These days, every last aspect of a loan application has to meet 100 percent of the rules, even 99.99 percent won’t do. This means condo boards must be vigilant to ensure that owners who wish to refinance can and, more importantly, buyers who wish to buy can easily get loans.
There are many aspects a lender looks at in approving a condo project, and every single one of them must pass or the entire project may be deemed ineligible for Fannie Mae or Freddie Mac loans. While there are other sources of loans that do not rely on Fannie or Freddie, those lenders usually do not offer fixed rates, and they may have much higher down payment or credit requirements. The quickest way for an entire condo project to drop in value is if prospective buyers who want a fixed rate or do not have 20 percent down can’t get a loan based on project approval.
One of the biggest issues we see is short term rental activity that is evidenced by numerous postings on the Internet, even if there is no front desk or rental program sanctioned by the HOA Board. There are many associations in the valley where a few owners rent their places short term either on the ‘net or via a local management company that advertises online using the association’s name. When a loan underwriter sees a loan that is in a resort area like Vail or Avon they automatically go to Google or VRBO and put in the association name to see if they can find short term rentals in the building. Generally, if they get more than one hit after checking several sources the property is deemed ineligible.
I was told by a local attorney once that it would be possible for an association to register its name and restrict usage, but have heard some who disagree that would be enforceable. I would say it is worth a try.
The next big issue we have run across lately is the number of owners delinquent in their dues, if over 15 percent of the owners are 30-plus days late, the conversation is over. I know more than once recently that managers have had to really put the pressure on a few owners because a refinance or sale was being blocked. If that happens and the rate lock expires or a contract date for loan approval stops then a lot of people can be financially damaged. Boards and property managers need to be very diligent about late payers.
Another frequent problem is if one owner owns more than 10 percent of the units.
Even in small buildings of 10 units or less there is a problem if someone owns two units. Oftentimes there is nothing anyone can do, although the problem can be brought up if other owners are aware of the rule and see a potential sale about to happen. There are several small complexes in town that this is an issue in.
Another problem we run into with small associations is that often there is no formal budget or dues, often neighbors just chip in periodically to pay for the snow plowing or whatever else comes up. This creates a problem as HOAs must have a budget and balance sheet.
So if you own a condo, it is wise to attend the annual meetings, review the books and ask questions of your manager or board members. If you are buying a condo (or are a Realtor about to list a condo) it is best to check into the operation, ownership and financial health of the association.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers.