Condo Financing Faces Strict Rules From Fannie Mae, Freddie Mac, FHA

Mortgage lenders have tightened the screw: It’s tougher to get approved for a loan in 2010 than it was in 2009 – and it’s a lot tougher than it was four or five years ago.

These days, mortgage lenders will want to verify all of the information on your application, including your income, assets, job status, credit history and credit score, and where you got your cash for a down payment.

At the moment, Fannie Mae, Freddie Mac and FHA account for around 90 percent of all loans being approved. So if you’re looking for a home loan, you’ll need to live by their rules.

It’s bad enough if you’re buying a single family home. For condo buyers, the application and approval process is getting even tougher.

New condo financing rules went into effect the last several months that may make financing for your condo an impossible proposition.

First, when it comes to FHA loans, most condo buildings must be “approved” properties, or buyers will not be able to finance their purchase through FHA.

In some cases condo buildings have been FHA approved for some time, but if the condominium project is not approved, the association might want to approach FHA to get the condominium project approved. If the condominium project is approved, buyers for units in that project will have an easier time getting financing.

FHA loans are now a greater percentage of the mortgage market and condominium associations must recognize that a large percentage of buyers of condos priced under $450,000 may use FHA financing. If the condo building isn’t approved, those buyers will have to find other loans.

According to Tim Are l,  condo building approval process can take up to six months, as FHA combs through the property, its budget, financials and other information.

What is FHA looking for? A wide variety of factors can sink a condo building’s application for approval, including the number of people who are late on paying their assessments, the amount of cash reserves the property maintains, and the ratio of leased to owner-occupied units. Above all, FHA will reject a condominium building if the property needs lots of repairs and work.

According to some lenders, Fannie Mae guidelines will reject a condo building if more than 15 percent of owners are delinquent in paying their monthly assessments. Likewise, if the condominiums’ budget does not set aside 10 percent towards the reserves and improvements, under many circumstances the condominium will not be approved, particularly if the condominium is located in an area where real estate values have declined or are declining.

The budget and cash reserves issue alone will sink plenty of condo buildings, say real estate observers. If a property has a budget of $500,000 and the property is located in an area that requires a full review of the condominium or the borrower is putting less than 20 percent down for the purchase of the home, Fannie Mae and Freddie Mac want to see a line item for “cash reserves” of at least $50,000 – 10 percent of the budget going towards reserves of the association. Many buildings will contribute a token amount to cash reserves, preferring to institute a special assessment if the need arises but this system will cause buyers in those building to be rejected.

There are other obstacles lurking in the wings. Developers who built multi-use properties, with commercial, retail, or restaurants on the first floor and condo units above may find that their properties will not be approved for financing.

Fannie Mae guidelines require that no more than 20 percent of a building’s floor area ratio (FAR) can be commercial. So if the building has 3,000 square feet, with a 1,000 square foot shop on the first floor and two 1,000 square foot condos above it, the property will likely not be “approved” and a buyer would not be able to get financing.

Condo buildings applying for FHA approved status (which is separate from Fannie Mae and Freddie Mac) may find a six-month wait, while analysts do an engineering study, check out the budget, perform verifications and make sure everything else with the property falls in line with the new rules and regulations.

In addition, Fannie Mae ranks counties by how badly the county’s home prices are declining. If the county ranks poorly, lenders must do a “full review” of each condo building, which will slow down the financing process and perhaps even eliminate some buildings, meaning buyers will be out of luck.

Condo buildings located in markets where property values are stable will have to undergo a less intensive review of the condominium building’s finances and documentation.

All this is bad news for condo buyers. Buyers who didn’t close before the end of 2009 may now find themselves rejected for financing if they are buying in a condo building that has not been approved or can’t be approved. Can you imagine the headaches this will cause?

Lenders say that buyers who need a loan to close on their purchase should ask whether a building is approved for financing before bothering to go for a showing.

In other cases, buyers might want to get condominium documents ahead of time to determine if the status of the condominium will be a problem for the lender. Getting that information well in advance might eliminate or limit some of the headaches buyers and seller are facing as they try to buy and sell condominiums.

While there are some waivers being granted, condo buyers all over the country will find it more difficult to finance their purchases. These days, if you can’t finance a property, the number of prospective buyers will decline, and the property value could tumble.

Condo owners and buyers beware.

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From the desk of Tim Arel

DO CONDO UNITS NEED INSURANCE?

Because it can be more efficient or economical, your condo association may insure all the building and common elements under a single package policy, commonly called an condo association insurance policy or condo association master insurance policy. The three typical ways to provide coverage, all through a condo association insurance policy:

1. Insures the basic condo association building(s) (walls, roof, floors, elevators) but leaves the condo owner the responsibility of insuring condo unit's appliances, carpeting, cabinets, wall coverings, and other items in your condo unit, and in some instances the interior walls.
2. Insures both the basic building(s) and the items within your condo unit other than personal property.
3. Insures both basic condo assocaition building(s) and includes unit owner fixtures and improvements.

In the opinion of Tim Arel , when the condo association insures the structure, a condo insurance policy is normally written to cover the condo unit owner for.

• Items not covered by the condo association insurance  policy that may be your condo insurance responsibility.
• The value of building additions or alterations made by you, at your expense.
• Value added (If you've put in a better quality carpet than was originally there, for example, this coverage would make up the difference in case of loss).
• Damage to your condo unit not compensated because of the condo association policy deductible.

Condo Association building coverage is one of the more complex parts of insuring a condo association.

In other instances, the condo association does not insure the structure. In this situation, a condo insurance policy would be written for the condo unit owner, just as it would be for an insured person with a conventional home.

Remember, however, that conditions in condo association bylaws and other governing regulations may vary widely. Be certain that your condo insurance policy covers any potential gaps in the condo association insurance policy.

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From the desk of Tim Arel

ROLE OF CONDOMINIUM MANAGEMENT
Condominium living is a multidimensional experience for the people who choose to do it. On the one hand, you do pay mortgage on your home, so technically, it belongs to you. You cannot be evicted, you do not have to renew your lease, and you can sell your home if and when you choose. Even though the unit owner owns their space and takes responsibility of most of the repairs and upkeep, however, most communities have a board of directors that then hire individuals or corporations to serve as condo management.
These individuals have many responsibilities to the community itself and should be chosen by the board with great care, as they will be directly involved with the owners themselves. Ideally your community will benefit if this person has strong social interaction skills and is well liked within the community. This serves to build strong ties between unit owners and the board, insuring smooth relationships and ease of communication.
According to Tim Arel ,  one of the most important responsibilities of condo management is that of a liaison between the board of directors and the owners of the units, it stands to reason that this person will be the one that the unit owners go to for general correspondence. Representing the collective group of homeowners is no small task. When there is a discrepancy or an emergency of some kind, it is the responsibility of the management to be on the front lines, resolving the issue and being the person in charge to insure that legally as well as mechanically, the homeowners have someone on their side.
Condo management also has a responsibility to supervise all employees of the property, including maintenance workers, repairmen of various kinds and contracted labor. They need to be paid, their payroll taxes need to be taken out, and the financial stability of the property itself must be tended to and secured. This person is also responsible for keeping records of all correspondence with unit owners and repair persons, and keeping an account of all funds that are spent, what they are spent on and who they are paid to. Even if the property itself is small, this can be a large task to complete.
If unit owners question the validity or feasibility of certain rules or restrictions that have been created within the community, condo management is who they will go to in order to get the ball rolling to either amend or completely do away with the rule. The manager represents the unit owners in front of the board in every instance. It is vital that they are holding the best interests of the unit owners firmly in mind.
In addition, creating the annual budget for the property is yet another one of the responsibilities that condo management may be required to take on. It takes a great deal of energy, time and work to keep an entire condominium community running smoothly and operating sufficiently at all levels. Consideration must be given to financial responsibilities, maintenance responsibilities, emergency actions and unit owner/board relations.
Finding someone with a strong, genuine work ethic who understands this type of responsibility can be challenging. Seek out bids from many different candidates, and take your time making the decision. Award this type of responsibility only after a thorough background search and many interviews have been conducted. Finding the right person for the job is more important than filling an empty seat. The unit owners will surely agree.
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From the desk of TIm Arel :

ROLES AND RESPONSIBILITIES OF CONDOMINIUM MANAGEMENT

Condominium living is a multidimensional experience for the people who choose to do it. On the one hand, you do pay the mortage on your home, so technically, it belongs to you. You can not be evicted, you do not have to renew your lease, and you can sell your home if and when you choose. Even though the unit owner owns their space and takes responsibility of most of the repairs and upkeep, however, most communities have a board of directors that then hire individuals or corporations to serve as condo management .

These individuals have many responsibilities to the community itself and should be chosen by the board with great care, as they will be directly involved with the owners themselves. Ideally your community will benefit if this person has strong social interaction skills and is well liked within the community. This serves to build strong ties between unit owners and the board, insuring smooth relationships and ease of communication.

Since one of the most important responsibilities of condo management is that of a liaison between the board of directors and the owners of the units, it stands to reason that this person will be the one that the unit owners go to for general correspondence. Representing the collective group of homeowners is no small task. When there is a discrepancy or an emergency of some kind, it is the responsibility of the management to be on the front lines, resolving the issue and being the person in charge to insure that legally as well as mechanically, the homeowners have someone on their side.

Condo management also has a responsibility to supervise all employees of the property, including maintenance workers, repairmen of various kinds and contracted labor. They need to be paid, their payroll taxes need to be taken out, and the financial stability of the property itself must be tended to and secured. This person is also responsible for keeping records of all correspondence with unit owners and repair persons, and keeping an account of all funds that are spent, what they are spent on and who they are paid to. Even if the property itself is small, this can be a large task to complete.

If unit owners question the validity or feasibility of certain rules or restrictions that have been created within the community, condo management is who they will go to in order to get the ball rolling to either amend or completely do away with the rule. The manager represents the unit owners in front of the board in every instance. It is vital that they are holding the best interests of the unit owners firmly in mind.

According to Tim Arel , creating the annual budget for the property is yet another one of the responsibilities that condo management may be required to take on. It takes a great deal of energy, time and work to keep an entire condominium community running smoothly and operating sufficiently at all levels. Consideration must be given to financial responsibilities, maintenance responsibilities, emergency actions and unit owner/board relations.

Finding someone with a strong, genuine work ethic who understands this type of responsibility can be challenging. Seek out bids from many different candidates, and take your time making the decision. Award this type of responsibility only after a thorough background search and many interviews have been conducted. Finding the right person for the job is more important than filling an empty seat. The unit owners will surely agree.

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CONDOMINIUMS AND SATELLITE DISHES

A reader recently asked whether an association Board could prohibit him from installing a satellite dish on the compressor for the air-conditioning system which exclusively served his unit. This is an issue that has generated much discussion during the past few years.

The Federal Communications Commission ("FCC") enacted legislation which permits owners to install satellite dishes one meter or less in diameter on portions of property: 1) in which they have a direct or indirect ownership interest; and 2) where the owner has exclusive use or control. This compressor is an amenity in which the owner has direct ownership interest and exclusive use. Based on this, it appears the owner may install the dish. However, as the wiring and other apparatus had to pass through portions of the common elements which were not for the owner’s exclusive use, the Board could still prevent him from installing the dish.

What is interesting is that the FCC regulations have been in place for several years and there is still a lot of uncertainty as to the rights of the Association to limit satellite dishes. As Association Boards are confronted with the installation of more and more dishes, they should keep in mind the following Do’s and Don’ts.

The Board should:

• Walk around the property and determine the least objectionable places where owners can install these satellite dishes. They should keep in mind that the required area may not impair the signal from the satellite.
• Require that the satellite dish, wiring and all other apparatus used to install the satellite dish does not encroach on any portions of property which are not within the owner’s exclusive use or control. Any apparatus that extends into the common elements may be removed at the owner’s expense.
• Require that the satellite dish be installed in a safe and proper manner.
• Require that the owner installing the dish on property within his exclusive use execute a Hold Harmless Agreement that will require the owner to indemnify and defend the association in the event there is any harm to person or property resulting from the installation, maintenance or use of the satellite dish.
• Require that a certain color of satellite dish be used or that the satellite dish be shaded by landscaping or other material. Please note that these types of requirements may not substantially increase the cost of the satellite dish.
• Allow a tenant to install a satellite dish which complies with the FCC regulations.

The Board shall not:

• Require the owner to submit an application which must be approved by the Board prior to installing the satellite dish. The FCC has implied that even if the response is made by the Board within as little as two days, this is an unreasonable delay on the installation of the dish.
• Require that the satellite dish be professionally installed. This was determined to substantially increase the cost of the dish. However, as stated above, if the owner has the satellite dish professionally installed, then the Board may require that the contractor be licensed and bonded.
• Enact any rules which unreasonably increase the cost of the installation of the satellite dish, unreasonably delay the installation of the satellite dish or impair reception.
• Require that owners pay a fee prior to installing the satellite dish. The FCC held that even charging as little as $5.00 is an unreasonable cost.
• Require owners to prove that they cannot receive an acceptable signal from a certain area prior to installing the dish. This was held to be an unreasonable delay in installation.
• Argue that since the Association has maintenance responsibilities over the property, that the owner may not install a satellite dish. The issue is exclusive use or control. Although the Association may maintain the property, it does not mean the owner does not have exclusive use.

Please note that the ruling also provides that an Association may install a central antenna system for all owners to use at the owner’s expense. Similar to cable installation, there are companies that install these systems for Associations. Generally, the expense is incurred by those owners who request the service. If an Association chooses to install such a service, the Board may require owners to use this service in lieu of installing their own dish, provided they can receive the desired service at a similar price without unreasonable delay.

Tim Arel suggests that by understanding the FCC regulations and taking a proactive approach to adhering to them, Associations can go a long way in upholding individual unit owner’s rights, while protecting the overall needs of the Association.

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RULE ENFORCEMENT

The first thing I advise Board members regarding rules enforcement is that the association must have clear and concise rules and regulations.

If you live in a condominium association, the Board, by law, has the right to adopt rules and regulations without the consent of the owners. If you live in a non-condominium association, your association’s Declaration will prescribe the necessary procedure for adopting rules and regulations. Generally, in these associations, the Board may also do so without the consent of the homeowners. However, make certain that this is the case prior to adopting the rules. Rules which are adopted improperly are unenforceable.

Once the Board has adopted rules and regulations, the next step is to enforce them. Prior to doing so, the Board should set up the following procedures:

• Any owner witnessing a violation should fill out a violation form and submit it to the Board of Directors. The Board should have a specific form which owners can obtain and submit substantiating the violation.
• Once the Board receives the notice of violation, they should send a form to the unit owner accused of the violation stating that there will be a hearing to further investigate this matter. The owner should be advised that the hearing will proceed in the owner’s absence. Again, the Board should use the same form in each instance.
• At this hearing, the Board should listen to the complaining witness and the accused. After doing so, the Board should convene in executive session to determine what, if any, action to take to enforce compliance.
• After the Board convenes, they should exit executive session and vote on the remedy. After a vote is taken, a notice of determination should be sent to the accused stating the outcome. This should also be a standard form.

It is extremely important that a Board follow the above procedures prior to assessing any fine. Not only does is it best practice that an owner receive an opportunity to be heard prior to the Board assessing a fine, but this approach can help insulate Boards from charges that they acted in a discriminatory manner when enforcing their rules and regulations. Although an association cannot prevent receipt of a discrimination complaint, it can take steps to minimize its exposure to such actions. By addressing each rules violation in the same manner and using the same form and procedure for each violation, the Board will aid the association in defending such a claim.

Obviously, the best rules enforcement is when there are no violations

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How a condo is managed can quickly determine its success or failure. While

many small condominiums can be self-managed, it is almost a necessity for

medium to large-sized condos to hire an outside HOA management company to

handle the responsibilities. Cost and time are the two most influential

factors all associations will consider when deciding upon the style of HOA

management, whether it be through HOA property management or

self-management.

 

The number of units in the condominium will be the main determinant of the

cost for what style of management will be implemented. Generally speaking,

the majority of professional property management companies will not manage a

building with fewer than twenty units because it is simply not

cost-effective for them. It is also not cost-effective for a small building

because they generally have limited operating budgets.

 

A positive aspect of HOA management companies is their solid relationships

with vendors and legal firms in the event an issue with HOA laws arises.

These relationships mean that vendors and law firms will make every effort

to provide great service. The vendors know they will be paid on time by a

stable management firm, and this will translate to repeat business. A

self-managed condo association typically does not have that kind of pull

with service providers.

 

When condos choose self-management, however, things do tend to get

accomplished just as well as when handled by professional homeowners

association management. When the owners have a personal stake in the success

of the association, things tend to function well. Self-management of a condo

also creates a sense of community for the owners. It is quite possible for

owners to work together effectively when operating procedures are

established and duties are delegated in a fair and consistent manner.

Subsequently, a strong sense of accomplishment will be felt among the

members when the tasks are accomplished through a concerted team effort.

 

Tim Arel believes that self-management should only be entertained when there are owners available

who have not only plenty of time available to them, but also the broad range

of knowledge required to address a variety of condo management issues all

the way from finances to maintenance issues. The cost of correcting errors

made due to poor management skills can quickly exceed the cost of simply

allowing a professional to perform the job.

 

Of course, HOA Property Management companies can also be quite expensive,

and a company may not always choose the most cost effective methods of

getting something done. The vast majority of homeowners association

management companies are conscientious about adhering to high standards of

quality, but they will generally not be as particular about decision-making

as the owners will be since they have no personal vested interest in the

property. Furthermore, outside HOA property management may not be as

receptive to concerns or observant of problems when they arise, and they may

very well ignore certain issues that an owner would catch.

 

A very important responsibility of Homeowners Association Management is

deciding upon numerous policy issues and clarifying HOA laws. Professional

HOA management companies can certainly help to accomplish such tasks;

however, consulting with an attorney can have the same outcome when

self-management is chosen.

 

When a decision must be made regarding self-management versus professional

HOA property management, there are some general guidelines to be followed.

As a rule, for buildings with twenty units or less, self-management is often

the only option. For buildings between twenty and thirty units, either

self-management or the use of a HOA management can work, depending on the

property. In buildings with thirty units or more, professional HOA

management is most likely the best choice.

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From the desk of Tim Arel:

Condos can make for a great low maintenance lifestyle, second home, or
investment property. One thing that is important to understand before you
make your purchase is the fees associated with owning the property. While
every condo is different, let's take a look at what condo HOA fees usually
include, so you have a better idea of what to expect when you make your
investment.

Tim Arel explains  HOA Fees?

To begin with, it is important to understand what HOA fees are in the first
place. A home owner's association is a group of local residents that work
together to plan neighborhood functions, amenity and communal space upkeep,
and amend and enforce condo rules in an effort to maintain the values of all
condos in the building. Condo owners are required to pay a portion of the
expenses associated with these actions in a monthly, quarterly, or yearly
fee.

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From the desk of TIm Arel :

 Many owners of condo units who want to make some money choose to either sell or rent out their unit. If you are in this kind of position, here are some tricks you can use to get the word out there (and get a good price), especially if you plan to do a lot of the work yourself, instead of letting an agent do all the work.

Firstly, catalogue the good points about your condo accurately and in detail. You might think you know your condo like the back of your hand, more so if you have lived in it for years. However, you might just miss some assets that could have netted a good customer. A good way to avoid this is to go through your condo systematically with a pen and paper. Start from the first room and proceed through each of them. You might even sub-divide the rooms into sections, so as to avoid missing things.

Tim Arel advises not to  forget assets that exist "outside" the apartment. In other words, these are advantages that have to do with the unit's location. Is your unit near convenient places like a subway station, a business center, a shopping center, or an entertainment district? Is it very close to hospitals and police stations in case of emergencies? Does the window offer a spectacular view? The building or complex in which your apartment is located might offer some excellent services that make life easier for those living there. These are all great attractions to potential buyers.

In addition, when scouting for customers, do not write off useful demographic groups without good reason. For instance, people tend to associate condo units with relatively young residents. We tend to think of older people as living in houses, or even rest homes. This is most definitely an over-generalization. Many senior citizens would not mind living in an apartment, which may be easier to maintain than a house.

Condo unit auctions are an interesting option, too. One of the best things about the process is its speed. Bidding can start and finish in the course of a single day, or even in a few minutes' time. This means that you do not have to go through the inconvenience of a long sales/marketing process, touring lots of people around the apartment and always being ready for visitors. Whether or not you set a minimum price at the auction is up to you. Setting up an auction without a strict minimum seems foolhardy, but it does tend to attract more bidders. If you really cannot decide, you might try getting a little professional advice on this question-if the advice is not too expensive. Interestingly enough, you might sell your condo unit as part of a set. Perhaps you have other properties. Or, you and some others might decide to pool your property as a set up for auction, and then divide the proceeds accordingly. Make sure that the agreement is set before the money comes in to prevent messy arguments.

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From the desk of Tim Arel:

Should you consider buying a condominium.

Condominiums tend fall into the love them or hate them position for buyers. Here's primer on condominiums.

Condominiums are all about communal living, which can be good or bad depending upon your personal views. This type of communal living doesn't refer to the failed experiments of the sixties wherein hippies packed into a structure and shared everything. Instead, the modern condominium community is all about sharing common spaces as well as rules, rules and more rules.

Condominiums come in all shapes and forms. Condos can be found in a single high rise building in a downtown area or in an apartment complex type of layout in a planned community. The structure isn't the determining point. Instead, the issue is how the properties are owned.

Unlike a stand alone home, the property lines on a condominium are the walls of the structure. Essentially, you own everything inside the condominium as your individual property. Everything outside the condominium is owned jointly with the people who own the other units. These areas are known as common areas and are subject to group rule.

Every condominium, says Tim Arel,  has a homeowners association in one form or another. The association has rules set out by the original developer regarding landscaping and so on. Members of the community are then elected to the board of the association, whereupon the immediately become a focal point of aggravation from individual owners and often wonder why they took the thankless job.

The problem with the association and condos in general is the issue of uniformity. If you desire to change the exterior of your condominium in some way, you must comply with the rules of the association. This means you cannot paint your property a different color, do landscaping and so on. For some people, this isn't a problem, but others are frustrated they can't express themselves.

When deciding whether a condominium is a good option for your next purchase, you need to carefully weigh the restrictions of a particular association. If you consider yourself an individual and want to show it, a condominium is probably a very poor choice for you.

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