in greater detail below.

In summary, a prospective buyer should weigh the benefits (price, amenities, rental income, etc.) against the drawbacks (less favorable financing terms) when choosing between a condo and a condotel.

OK, now that you have a basic understanding as to why the interest rates differ from condos to condotels, let’s take a look at the reason the current exceptionally low conventional interest rates are resulting in conventionally financed condos selling better than condotels over the past 18 months.

This first chart shows interest rates for condos vs condotels since 2014. Even though many condotel loans offer adjustable-rate financing, I chose 15 year fixed rate financing with no points so that I would be able to directly compare with conventional rates. Also, please note that the condotel rates came from rate sheets I collected periodically so they are not necessarily evenly spaced in time. The conventional rates came from a table (provided online by Freddie Mac) showing average interest rates for each month.

Condotel Interest Rates vs Conventional Rates Chart

As you can see, the interest rates for the two types of loans generally tracked each other until early 2019. That’s when conventional rates started decreasing at a faster pace than the condotel rates, leading to an ever-increasing gap. Note that the problem is not that condotel rates have gone up. It’s just that conventional rates have dipped to extraordinarily low levels. 

To further illustrate this, take a look at this next chart which shows the percentage difference between the two rates.

Percentage Difference

Since 2014, with the exception of one brief period in 2016, condotel rates have been 40% to 50% higher than conventional rates. However, the percentage gap has been climbing since early last year and is now over 90%. In other words, the interest rate is almost twice as high for a condotel as it is for a condo. I think this is definitely one of the reasons we have seen condos selling exceptionally well while condotel sales have been off.

As mentioned above, keep in mind that the interest rate is factored into the pricing for condotels. This means that, even though the interest rates are higher, buyers are able to purchase at prices lower than they would be able to if these were eligible for conventional financing. So you couldn’t have your cake and eat it too. A perfect example of this is the time period from about 2003 until about 2006 when Fannie Mae and Freddie Mac inexplicably allowed conventional financing for just about any type of property including condotels This had not been the norm prior to that time. When this occurred, prices and sales volume for condotels skyrocketed. By the way, in the resulting “Great Recession”, the secondary markets reversed course and forced lenders to buy back billions of dollars in loans. This is one of the reasons many lenders are still wary of condo loans in general. 

So what does all this mean?

Buyers: It’s a great time to buy condos eligible for conventional financing. Take advantage of these historically low interest rates. They won’t last forever.

As for condotels, rates are actually the lowest they’ve been in six years. They only appear high because of how low the conventional rates have gone. Also, there are some bargains that can be purchased right now because of the relatively slow market. This might be a particularly good time to buy for someone who is planning to pay cash anyway or do a 1031 exchange.

Sellers: it’s a good time to sell for the same reason it’s a good time to buy. Low interest rates are attracting lots of buyers and enabling many to purchase at prices higher than they could in the past or will be able to in the future.

As for condotel owners who want to sell - people are still buying. In particular, condotels are the optimum choice for many 1031 exchange transactions. Also, about half of all condotel buyers pay cash anyway. I’m expecting activity to pick up early in the new year as buyers anticipate a more normal rental season in 2021. Even with more sales, however, it may take a while for prices to start increasing significantly so I don’t think there is any benefit in waiting.

I’ll end with a really quick Covid report. The number of new daily cases in Horry County has continued to bounce around in the 50 to 100 range. There have been no additional changes in restrictions to activity.

That’s all for now. Check out all our usual Grand Strand Market Reports, Sales and Listing Updates, new Beach Pro Team review, and my Best Buys.

See you at the beach!


Beach Pro Reviews

Here is a new review published in Zillow. 


  • Gene's market knowledge and promo efforts work! 4 days from listing to contract with multiple offers above asking. Who could ask for more? Gene and his coordinator Bea were very responsive and proactive from listing through closing. I have had numerous RE transactions over the years and this was by far the best experience. Thank you Gene and Bea!!! Jeff. Bahama Sands. North Myrtle Beach.

We have chosen to utilize Zillow's review platform. This is not an endorsement of Zillow (Please ignore the ridiculous "Zestimates") but we think an online third-party review service provides more credibility than simply printing reviews ourselves. At this time, we have over 80 reviews with more coming in each month. To see all of the reviews at any time, you can visit Zillow Beach Pro Team reviews

Grand Strand Market Report


Below is a link to a detailed report on the current state of our local real estate market complete with statistics for just about anything imaginable. Please keep in mind that these statistics cover a broad range of properties and that particular areas or developments may behave quite differently.  

As always please contact me if I can be of service in any way.

See link below to interpret terms used in this report.

Grand Strand Market Report - October 2020

Best Buys


The following current listings are exceptionally well-priced and represent great values. The spreadsheets are sorted by price. These are live links to listing details and they will change according to changes in the MLS (Pending, Sold, etc.). The listing details are in the same order as the spreadsheets. Please call me directly if you find something of interest to you.
  

OF/OV Homes Brochures:    Link to Listings 
OF/OV Homes Spreadsheet:   Link to Spreadsheet 
 
OF/OV Condo Brochures:    Link to Listings
OF/OV Condo Spreadsheet:   Link to Spreadsheet

Non-OF Condo Brochures:     Link to Listings 
Non-OF Condo Spreadsheet:  Link to Spreadsheet
If you are considering buying or listing any property on the Grand Strand, or if I can be of assistance in any other way, please contact me. Also, please feel free to forward this newsletter to friends or acquaintances and of course I will be happy to add them to my email list.

Finally, please let me know if you are going to be in the area and would like to get together.

See you at the beach!




Gene Carter
Beach Pro Team
Cell Phone:  843-455-4785

The material provided is for informational and educational purposes only and sometimes contains current or forward-looking statements on real estate market conditions, and should not be construed as legal, investment and/or real estate advice. Although the material is deemed to be accurate and reliable, we do not make any representations as to its accuracy or completeness and as a result, there is no guarantee it is without errors, and is not necessarily the opinion of RE/MAX Southern Shores or its agents.


Share on Social Media:

Comments (0)

Comments have been closed for this post.
Please contact us if you have any questions or comments.