A high number of condo sales never make it to the closing table. A common problem lies with the condo association. When buying a condo, most buyers are not aware that in order to get a mortgage in a condo building, the condo association (HOA) has to qualify – not just the buyer.
For most mortgage loan products, a condo building must be deemed“warrantable” in order for a buyer to buy a condo in that building.
Buying a Condo? The Condo Association Could Make It Fail!
In addition to reviewing the extra expenses with condo ownership, you’ll need to consider these common issues with the association. You’ll be able to review details on the association when you make an offer to buy a condo.
#1 Inadequate Reserves
It’s important for condo associations to save money just as a buyer needs to budget savings to buy a home.
The HOA must show a current budget that allocates 10% of its annual HOA Dues to Reserves. This is essentially the association’s savings for major repairs and maintenance over time.
An association that is not saving at least 10% annually is not likely to have accumulated enough to cover these repairs (such as a new roof) when needed and will have to charge the owners to cover it. Unexpected charges to owners mean more risk to banks holding mortgages in the property.
#2 Existing Litigation By or Against the Condo Association
Existing litigation by or against the HOA can prevent a condo sale. Lawsuits filed for construction defects are particularly problematic because they indicate serious repair issues that could be extremely expensive for an owner.
#3 High Single Entity Concentration
If a single owner or investor owns more than 10% of the total units in the association, the project will be rejected for many mortgage products.
This is typical of many projects developed during the real estate boom of 2004-2007, when developers were unable to sell off all of the units to new owners after the market tanked.
#4 Excessive Delinquencies
Non-paying neighbors are a red flag for obvious reasons – and buyers should pay attention to this item. When everyone isn’t paying, the association can’t pay its operating expenses and fees increase for the paying owners.
If too many owners are behind on their dues, it can also make it impossible for their neighbors to sell. Condo owners not paying HOA dues could end up in a foreclosure sale. This could create more problems for condo ownership.
#5 Too Much Commercial Space
Many condo buildings are developed with retail or office space on the ground floor. This allows developers to sell the residential real estate above and continue to profit from leasing the commercial space. Good for the developer, bad for the residential owners. Excessive commercial square footage can cause a mortgage to be denied by a mortgage lender.
Many condo buyers are unaware of the pitfalls that they can encounter before closing that can prevent or delay buying a condo.
It’s important to find out as much as you can about the association before you sign a contract to buy a condo that you may never be able to call home.
About the Author
Lauren Peddinghaus is a contributing blog writer for the Delmarva Home Relief Blog educating readers about condo ownership. Lauren Peddinghaus is co-founder and CEO of CondoGrade. She has over 10 years of experience in condominium accounting, legal compliance and management. Read More Blogs by Lauren Peddinghaus here.