Step 15 to Buying a Home: Review the Condo Documents
If you’re buying a condo, at some point you will need to review and approve or disapprove the condominium documents.
These documents generally include the Declarations and Bylaws, the Rules and Regulations, the current year budget, the meeting minutes, and the 22.1 disclosure. If you’re buying a single family home or a multi-unit building, this step won’t apply to you.
The reason you need to review these documents is that when you buy a condo, you’re not just buying your particular unit, but you’re also buying into the building. You need to figure out if the building is stable and healthy financially speaking or if there could be potential problems, either with big upcoming maintenance issues or delinquent condo owners who aren’t paying their HOA fees, etc. It’s also important to learn about the building’s rules such as:
- Are there pet restrictions (number of pets, breeds, weights, etc.)?
- Can you move in any day/time or are there restrictions on when you’re allowed to move in?
- Are there are move in fees or procedures such as needing to reserve an elevator?
- Can you lease your unit and, if so, for how long?
- Is more than 50% of the building renters? If so, there is a good chance your mortgage lender won’t approve the loan as a building with too many renters is a risky investment
For all the above reasons, I strongly urge you to read each condo document thoroughly. Write down any questions or issues you’d like to know more about as I can ask for clarification or further documentation. Pay particular attention to the meeting minutes as this is often where you’ll learn what’s really going on in the building and any future plans for big ticket repairs.
So here are the top 10 questions you should ask the HOA or property management company when considering buying a condo:
- “What’s the beef?”
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.
- “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.
- “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
- “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
- “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.
- “Are most of my neighbors’ landlords or owner occupants?”
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.
- 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.
- “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!
- “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.
- “Can I ‘shop ‘til I ’ 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). After you’ve read the condo docs, email me any questions you have and whether you feel comfortable going forward, want to cancel the contract or would like additional information.
Go back to Step 14 to Buying a Home: The Appraisal, go forward to Step 16 to Buying a Home: Set Up Homeowner’s Insurance.