If you are considering buying a condominium or townhouse in the near future, make sure you perform your due diligence by reviewing the finances of the condominium or homeowners association, paying close attention to outstanding maintenance and repair issues. Under new guidelines, lenders may not be able to resell their loans to the “quasi-government” financing agencies such as Fannie Mae, who provide the bulk of support for condominium and townhouse loans.
A small but growing number of Condominium Associations are failing to meet the standards necessary to maintain their property, particularly those that converted from rental properties in the 60s and 70s — effectively extending their usable life spans – that were originally built in the 40s or 50s. Most buildings have a limited life span and if not properly maintained, that life span becomes even shorter.
What is happening in a number of condominiums is a split among residents between those who want to undertake the structural and equipment improvements and those that want to keep fees low and only do cosmetic updates. Increasingly, however, these buildings are requiring structural or equipment improvements and conflict is arising between owners who want to keep the condo fees low (primarily pitting senior citizens and those who are living on a restricted budget) versus younger, more affluent residents.
Fannie Mae has recently issued a directive that they will not purchase loans in condominium or townhome projects with significant deferred maintenance or are under orders from County authorities or inspection agencies to make repairs for unsafe conditions.
It’s not clear what the term “unsafe conditions” are in this context, but it clearly would apply to the condominium’s structural integrity and the repair or replacement of major components such as heating, air conditioning, plumbing, elevators, etc.
It has evolved into a classic Catch-22 situation: if you can’t finance-purchase a condominium or townhouse property because it won’t be repurchased by one of the “quasi-governmental” finance agencies, it will leave the market for these units to buyers who can pay cash or buyers who can convince the local bank to privately hold the Note effectively limiting the number of potential purchasers.
In this scenario, the lack of potential buyers will normally lead to a decrease in the price of the property or at a minimum a lower rate of appreciation.
It also has the potential to affect a whole neighborhood if a number of these properties are in the same geographic area. Expect that most well-run condominiums and homeowner’s associations will be making special assessments for major repairs and improvements in the amounts annually placed in reserves to around 10% of their total budget.
If you have questions on potential pitfalls to purchasing older condos or townhomes with HOAs, please contact Jon Kinney at (703) 284-7240 or jkinney@beankinney.com.
This article is for informational purposes only and does not contain or convey legal advice. Any views or opinions expressed herein are those of the author and are not necessarily the views of the firm or any client of the firm.