The Case for Condo Hotel 2019
Lenders have learned a new word called “risk” in the last few months. Over the last 5 years, mortgage lenders have deviated from basic lending philosophy to create more risky and exotic mortgage products in an effort to expand the volume of mortgages they wrote. Home mortgages offering ‘no money down’, ‘no payments for 12 months’, ‘bad credit amp; no docs ok’ became commonplace by the fall of 2006. So it should have been no surprise when delinquency and default rates on these home mortgages spiked to over the traditional 1%. Lenders are just beginning to calculate how poor their judgment had become for credit risk.
In search of higher yield, lenders also embraced speculative condominium buyers, by offering zero down investor loans, this encourage the no infamous ‘flippers’ and distorted properties values and expectations. One area of lender sanity was the condo hotel mortgage business. By spring of 2007, the mass of condo hotel inventory had just begun to close (this fall will see more units close than in the past 2 years). Condo hotel mortgages were never really understood by most lenders, because few lenders had ever really closed one. Somewhere between a commercial loan to a hotel room and a residential second home loan, condo hotel mortgages are unique.
Condo hotel, unlike a traditional condominium second home, has many advantages like hassle-free and more consistent rental income, professional management and maintenance, and often an uber-prime location. Because there are fewer condo hotel units, there is also a degree of scarcity that will limit the number of people who can own this form of vacation property in key markets. Hotels often occupancy the best locations in a given market, and by owning part of that hotel, savvy buyers insure they are buying rare-air real estate. The hotel industry is on a roll, housing may be slumping, but tourism and business travel in America in on the rise. Industry statistics show that many of the new construction hotels and condo hotels will not hit the market until next year. Many of the first wave of condo hotels were conversions of existing hotel rooms, which did not add to the supply of rooms. Average daily rates and occupancy levels have been rising and so have the incomes of condo hotel owners in many markets. All of these facts were lost on residential mortgage lenders who never took the time to understand the risk or rewards of this new market.
By the same sense, lenders hadn’t had the chance to lose their minds and go ‘out the risk curve’ to create low and no down payment loans for condo hotel, the typical condo hotel loan has 20% down payment. A key difference in whether a buyer defaults is whether they have anything to loose, with zero down, there is little to loose by giving a home back to the banker.
Buyers of condo hotel also typically have the highest credit scores, and were qualified by lenders to have the ability to make the payments even if no rental income were present. Of course condo hotels do generate rental income; often significant income that will cover most or all of the mortgage payments. The early buyers of condo hotel have been savvy, well-healed, luxury vacation home seeking consumers, who can easily afford these properties. The loans to these consumers are anything but subprime. In many ways condo hotel loans were the safest loans made over the last several years. Yet many lenders who were late to the condo hotel game have already suspended their mortgage programs to condo hotels. Available mortgage money for condo hotel buyers have tightened along with the entire lending industry, but this has nothing to do with condo hotel as a viable niche in the real estate market.