Home Owners Associations. The very words strike fear in many folks. And often with good reason in this economic environment.
What’s the big deal you ask? Well more and more we are seeing issues with HOA’s. These issues vary from lending hurdles to serious financial shortfalls within the association.
Here are a couple of examples of what I have heard of…and seen happening.
1. There are no mainstream lenders I am aware of that will fund a loan in an association that has MORE than a 15% delinquency in HOA dues. This is a HUGE issue here in Arizona where it seems every other residence is either a short sale or a lender owned property. THESE UNITS ARE TYPICALLY ALL DELIQUENT IN THEIR HOA DUES. So…even if you are buying with cash…it is still a concern. Why? Because…someday you will be a seller…and could very well have a hard time finding a buyer! Who knows what the future will bring. But for now lending guidelines are VERY TIGHT with many restrictions around condo/townhouse purchases.
2. It only goes to reason then…that if many of these homeowners are not paying their dues the HOA is oftentimes insolvent. So what happens if the complex is in need of painting? Or repaving the streets and parking area? Or it is time to re-roof all of the units? Well, it’s a little thing called ASSESSMENTS! For something like paving it can very well result in an assessment in the thousands.
When it comes to checking up on a reserve fund, there are two good rules of thumb. First, about 20% to 25% of your dues should go toward the reserve fund, says Robert Nordlund, president of Association Reserves, a California company that specializes in reserve accounting. Second, there should be a long-term schedule for the reserve fund in the annual budget, including a projection of upcoming expenses for each common-area item: painting, pool maintenance and so on. Reserve accountants suggest that the account should contain no less than 70% of the projected reserve budget. If the account is 30% funded or less, you can expect to be hit with some big assessments down the road.
An additional challenge is getting the data and financial information from the HOA in a timely manner. It might be a good idea to ask the seller to provide a profit and loss statement during the buyer’s inspection period. This can at least give a glimpse into the financial soundness of the complex. Another good tool is requesting that the seller provide the buyer the minutes of the last several HOA meetings. This can sometime give the buyers a bit of insight which may otherwise go unmentioned. Like “potential” assessments that may be on the horizon. Of course, if the home is a foreclosed property and is lender owned…the buyers will not be getting any information from them!
So…I guess the old saying “buyers beware” is the best rule to follow. Also, if you are planning on purchasing with new financing, make sure you have a VERY good lender on your side. Someone that is VERY up-to-date with all of the nuances of today’s requirements.
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