A key element in the value of a condominium unit is the
value of the individual unit owner's pro-rata share of the common area owned by
the homeowner's association. What’s also critically important is the financial
condition of the association. Associations operate at break-even financially,
allowing for adding to the replacement reserves.
But because of the large number of foreclosures that have
been, are, and will be going on, there exists the potential that not enough
owners will pay their dues – and you can't have a viable association if owners
aren't paying dues. If you own a condo unit, or are considering buying one, be
aware that this scenario can have serious implications.
The first: the remaining owners have to pay increased dues in
order to make up for the shortfall caused by the delinquent homeowners. They
won't want to do this for long.
The other implication: the association’s financial straits
could drive away new buyers for the units. In fact, an otherwise well qualified buyer might find a
lender won’t approve a loan for a condo unit in a development that isn’t
financially stable. That's because a lender does not want to potentially end up
having to foreclose and get stuck with a property that they could not sell (at
any price).
Associations with a large number of non-owner occupied units
(units owned by someone but rented out to another party) are of particular
concern. An investor-owner does not have the same kind of emotional attachment
to such a property because it is not his or her home. As a result, an
investor-owner might be motivated to just walk away from the unit if he or she
owes more than the property is worth, is not getting enough rent in to cover
the mortgage payment, taxes, and association dues – and can’t see any prospect
for recovering the equity.
Currently, these associations are undergoing a high level of
scrutiny by lenders. One lender we work with will not do a loan if the number
of delinquent owners exceeds 15% of the total number of units. If you are a buyer, obtain this
information, as well as the current operating budget and most recent financial
statements, before making an offer. If you are in escrow, it is more important to get verification of these
facts early on in the process, even before ordering an appraisal. Be sure to discuss this with your agent
ahead of time.
If you own a unit in a condominium, pay particular attention
to the financial statements from your association's management company. The
delinquent dues should be reported on this statement. You should also know the
number of non-owner occupied units in the project. If there is a problem, it's
better to take action sooner rather than later.
Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.
Randy Johnson Randy is a Credit.com contributor and seasoned mortgage expert. He writes about home buying, mortgage laws and real estate finance issues. He has financed over $1 billion in properties, is the author of How to Save Thousands of Dollars on your Home Mortgage and he is a feature columnist for Savvy Borrower.
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