Think an 'unsafe' building kills the deal? Learn how smart buyers can still secure financing and win
Sailing through the financing landscape for buildings with “SWARMP” or “unsafe” designations presents a unique set of challenges, especially in densely populated areas where weather and old infrastructure often exacerbate facade issues. Mark Maimon (pictured), SVP and branch manager of NJ Lenders Corp, deals with these complications head-on, particularly in cities like New York, where high-rise buildings are subject to strict inspection requirements.
“There’s SWARMP - safe with a repair maintenance program, which means that repairs need to be done within five years,” Maimon explained. But it’s the “unsafe” designation that causes the most problems, as it implies a need for repairs within 12 months, making the building ineligible for many financing options.
According to Maimon, the 2019 changes to New York’s Local Law 11 have brought this issue into the spotlight, as inspections now must be done every five years instead of 10. The shift has caused a flood of properties being flagged for necessary repairs, which can derail the financing process.
“A conventional lender will typically kill that loan right away if they see the unsafe designation,” Maimon said. However, he and his team have found ways to navigate this by working with lending sources familiar with the New York and Florida markets, who are more open to evaluating the specifics of the building’s condition.
These lending sources don’t automatically reject a building flagged as unsafe; instead, they assess the situation based on the building’s actions. For Maimon, the key is showing that the building is already addressing the issue, whether by raising funds and/or starting repairs.
“They may want to see that the building is aware of the issue, that they’re already doing something about it,” he said, pointing out that lenders are more likely to approve loans if there’s a clear plan in place to resolve the unsafe designation.
One of the more frustrating aspects of these designations, as Maimon pointed out, is that they often sound worse than they are.
“The unsafe designation sometimes sounds worse than what it actually is,” he added. The broad language of the term can make lenders fear catastrophic scenarios, even when the issues are relatively minor and easy to remedy. For Maimon, understanding the details of the inspection reports and knowing how to navigate the nuances of lender questionnaires can be crucial. He described how certain lenders phrase their questions differently, asking whether there are structural issues that affect “habitability or soundness,” which can help bypass concerns about superficial problems.
The financing options for buildings with the unsafe designation tend to be more limited, often leaning towards adjustable-rate mortgage (ARM) products being the only option.
“It might limit what loan products the client can get, in addition to being a little bit higher rate,” Maimon explained, estimating that rates can be up to about half a percent higher than market rates. However, he noted that these are temporary issues. Once the necessary repairs are completed and the unsafe designation is removed, buyers can typically refinance into more favorable terms.
“These are temporary issues that will usually be resolved within one to two years max, depending on how extensive the work is,” Maimon added.
Interestingly, this situation can sometimes present an opportunity for buyers willing to navigate the financing challenges. Since buildings with unsafe designations are harder to market, they may come at a discount.
“The buyers who are willing to buy despite these temporary issues may be theoretically getting a better deal on that property than they would otherwise,” Maimon pointed out. Buyers willing to take on these properties may find themselves in a better negotiating position, allowing them to purchase at a lower price and then refinance once the designation is lifted.
Education plays a crucial role in this process. Maimon emphasized the importance of both buyer and agent awareness.
“As a consumer, you want to be aware of it, but as an industry professional, you have to be aware of it. You have to know how to navigate this,” he stressed. To aid in this effort, Maimon has taken steps to educate both clients and real estate agents. He hosts a podcast and has created YouTube videos explaining how to search New York City’s Department of Buildings records to check a building’s status. These resources are designed to help both agents and buyers avoid surprises later in the buying process.
“We tell agents to check with us when they’re getting a new listing so they can circumvent potential implications of an unsafe designation for the building their listing is in” Maimon explained.
“I think it’s just something that people need to be proactive about, You can’t hide from it. Eventually it’s going to come up and, as a productive lending partner, you need to know how to react quickly and decisively when it does.”
