Is That Crashing Sound Your Homeowner Association?

The housing market has been taking huge hits over the past few years because of economic conditions, but one segment of real estate will have more than its share of problems… condos!

If you have a home with a Home Owner’s Association, or contemplating buying a home (condo, townhouse, etc) with a HOA, you need to investigate its financial viability.

Questions to ask your HOA representatives:
1.    How many units are presently in arrears in paying their dues?
2.    How many units are in foreclosure, or have Notice of Defaults against them?
3.    What is the condition of the HOA reserves?
4.    Are there any potential HOA fee increases, or special assessments scheduled?
5.    Is there any pending litigation against the complex?
6.    What is the percentage of non-owner occupied units in the complex?
7.    Is the complex FHA approved?

Hopefully your HOA is in great shape, but don’t take it for granted that even though it’s been fine in the past, you don’t have to stay on top of it. Reality, many HOAs have substantial financial pressure being put on them due to homeowners’ non-payment of dues, bankruptcies, or units going into foreclosure. As the financial condition of the HOA deteriorates, the underfunding of the reserve accounts can become critical. This will put more pressure on the homeowners that are still paying their dues, to cover a higher percentage of the complexes overhead. Expect higher HOA dues and special assessments to recapitalize the depleted reserve account.

To make matters worse, no matter what you hear in the media about the government helping with real estate financing, the loan underwriting guidelines have tightened substantially on condos.  Instead of the old standard 80% loan to value, lenders now demand higher interest rates for condos over 75% LTV. Fannie Mae won’t purchase mortgages in complexes in which more than 15 percent of the owners are 30 days late paying their association fees.  Also Fannie requires that 70 percent of units in a new building be presold – up from the previous 51 percent standard.  All these factors discourage lenders from approving condo loans.

Piggy-Back secondary financing is gone. PMI (Private Mortgage Insurance) needed for condo financing over 80% LTV for condos in “soft market” counties like Los Angeles, has become non-existent. Only if the condo complex is FHA approved is a high LTV loan possible.

If a complex is in trouble and a buyer can’t get an attractive loan, the resulting smaller buyer base will contribute to the values dropping more than they would if it was only market driven.

If an existing owner is over encumbered, or can’t refinance into a more attractive rate, while being pressured by the HOA to pay higher dues, they may default, perpetuating the negative cycle.

Ask your HOA representatives questions asap so you can make informed decisions.

Author is Ron Henderson, President/Broker of Multi Real Estate Services, Inc. California License #00905793. Contact Ron at ronh@mres.com