If it looks like a duck and quacks like a duck, it’s most likely a duck. But in the case of real estate, a PUD (Planed Unit Development) often looks just like a condominium, yet it is something completely different. This might not seem like an important distinction, but after speaking with a townhouse PUD owner recently who was rejected for a conventional loan because the lender AND appraiser incorrectly labeled her property as a condo, this is definitely relevant.
Why can financing work for a PUD but not a condo? I asked Dave Heard, Branch Manager of Mason McDuffie Mortgage, for some insight on the situation above, and here is what he tracked down from one of his underwriters:
Underwriting guidelines and documentation requirements vary greatly depending upon whether the subject property is a condo or a PUD. It is important to confirm which type of property you are dealing with. Condos can require project approval and HOA insurance approval, which will require specific documentation which must be provided by the HOA. This documentation is analyzed for acceptability against investor guidelines. Many aspects of the project are reviewed and must meet specific criteria such as a certain number of units are expected to be occupied by owners, minimum square footage requirements, certain financial reserve requirements, whether the project has any commercial space just to name a few. The condo project review process can be lengthy and sometimes results in the project being rejected. A PUD on the other hand has far fewer eligibility and documentation requirements, and in some cases requires no review at all. If your PUD is a detached PUD, then these are normally just treated like a single family dwelling with no PUD project review required at all. If the PUD is an attached PUD, limited documentation may be required and the PUD project review process is much more limited with just a few project criteria checked. A conventional loan that can be approved for a PUD project may not be able to be approved for a Condo project because the underwriting guidelines do differ for condos and PUDs.
Labels Matter: In short, the PUD owner mentioned above was denied a loan with her first lender because both the lender and appraiser thought her property was a condo. Some of the “condo” information just didn’t jive well with the lender (there were far too many rentals), so the loan was rejected. BUT since this property wasn’t actually a condo (despite Tax Records saying it was), the owner was able to get a loan on her PUD property despite a high level of rentals in her subdivision.
Is it a condo or not? How to use a plat maps to know: If you want to be a real estate expert and provide accurate information to clients, it is crucial to be able to be able to tell the difference between a PUD and condominium. Let me use words, images and video to help illustrate how to do this. Remember, Tax Records can frequently label a PUD as a “condo”, which can be confusing.
It’s all about the lot: If you don’t have the CC&Rs or a legal description, it’s time to use the plat map in Realist. Does the plat map show specific lot dimensions for the subject property unit? If so, it’s most likely a PUD and not a condominium. Why? Because the owner of a condominium does NOT have ownership of the specific site on which the unit is built, so there is no reason to give specific dimensions on the plat map for the lot shape. If an individual parcel is identified with dimensions on the plat map for the individual lot, it’s not a condo. In contrast, since a PUD does own the lot, there should be dimensions for the individual lot. Click the thumbnails to view larger images.
Below is a quick video screencast so you can know how to use Realist Plat Maps in the Sacramento area to see if it’s a condo or not. Watch the video below (or here).
Any questions, stories or thoughts? What do you think of the lender and appraiser getting it wrong? Feel free to share your two cents.
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Thanks once again Ryan, for such helpful information. Especially with our current low inventory, it helps to know where to focus our attention – a PUD which may be more successful than the condo. I’ve been told by lenders that PUD’s are different and better, but never ‘why’ – no explanation. A good teacher explains the why, not just a yes or no. The student actually learns that way. Thanks!
You’re so welcome. Thanks for the kind words, Lori. It’s definitely confusing to know how to tell the difference if you don’t know what to look for. As I mentioned in the post, the appraiser labeled this property incorrectly, which essentially means the appraiser put the property on a condo form when it should have been on a regular SFR appraisal form. Details make a difference.
If any onlookers have questions, please speak up. I hope the plat map explanation makes good sense. It’s worth opening up MLS and some plat maps to try to know how to do a search like this. As you said Lori, with such low inventory, it’s important to know how to market these properties. Who are the likely buyers? Will conventional and FHA financing be applicable? Key questions.
Hey Ryan, these are some great tips. It’s interesting that the county records mislabeled the property. Since that is where appraisers get a lot of their info. for the appraisal it is a good idea to verify with another source as well. Thanks for sharing.
Thanks Tom. Well said. It’s fairly common to have a situation like this in my area. I also see condos listed with an individual lot size, which is clearly not accurate. This is why it’s so important to know how to navigate plat maps as a back-up to Tax Records information.
I am closing a refinance loan right now where 4 different lenders rejected the project before I got the deal because they thought that it was a CONDO and not a PUD. One of these lenders actually collected a $500 application fee from the owner before rejecting the loan based on the project. It really does matter! We all need to use the correct terms when describing the project!
That’s amazing Dave. I wonder why the lenders were not able to see the property was a PUD. I do hope the lender returned the $500, though that may not have happened.
Thanks again for contributing to this post. When we talked last week about one of your deals where this happened, I knew it was perfect blog fodder. Congrats on the closing too. I’m glad you were able to make it happen for the PUD owner.
Excellent article – there is often a lot of confusion when it comes to PUDs. And not indicating it correctly as a PUD is a big deal in a mortgage processing center.
Thanks so much Rosemary. It’s good to hear from another mortgage pro that it is indeed a big deal. 🙂
Just read the legal description. If it is condo the legal description will mention % of shared interest for the unit. No need to waste your time looking at the lots.
Good point, Dano. If the full legal description is available, that’s the best way to go. The only issue is that the full legal description is often only found in a preliminary title report (not in Tax Records).
hi ryan, you did a great job on this one. can you tell me what would be the pros and cons buying PUD opposed to a condo? if I understood this article correctly one PUD advantage would be less requirements and docs needed if one wanted to get a loan (im assuming this loan would be a 2nd). but is there any other advantages beyond this? also beyond the plot map ( apparently from your comment above, can also be incorrect) how could a potential buyer find out if a property is in fact a condo or PUD if tax docs have labeled a PUD incorrectly? again keep up the great work! thanks sandy 🙂
Hi Sandy. Thanks so much. I think the main pro of owning a PUD has to do with having greater access to many types of financing. This is exactly what you noted from the article. If buyers cannot get financing in a particular condo subdivision for whatever reason (not FHA-approved, too many rentals, budget problems, pending litigation against the association, etc..) it can narrow the pool of prospective buyers, which can also lower property values over time too. This is when it becomes better to own a PUD where financing or even values are less influenced by these matters. I cannot think of any real cons to owning a PUD compared to a condo, though I will say it’s important to really know if the HOA is managing funds and the community properly. For instance, it would be good to know if there is a balanced budget or an extraordinary deficit. A poorly managed PUD is definitely not better than a competitive well-managed condo subdivision.
Regarding the plat map, a potential buyer doesn’t really have any tools for interpretation that are available to real estate professionals (such as legal description or plat map), so the best method would likely be talking to the HOA directly or even contacting the city or county to ask them what the units are. If you get an HOA manager who really knows what he/she is talking about, you may get some good information. Usually city planners are in tune with issues like this, so they can be a great resource.
Plat maps are a wonderful tool if you have them. I don’t find many plat maps to be erroneous, but I always leave that option open just in case. I tend to pay less attention to the word “condo” written in Tax Records or MLS because I want to verify that it is indeed a condo by looking at the plat map (or the rare case of having a preliminary title report in front of me).
Let me know if that answered your questions.
YES, you do a really great job and you are very thorough. thanks again ryan 🙂
Thanks Sandy. 🙂
Here is further commentary from one of Dave Heard’s underwriters at Mason McDuffie. I thought it was worthy of posting for anyone wanting further insight into the “PUD vs Condo” issue:
“There is a significant difference between a condo and a townhouse. A condo is a “legal” designation with certain property characteristics. A townhouse is simply an architectural style…and could be either a condo or another legal entity such as a Planned Unit Development (PUD). Lenders typically view condominium loans as having higher risk, due to the ownership that is shifted from the unit owner to the homeowners’ association. For example, a condominium unit owner generally owns only “air space” and not the exterior of his unit or the land on which it sits. The exterior of the unit and the land are owned “in common” with other unit owners (homeowners’ association). In contrast, a PUD unit owner generally owns the exterior of his unit and the land on which it sits. Thus, the significance of the homeowners’ association is less.
Because the homeowners’ association is of such importance in a condominium project, a lender may evaluate the HOA’s financial and physical management of the project. This assessment is not performed for a PUD project. So…if the “townhouse” is a condominium, the lender, as a result of its evaluation, could deem the project too risky and deny the applicant’s loan request. If the “townhouse” is a PUD, no such assessment would take place, precluding any lender disapproval based on the property type.”
Ryan,
Some of your information is not 100% correct for all states. Here in Michigan we have site condo’s, the owners own the lot and pay a small HOA fee, many times just for the maintenance of the entrance. According to Fannie Mae’s definition of a PUD this is not a PUD. In this case you also have to consult with the lender/client as to which form it goes on, some want it on a condo form others want in on a URAR. If loan is FHA and it is a site condo (as you described as a PUD) has to go on a condo form.
Thanks Lonnie. There are bound to be exceptions, which you pointed out. I appreciate that. For the Sacramento area, this is very solid information. Thanks for the insight. The example I mentioned above should definitely not have been on a condo form. It’s too bad the Borrower spent time and money and an error was made by the lender and appraiser.
Great article and one thing that has always made me scratch my head. As a real-estate appraiser, identifying the property type (interest) to be valued is the most basic part of an appraisal, yet so many appraisers get the condo/PUD designation wrong. No excuse in my opinion for this. I have a company I did work for many years ago that still calls me from time to time to confirm property type after one of their appraisers has failed to identify it correctly. Check legal and check plat and the ownership rights of the property will be crystal clear regardless of what the property looks like.
Thank you so much Anthony. Well said. You are right that this is basic, yet it’s often easily missed. The property that inspired this post was a townhouse PUD, yet the lender considered it a condo and the appraiser completed the report on the condo form. That’s just not good. The Borrower really deserves a refund from the original appraiser / lender.
I agree completely. Your article is well needed based on the mistakes I’ve seen in the course of review work. And yes, I side with the borrower too. A refund is definitely warranted.
Thanks Anthony. I do help this article helps put good information out there. This is something every appraiser should know how to tackle. Thanks again.
Mr. Lundquist,
I have just started working at a property management office. I appreciate your lesson and, it’s simplicity. I was wondering if PUDs could be FHA approved as well?
Hi Breanna. Congrats on the new job. That’s great. I’m glad this was useful too. Yes, PUDs can obtain FHA financing. By the way, many in the real estate community tend to lump PUDs and condos together, so it is important to know the distinction since lenders tend to be less strict when it comes to a PUD as opposed to a condo. Also, for reference, this link shows which condos are approved for FHA financing in case you have clients asking: https://entp.hud.gov/idapp/html/condlook.cfm
For any onlookers, here is the difference between a PUD and a condo:
https://sacramentoappraisalblog.com/2013/05/30/why-it-really-matters-if-its-a-condo-or-pud/
Hi Ryan,
I am in the same fight with Lender and Appraiser. I read your article and went through the plat map and legal and the AZ assessor’s office. Per a statue in AZ, if any form of the legal has a % of ownership in the description, then they have to list as a CONDO. However, my argument is the dwelling portion or Unit of the legal does not contain a %. The shared % is only for the common areas, pool playground. They did not care about that. So it is going again to the Title underwriter who already rejected my dispute because of the language in the statue. Any words of wisdom. This has cost me $650.00 appraisal fee with no rfnd and time since April.
Hi Kathi. Thanks for reaching out. I’m sorry to hear about your situation. It’s hard to give advice here. I suppose the ultimate source would be the preliminary title report. Looking at the plat map can be a good quick hack to know what the property is, but at the end of the day the preliminary title report is deemed the definitive source (unless of course it’s wrong (but let’s hope not)). I would recommend you ask the lender to share that with you so you can see what it says. Generally speaking, if it mentions “condo” anywhere, that’s a big tell what the property is.
Very informative. I’m tempted to send to the lender I am currently working with to refinance! I have a PUD townhome. Evidenced by plat, title, appraisal, every project document, and has been financed twice under conventional financing without problem. They are currently trying to decline my loan because my personal State Farm policy (in addition to blanket policy through HOA) says “condo policy”. I’m losing my mind with this bank!
Thanks Claudine. It sounds odd to think a lender would deny a policy based on what an insurance company has given you for your policy. Last time I checked insurance companies aren’t the authority for discerning this type of thing. Hopefully in your case the preliminary title report, plat map, and what the city/county says will carry more weight than State Farm.
Could it be because your lender is requiring more coverage, e.g., HO-3 instead of HO-6? My insurance agent said that PUDs are sometimes tricky to insure since they can lie between a SFH and a condo.
Thanks Jared. I appreciate you pitching in that thought.
How can you tell the difference between a detached condo and site condo in MI based on legal description in title work?
Hi Elissa. Thanks for reaching out. I’m really not sure exactly in MI and I would defer to your local market for the answers. However, here here is a link from Fannie Mae talking about detached condos. They basically state a site condo is a type of detached condo. That’s maybe not terribly helpful in identifying the property, but maybe it’s important for some reason. https://www.fanniemae.com/content/guide/selling/b4/2.2/05.html Here is a blog post from a loan officer on site vs detached condos. I did not thoroughly read it, but maybe there is a nugget or two in there for you. https://stephaniewilsongast.wordpress.com/2017/04/16/site-vs-detached-condos/ Lastly, here is an article that might give you some questions to ask. I don’t know that you would find the truth of what the property is in the title report or not, though you may be able to ask questions about how the HOA is managed, how insurance is handled, etc… that can point you in the right direction in helping to define the property. https://www.realtor.com/advice/buy/what-is-a-site-condo/ Hope that helps.
Hi Ryan,
Separate from classifying the subject, what do you think about using PUD comparables for a condo appraisal (or vice versa)? Have you ever been able to get your brain around what the practical difference might be to the buyer?
Putting aside lender concerns and trying to imagine all the ways the difference in ownership might affect owners is dizzying. But then I think about what valuation is; a reflection of market reaction. If the market is not knowledgeable enough to make the distinction, does valuation need to? Is a buyer still acting “prudently” when not making the distinction? I would say yes if it’s common not to. Heck, the assessor even called it a condo!
One footnote, I’m assuming a case where the structure and any exclusive land use are similar, such as with townhouses.
Hi Paula. That’s a great question. Right or wrong I’ve used sales like this a few times in the past when it made sense to do so. A couple times I have thrown in one sale that made sense (maybe Comp 3 instead of Comps 1-2). Though I wouldn’t feel comfortable using only condo sales when appraising a PUD, and I wouldn’t feel comfortable using only PUD sales if appraising a condo. I’m usually pretty strict about sticking to the like kind, though throwing in a relevant sale for supplementary support is okay with me. I think when I observe two properties and realize the market looks at them the same from a price perspective, that helps me make the decision. It’s just really important to be sure of this though. Also, there wouldn’t be any reason for me to use something that is different if I have a ton of available similar properties either. For me this is where graphing comes in handy too to help show comparability over time.
Buyers really might not know about any of the differences at all, and maybe the real estate community doesn’t either. That’s true. But we do because we’re the professional, so in my mind we just have to exercise caution and good judgment. I am always thinking about financing too because if it’s not available in a condo subdivision due to too few owner-occupied units, then buyers really might distinguish between two subdivisions and pay less in the one that doesn’t have financing available. I can imagine some appraisers would never do this, but I feel comfortable doing this in some cases where it makes sense and where I can really see the market is looking at the properties as the same (even though they’re technically not the same in terms of the way the land is owned).
What do you think?
The condos and PUDs were all units in 1-sty row buildings. While the condo had commonly owned space in front and rear similar to yards, one of the PUD sales actually had a pool! There could be a difference in the potential for lawsuits against the HOA. But that can be where the road parts between loan security and valuation. Investors like it when the equity is more secure that, I feel, has influenced a lot of our practices and concerns. But if we are doing an as-is FNMA 1004/1073, we are saddled with the definition of market value which doesn’t make provisions for equity security anymore than what is reflected in the market. The industry has grown up with too many cooks in the kitchen.
Thanks Paula. I appreciate your take here. There are so many issues we can parse. It does get complicated very quickly. I concur that lending guidelines have influenced valuation – maybe a little too much at times. So instead of asking, “What is this worth?”, appraisers often say, “What would Fannie Mae say or do?” Those can be two different things…