Financing woes challenge 'micro' condos

by Jemima Codrington24 Oct 2012

In fact, financing availability for any unit under 480 sq. ft. can prove tricky, say seasoned investor, their observations coming on the heels of a new Vancouver project touting the benefits of condos smaller than 300 sq. ft. Those condos are often tailor-made for young urban renters willing to sacrifice space to be close to the action.

“There are lenders that will finance properties that have extremely small square footage, but the lenders that will do it are usually backed by insurers, because the insurers typically don’t have restrictions on condo size so long as there’s nothing wrong with the building,” says Phil Edwards of MorcanDirect. “In that case, the lender will finance it as long as an insurer backs it. But for lenders that do have the restriction, if the insurer is behind it they may pass the insurance premium on to the client if it is a conventional deal.”

Some argue that an increased interest in this property size may prompt lenders to re-evaluate their stance, something Edwards says may happen once the apprehension surrounding the current condo market subsides.

“With that condo size being so small, if the person does default on the loan, there’s only a certain type of person that’s going to buy that property,” he says. “The chances of them going to be able to offload that investment are smaller.”

This could of course work in the favour of investors, who often have adequate capital or joint-venture financing to avoid having to depend on A-lenders to afford the units.

And with the success of the equally small Burns Block in B.C. (units between 226-291 sq. ft. are fetching $850/month), demand from the end-user is on its way up.

According to Edwards, if the interest from renters continues to rise and quell qualms about the condo market softening, the banks may indeed rethink their stance on financing smaller units down the line.

“At the moment, we’re seeing lenders shying away from condos altogether,” he says. “When the market is a little healthier, I think they’ll re-evaluate their position on smaller condos.”

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