Condo Buyers: Check Out the HOA

Thinking about buying a condo? Here’s the first thing any potential buyer should do: check out the HOA–the homeowner’s association. That’s the first thing you should do, but it’s usually far off the radar for buyers, especially first-timers. So, why does it matter?

The Whole Enchilada

In buying a condo, you are buying a share of the whole complex. You are obligating yourself financially to support the whole operation and to obey its rules.  It makes sense to know the rules, doesn’t it? Aren’t you concerned about the financial health of the group? The fact is the seller is obligated to give you all the documents relating to the HOA. It’ll be a big packet, and you will get that sinking feeling just looking at it. Fear not. Here’s what to look for.

Fees

That’s very important. What exactly are the fees and what do they cover? Typically, fees include exterior maintenance and insurance as well as exterior lighting and groundskeeping.  If your condo has lots of beautiful grounds with trickling brooks, is a high rise or if it has a pool and clubhouse or is gate guarded, the HOA is going to be higher.  Be sure to find out exactly what the HOA covers, including insurance.  Many include earthquake insurance, a comforting thought these days.

Financials

Check out the reserve fund, a special amount set aside for major repairs and replacements. Some smaller condos or those in financial distress have nothing. That means if a unit in the complex needs a new roof or it’s time to paint, then a special assessment comes into play, requiring all the homeowners to pay extra. This can run into thousands of dollars. So, it’s important to have good reserves.

Delinquencies

Make sure to find out from the HOA board or the property management company if any homeowners are delinquent in their payments  and exactly how delinquent and how many such homeowners there are. Remember that the condo complex owners are all in this together. If some are not paying or are in foreclosure, that means the rest of the homeowners have to take up the slack or dig into the reserves. Alternatively, the HOA may be cutting corners–an accident waiting to happen. If more than 5% of the owners are delinquent, think seriously about taking a pass on your purchase.

CC&Rs

CC&Rs [Covenants, Codes and Restrictions] are the rules of the condo association. Things like pool hours, color of paint, number of pets and parking rules are covered here. Make sure you are on board with the rules. If you flaunt them, the HOA can legally fine you or restrict you from using a common element, such as the clubhouse or work-out room.

Go Beyond

Make sure you check out the whole complex because that’s what you are really buying. The unit you have in mind may be gorgeous, but are they all? It’s kind of like buying the best house on the block, a definite real estate no-no. Just be sure that other units are equally attractive or you may have a great deal of difficulty selling in later years.

The Board

Sometimes it’s good to be nosy and this is especially true when you are buying a property. Read the documentation you are given. Talk to the neighbors. How often does the board meet? Quarterly is the best. Read the copies of the meeting minutes and find out what kind of issues the board deals with. Do they seem to be proactive about protecting the complex or do they seem to be just marking time? How is the board perceived by the other condo owners?

The Management Company

Unless the complex is extremely small, less than 10 or so units, it should have a professional management company. If it does not, this is not a good sign.  For some reason, the board is obsessively saving money and relying on part-time volunteers. For sure, this will result in deferred maintenance or a gradual decline in the appearance of the property. Not good.

Rental Restrictions

Because some lenders, such as FHA,  set limits on the number of rental units in a complex, HOAs have started limiting the right to rent much as mobile home parks have done for years. This may be a big negative for you, so make sure to find out the rule. Decide if you can live with it. Many condo owners go on to own single-family houses while keeping the condo as a rental. It could be you.

Most likely, you’ve checked out the place, the complex, the rules, the board and the financials and found the place is well-run with good financials. You are good to go. Get ready for condo living. It can be really fun.




 

 

Condos: Why The Complex Should Be FHA-Approved

If you hadn’t noticed, the housing market has slowed to a crawl since the expiration of the home buyers’ tax credit. For those who are trying to sell their houses either as a short sale or a standard sale, it’s becoming that much more difficult. Add to problems with appraisals, issues with underwriting and stingy banks a dearth of buyers. Inventory is up; demand is down.

Why is selling a condo even more difficult?

It seems-around here at least-that the majority of buyers still prefer a single family house with a yard for the dog and the kids and even a white picket fence. Of course, standalone homes do cost more, so frequently-though not always-the condo buyer is looking at price. Many condo buyers eke out a down payment so they can squeak into the payment and get themselves a property. Of course, there is such a thing as a luxury condo market, but we can safely say most condo buyers are very concerned with price.

What is FHA and Why Should I Care?

Enter the FHA loan. FHA is a government-backed loan which allows the buyer to purchase a property with 3.5% down and some extra money for closing costs which can be paid by the seller or the bank if it’s a short sale. FHA loans also allow lower FICO scores and higher “ratios”, the total housing cost paid by the borrower. Sometimes, FHA ratios can go to 50%, 55% or even 60%, allowing the buyer to get into the property for very little money.

Funny thing about FHA loans. During the “bubble years”, they all but disappeared. They take a bit longer to do. The lender has to know what he’s doing -a rarity in those years, and they do cost the buyer more in the long run. During those years, though, Congress  changed the loan limits repeatedly as prices soared. Today, depending on the area, loan limits run as high as $729,750. Beyond that, it’s luxury property to the FHA,and you don’t need the government’s guarantee to buy your house.

Today, because money is tight and and appraisals are often arbitrary due to new regulations, FHA-backed loans have really saved the day. Today, more than 30% of all loans are FHA, up from 3% in 2007. Big jump! For you, trying to sell your condo, this means your complex really, really needs to be approved by FHA. If it’s not, you are missing a big chunk of the market.  If you are a buyer using FHA or not, it should still matter because of what it means for resale down the road. If you buy into a non-FHA approved complex, then you may have problems selling it, too.

Is My Complex Approved and Does It Matter?

In the past, having the complex approved didn’t make so much difference because FHA would “spot” approve a  loan in non-FHA-approved complexes depending on the details. FHA no longer allows this. It makes sense, too, because guaranteeing 30% of the market has put FHA on the line and it needs to protect itself as much as possible. Now, the complex must be FHA-approved to use FHA loans.

By now, you’re wondering if your complex is FHA-approved. You don’t need to call me to find out. Just go to www.fha.gov , enter your complex’s information and voila! you will know. If you a buyer and want the real lowdown on the complex, and that is vitally important information to have–go to Check.FHAA which for a small fee tells you about approval, and outstanding liens,pending litigation, percentage of units financed by FHA, percentage owner-occupied or investor-owned. Also, the complex’s management company or Board President if it’s small should be able to give you this information.

If your complex is not FHA approved and you want to sell, the Check FHA Approval site will show you if the complex is even eligible. Then, get the HOA, the management company or even your own attorney to get the ball rolling. It’s worth it.