Tip #1: Review the Association Budget
Take a look at the association budget – are there adequate reserves being set aside for future major repairs and maintenance? If the association isn’t saving up for future repairs, then what typically happens is that owners are socked with “special assessments” which can range from a few thousand dollars to literally $60,000 or $100,000. The condo we rented last Christmas in FL on the golf coast which was worth about $350,000 was getting hit with an $80,000 special assessment to replace the siding on all the building. 2 years ago we were financing a condo unit in an association of 10 units where each owner had been hit with a $60,000 special assessment to pay for structural repairs caused by faulty workmanship by the developer. It was a million dollar repair and the association succeeded in getting $400,000 out of the developer, but the remaining owners had to come up with the other $600,000. $600,000 divided by 10 is $60,000 a piece. That special assessment caused 1 owner to throw up their hands and go into foreclosure. Of course that meant the remaining 9 owners had to pick up the unpaid $60,000 special assessment of the foreclosed owner, so another $5,400 a piece.
Tip #2: Review Homeowners Association Board Meetings and By Laws
Ask for and read the minutes from last three board meetings and By Laws of the homeowners association. What issues are being talked about? Is there controversy especially regarding repairs or maintenance? Is there anything you want to do with your property that’s prohibited in the bylaws? Remember we had the case this year of a FL buyer who wanted to rent out his unit and who found out the association was considering major restrictions on how often you could rent out a unit each year. If you’re an owner occupant of your condo unit, you probably don’t want any rentals. But if you’re buying in a vacation destination, you may very well want the ability to rent your unit.
These last three tips have to do specifically with whether or not the condo project meets the requirements for the most popular loan in America – the 30-year fixed rate mortgage:
Tip #3: Ask Yourself
Does any person or entity own more than 10% of the units? If so, the project is not Fannie Mae eligible.
Tip #4: Does the Association Have Adequate Insurance?
Fidelity insurance is required for any project with 20 or more units, and it protects the association members in the even the condo manager steals money from the association’s operating or reserve accounts. It’s a good idea to have it no matter how many units there are, but it’s required by Fannie Mae when there are 20 or more units. The insurance must cover the greater of the balance in the association’s operating and reserve account combined or three months’ worth of Association dues for the entire association.
Replacement coverage in case of fire, wind or other casualty events
- Liability insurance – $1 million is the standard for liability insurance, and the policy must allow for individual members of the association to sue the association itself if the association’s actions or inaction causes harm to an individual condo owner. This is called “separation of insured” or “severability of interests.”
Tip #5: Association Dues
What number and percentage of owners are delinquent on their association dues and how many months of delinquent association dues can a foreclosing lender be stuck paying? 15% is the magic maximum percentage of delinquent homeowners allowed by Fannie Mae. And If the answer is that a foreclosing lender can be stuck paying more than 6 months of delinquent association dues, the project is not Fannie Mae eligible either.
See more tips for buying a condo to learn more.
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