Condo buyers who sat out last year's real estate market, waiting for prices to bottom out or their own financial footing to improve, are in an enviable situation.
Prices have plunged. And mortgage interest rates, while slowly rising, remain near 5 percent, creating the best home affordability in decades for consumers who qualify for loans.
Just one problem.
It's not just the borrower who has to be up to snuff; it's the building, too, and there are buildings that lenders won't touch.
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Among the deal killers -- too many renters in a building, pending litigation, inadequate association reserves and delinquent assessments.
Those are some of the criteria lenders must look at to sell the loan to Fannie Mae or Freddie Mac, the troubled government-sponsored entities, and the Federal Housing Administration, the first choice for many first-time homebuyers. Combined, the three agencies account for about 90 percent of the secondary-loan market.
Rebecca Bass, branch manager of Element Funding in Beaufort, said she recently worked with a middle-aged, professional couple interested in buying a condo on Fripp Island as a second home.
The deal fell apart, however, once the complex's managers indicated on a questionnaire they permitted short-term rentals.
The clients were well-qualified in terms of income, assets and credit, Bass said, but Element's underwriters said they couldn't approve a loan because the complex wouldn't pass muster with the federal agencies.
"They were disappointed and incredulous," Bass said of her clients after being rejected.
Bass said other clients have hit a similar wall when trying to refinance a condo.
Ron Bruno, broker-in-charge at Plantation Realty and Rentals in Bluffton, said lending restrictions have depressed condo prices to the point buyers can own for less than they can rent -- if they can get a mortgage.
One of his clients has been approved for a condo mortgage through Bank of America. Most sellers, however, must find buyers able to pay cash, he said.
"People are pretty much paying cash for everything," he said.
There's no single list to check and no way to quantify the number of buildings that don't measure up. Rather, real estate agents have learned from experience what buildings to steer buyers clear of, and in other cases, they are investigating a building's health before they schedule showings.
Meanwhile, some lenders maintain a frequently updated list of condo buildings where they know a loan won't get approved. They also are working with homeowner associations to improve their buildings' lending potential by boosting financial reserves and limiting the number of condo units that are turned into rentals.
Ann Marie Jenkins, a certified mortgage planner at First Federal on Hilton Head Island, said it's difficult to estimate how many local condo projects are "unwarrantable" in the eyes of the federal agencies. A complex that meets one of the feds' standards one month might not do so the next, she said.
Underwriters usually hesitate to authorize loans in certain condo projects if they find check-in or concierge desks, which indicate a project is a "condotel" that might offer nightly rentals, she said.
"Sometimes, even the word 'resort' can tip off an underwriter," Jenkins said.
Jenkins said she hasn't had many borrowers encounter such hurdles with her bank's underwriters, who she said generally understand the nuances of coastal markets better than those at First Federal's larger competitors.
"I'm not having a lot of issues, but it can be an issue," Jenkins said.
Several years ago, there was an assumption that every condo building would pass scrutiny, but that's no longer the case, said Jim Linnane, Northeast division sales manager at Wells Fargo Mortgage's retail sales group. Wells Fargo has a designated group of employees who dig into the financial details of a condo development and work with borrowers and buildings to meet agency guidelines.
The situation is slowing any recovery of the condo market, often the housing of choice for first-time buyers in some parts of the country. Owners in troubled buildings aren't able to refinance, and sellers who want or need to sell find thin ranks of buyers.
The requirements are thwarting the plans of some potential purchasers, who have abandoned their searches and remain renters.
Others continue to pore over real estate listings after finding that the condo they thought was perfect for them isn't so perfect after all.
Some lenders will look past a problem in a building and still offer to take the loan and hold it in their own portfolio, but that acceptance comes at a price. The borrower's credit has to be stellar; they have to make a sizable down payment; and the loan will carry a higher interest rate.
Russell Martin, a loan officer for Perl Mortgage, questions why buyers would want to invest in what he terms "zombie buildings."
"Not only are the banks protecting themselves, but they're protecting the borrower," Martin said. "There's a reason the bank doesn't like that building."
Mary Ellen Podmolik of Chicago Tribune and staff writer Josh McCann contributed to this report.