Condominium Conundrum over Lunch

It is confusing to most of us who do work in real estate whether they be agents or those working in lending retail front, condominium lending guidelines are somewhat ambiguous. A lending source of mine and I hashed it over lunch, it was a good way to mix the less palatable with a savory incentive, food. Anyway, the communication didn't come across clearly or at least I was told that there was a lot of gray matter, no brains mind you, but a lot of stuff left to interpretations. After all as she reminds me, it is a guideline.

Although conventional loans are less restrictive but do require a higher down payment, FHA loans are more restrictive because it is insured by the government and the asset, in this case condominiums which have higher investment risks, requires a small minimum percentage down of about 3 to 3.5%. If you take it from the stance of a tax paying citizen, it's a process we're willing to support and agree to, a necessary process even if it is an inconvenient process for a piece of the American dream of home ownership.

FHA condo loan requirements include all of the following and but does not include all:

1. At least 51% of the total units must be owner occupied or sold, not rented out.
2. At least 90% of the total units must have been sold.
3. No single entity (i.e. business ownership, or private ownership), may own more than 10% of the total units in the same project.
4. There must be no litigation or legal actions pending.
5. The common areas must be completed with no additional assessments or special assessments separate from that of the HOA (Homeowner Association) dues.
6. The HOA reserve fund, independent from operating expenses, must be at least 60% to prevent deferred maintenance (i.e. roofs, siding, plumbing, windows, etc.).
7. Proof of Insurability, or proof that the building has been and is still insured.
8. Condo projects having more than 30 units, no more than 10% of the units can become FHA approved at any given time. OR if the condo projects having less than 30 units may have no more than 20% of the total units become FHA approved at any given time.
9. There are exceptions and the guidelines can be tailored to fit each projects needs.

Some condo projects may have their building FHA ready - that just means the project has been put through the process, the ringer, to get the entire project qualified for FHA loans. The process has a cost - time. What if the condo complex doesn't have the time or want the inconvenience just to have the entire complex qualify for just one seller? That's where spot approval steps in. It means what it says, on the spot approval. What it doesn't mean is that it will be quick. No surprise there.

Here is a guideline for what a spot approval may look like. Keep in mind that this is an August 1996 exurb from hudclips.org:

SUGGESTED CHECK LIST FOR SPOT LOAN APPROVALS

_______ 1. The legal documents of the homeowners association do not contain a right of first refusal or restrictive covenant.

_______ 2. The unit is part of a condominium regime that provides for common and undivided ownership of common areas by unit owners.

_______ 3. The project, including the common elements, and those of any Master Association, are complete, and the project is not subject to additional phasing or annexation.

______ 4. (a) There are no special assessments pending.

______ (b) No legal action is pending against the condominium association, or its officers or directors.

______ 5. The common areas have been under the control of the homeowners association for at least one year.

______ 6. At least 90 percent of the total units in the project have been sold. Verified by _________________________.

______ 7. At least 51 percent of the total units in the project are owner-occupied. Verified by ______________________.

______ 8. There are no adverse environmental factors affecting the project as a whole or individual units .

______ 9. No single entity owns more than 10 percent of the total units in the project. Verified by ______________________.

______ 10. The units in the project are owned in fee simple or the units are held under a leasehold acceptable to FHA.Leasehold in file.

______ 11. The owners association has adequate common area insurance coverage. General liability, replacement coverage,etc. reflects the character, amenities and risks of the particular development. Flood and other insurances carried, when applicable.

______ 12. General maintenance level of common elements is acceptable and there is no deferred maintenance, based on the comments by the Appraiser and/or the pictures.

______ 13. The owners association has a reserve plan and are serve fund, separate from the operating account, that is adequate to prevent deferred maintenance. The amount of the fund is $_________ as of __________.

_______14. (a) For projects consisting of over 30 units, no more than 10 percent of the total units are encumbered by FHA insured mortgages. Verified by ___________________.

_______ (b) For projects consisting of 30 units or less, no more than 20 percent of the total units are encumbered by FHA insured mortgages. Verified by _______________.

Quality Concierge Service: The Icing in Condo Living

How is the concierge service at your condominium?

Aside from the typical drill when purchasing a condo, i.e. location, HOA dues, occupancy rate, special assessment, etc., have you considered how important it is to have good quality concierge services when purchasing a condo? I hadn’t given it much thought until a colleague and I went to stage a condo unit in downtown Bellevue. My first impression of this supposed desirable condominium was poor. There were no warm greetings, salutations, acknowledgements, or offers for help of its incoming and outgoing residences or its visitors. This concierge was preoccupied and our visit was an intrusion rather than a welcome to this person.

Okay, I’ll admit this seems silly and petty but hear me out. A condominium building is an encased microcosmic community, a village within a metropolis. It should be an oasis from a sea of city commotion. Wouldn’t you agree? So, in such an environment, quality concierge services have a rippling effect on resident attitudes, the quality of life within, and should help resonate desirability. Good concierges can bring in a sense of community in an already increasing chasm of neighborliness. It’s a sorry excuse to create an artificial community but it has to start somewhere. It’s a hefty job and most of the time a thankless position.

Here’s a positive experience I want to end with. Julie works at the Astoria off of Old Main in downtown Bellevue. I met her while showing several units in the Astoria. My clients had made several visits to neighboring condominium complexes in the surrounding downtown area but they felt Julie’s great concierge services persuaded them to more seriously consider purchasing the units there. My clients were looking to purchase something within the interior courtyard which at that time was not on the market. Julie took time to show us the floor plans, the building design and then proceeded to jot down the units that faced the inner courtyard that in due time would become available. She discussed with us the history of the building and its management. The experience for them as well as for me was one of care, importance, community and a personal touch. Julie was very knowledgeable, she knew her residents, their needs, building activities, she knew of units for sales long before they came on the market, she offered helpful suggestions, and her persona communicated to us that she loved working there.

I believe great concierge service is the icing on the cake. They can be the hub of community interactions and the epicenter for positive influences. So if you happen to have a great concierge, please do compliment them plentifully, acknowledge their good services, and encourage them to continue their good services by showing your appreciation.

New Condo Underwriting Guidelines Effecting Condo Loans

Mr. M came to my office asking for advice about whether or not he should sell his condo now or later. It is always a good time to sell if you need to sell; however, I believe his concerns were more than real estate related. He lives in a condominium complex where the homeowner association was borrowing against the HOA (Homeowner Association) funds which are collected monthly from the associated condo members. Could the HOA action affect the value of his condo, he asked. If the HOA action is questionable, i.e. illegal, shows poor management, or jeopardizes quality of life, yes it can affect the desirability and the value of the condominium. Any material facts or concerns that may affect the value of the condominium are required disclosures and they can often turn away potential buyers. But to not disclose these material facts is fraud.

With increasing scrutiny from lending underwriting guidelines, condominiums have become the forefront casualty of tightening guidelines because of its higher level of risk for the mortgage investors. Condo ownership has associated dilemma and problems that can become cancerous. A few bad rotten apples can spoil the entire lot. Fannie Mae has new guideline requirements such as no more than 15% of the condo HOA dues can become delinquent more than 30 days in new condo projects and homeowner association must have at least 10% of its budget placed in reserves for repairs and insurance deductibles. However, each condo projects are assessed on a case-by-case basis.

When purchasing condominiums homebuyers should be conscientious and be informed of possible liens, defects, special assessments, history of assessments, pending litigations, delinquent dues, percentage of homeownership versus rental units, quality of management and maintenance, board meeting minutes for the past two years, HOA meeting minutes for the past two years, the insurability of the condo complex, and whether or not a reserve study was done.

Having a reserve study has not been a common practice but because of poor management of condo finances, it is a practice that has become highly recommended. Although the practice of having a reserve study is strongly encouraged there is no enforcement power except when a lending underwriting guideline may require monetary reserves set aside for a rainy day and for insurance. So, if the condominium don't meet those guideline requirements, the buyer cannot obtain a loan from that lending institution for that particular condo complex. However, as lending institutions differ from each other their underwriting guidelines may also differ. It is best to do some research to find loans that best fit your needs and know well the condominium you plan to buy into.

Keep in mind that townhomes are considered condos in the State of Washington; and to be safe, double check lending requirements in all complexes that have HOA dues to determine whether or not they are subjected to any new lending requirements.