1. “What’s the beef?”
Take a look at the minutes from the most recent 2 or 3 board meetings to see what the owners have been griping about. These documents can give you great insight about potential headaches you might encounter should you choose to live in the building. In addition, if you’re doing a FHA loan, the lenders will ask for these as part of their FHA loan-level review to insure there are no major issues that could adversely impact the operation or marketability of the project.
2. “Should the project have a Chapter of Deadbeats Anonymous meeting here?”
Find out the 30-day delinquency rate of present owners in terms of paying their HOA fees. The maximum allowed by Fannie and Freddie is 15% of the total number of units. FHA allows 15% of the owners to be 60 days delinquent. Therefore, if more than 15% of the current owners are late on their HOA fees, you may have trouble getting a loan for a unit in that building.
3. “Is there a Rainy Day Fund?”
Often times, lenders must review the homeowners’ association current budget to determine that:
- the budget is adequate (i.e., it includes allocations for line items pertinent to the type of condo
- it provides for the funding of replacement reserves for capital expenditures (such as roof replacement) and deferred maintenance – at least 10% of the budgeted income should be put towards the reserves
- it provides adequate funding for the building’s insurance deductible amounts
4. “Am I covered?”
Does the association insurance include?
- a $1M Commercial General Liability policy on a per occurrence basis, and
- Hazard Insurance with 100% Replacement Cost coverage and no coinsurance, and
- A Fidelity Bond that protects the HOA against embezzlement or other loss of funds (21 and more units)?
- Are the interior finishes of the unit covered by the Hazard Policy or will the buyer have to purchase a separate walls-in policy?
Prohibited Project Insurance Practices
The following are not permitted:
- A blanket policy which covers multiple unaffiliated condo associations or projects which do not meet FNMA requirements, or
- a self-insurance arrangement whereby the owner’s association is self-insured or has banded together with other unaffiliated associations to self-insure all of the general and limited common elements of the various associations
5. “Does Perry Mason live here?”
Currently, mortgage loans in projects with any type of litigation are ineligible for delivery to Fannie Mae, Freddie Mac and HUD. Litigation, however, can vary from having no impact on the project to having a major impact. In recognition of the various types of litigation and potential impact to a project, the current policies related to litigation are as follows:
·Any project (condo, co-op, or PUD) for which the homeowners’ association or co-op corporation is named as a party to pending litigation, or for which the project sponsor or developer is named as a party to pending litigation that relates to the safety, structural soundness, habitability, or functional use of the project is ineligible.
The following are defined to be minor matters and may be acceptable:
· the homeowners’ association is the plaintiff in an action to collect past due homeowners’ association dues, or
· the homeowners’ association is named as the plaintiff in a foreclosure action, or
· >the homeowners’ association is named as the defendant in litigation for which the claimed amount is known, the insurance carrier has agreed to provide the defense, and the amount is covered by the association’s insurance (Slip & Fall), or
>· the homeowners’ association is named as a ‘Necessary Defendant’ in a mortgage foreclosure suit, or
· the homeowners’ association is named as a defendant in non-monetary litigation involving neighbor disputes or rights of quiet enjoyment.
6. “Are most of my neighbors landlords or inhabitants?”
Does the association have any restrictions on renting units?
If yes, do those restrictions comprise a prohibited restraint on conveyance per the Fair Housing Act (24CFR – 203.41)?
Are first mortgagees exempt from any Right of First Refusal or Leasing Restrictions? If not, the project may be non-warrantable.
The requirement that a prospective buyer or renter provide ‘character and/or credit references’ to the HOA Board is considered discriminatory by HUD.
Generally a good rule of thumb is that if more than 50% of the building is renters, you may have trouble getting a mortgage in that building.
7. Am I my association’s keeper?”
Is the project professionally managed or self-managed? Each type of management presents its own unique risks with self-managed properties representing greater risk.
8. “Are there any Real Estate Barons in the project?”
Per Fannie, and Freddie no single entity (including a person) may own more than 10% of the total units in the project. HUD now allows a single entity to own up to 50% of the units. For example, if you’re looking to buy a condo in a 3 flat building and 2 of the units are one person you probably won’t be able to get financing for the unit you’re interested in purchasing. Crazy right!
9. “Would the project be “at home” in Universal Orlando or Walt Disney World?”
Does the project function like a timeshare or condo-hotel? If so, the appraisal report may identify project characteristics that do not definitively determine that the project is a condo or cooperative hotel; however the report may provide evidence that would require the lender to perform additional research. Such project characteristics include, but are not limited to:
- a central telephone system
- room service
- units that do not contain full-sized kitchen appliances
- daily cleaning service
- advertising of rental rates
- registration service
- restrictions on interior decorating
- franchise agreements
- central key systems
- location of the project in a resort area
- owner-occupancy density – the project may have few or even no owner occupants
- projects converted from a hotel or motel
- interior doors that adjoin other units
If any of the above applies, it may be difficult for you to obtain financing in that building. In addition, lenders must thoroughly examine the appraisal and contract of sale to determine if there are guaranteed rent-backs, references to rental pooling or management agreements, and SEC filing references and/or prospectus documents.The Internet has become a useful tool for obtaining project and unit-specific information. The applicable project’s Web site may contain information on the project type, amenities, and the availability of units for rent.
10. “Can I ‘shop ‘til I drop’ without leaving the project?”
Does non-residential usage exceed 20% of the Gross Building Area for a Conventional loan or 25% if FHA? If yes, the project would require a ‘Project Waiver’ for Fannie Mae and a ‘Waiver’ by HUD (which is very difficult and time consuming to obtain because only the Housing Secretary can grant a Waiver).
Have more questions? Email us at shay(at)buyselllovechicago(dot)com as this stuff can be confusing!