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Renters complicate condo financing

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POSTED May 17, 2012 6:32 p.m.

DEAR BENNY: Four years ago I bought the cheapest condo in town, intending to buy a house soon. However, I learned that our complex doesn't qualify for mortgages that Fannie Mae would repurchase because landlords own more than half of the units in the complex.

How much more does a purchaser pay for a mortgage that doesn't qualify for repurchase by Fannie Mae?

What can we do to change our rules to make owner-occupancy go over 50 percent since landlords own the majority of units now? --Russel

DEAR RUSSEL: Many associations throughout the country are facing this exact problem. Fannie Mae, Freddie Mac and especially the Federal Housing Administration (FHA) have been so "spooked" by the number of association foreclosures -- especially in California, Nevada and Florida -- that they all have tightened up the qualifications one needs to buy (or refinance) a unit in a community association.

But it's not only about the number of investor-owners, although that's one of the issues. If there are too many delinquencies, or if the reserves are too low, that would also disqualify the entire association from being eligible for such loans.

And to add insult to injury, spot loans are no longer available. A spot loan was a loan made to an individual condo owner, based on the credit worthiness of that owner and not on the status of the association. Now, however, unless the association is approved by FHA, for example, individuals will not get an FHA-insured loan.

I am concentrating on FHA because that has become the primary source of funding for loans to individual community association borrowers.

If you cannot get a loan backed by the secondary mortgage market, you will probably pay a quarter to a half an interest point higher. But more significantly, your down payment will be high, perhaps 10 to 20 percent of the purchase price.

What can your association do? There are professional companies that assist in attempting to get FHA approval. You can get some names from the Virginia-based Community Associations Institute online at www.caionline.org.

Many associations are attempting to deal with the high level of investor units, because if there is more than 50-60 percent in your association, it won't pass muster with those secondary financing agencies. The board cannot merely enact a rule prohibiting rentals (or putting a cap on the number of rentals).

The safest route (which has been approved by several courts around the country) is to amend your highest legal document (in a condo, that's the declaration; in a homeowners association, they call it the CC&Rs (covenants, conditions and restrictions).

How, you will ask, can we convince current investor-owners to vote for a restriction on rentals? Simple: The amendment will grandfather those investors so long as they remain owners. The investors should understand that if and when they ultimately want to sell their units, their potential buyers may not be able to get financing based on FHA standards and requirements.

But you must talk with your association's legal counsel to make sure you are going down the right path.

DEAR BENNY: I have a question regarding the master policy. We are a condo community with 27 freestanding units. When a claim is made on the master policy, who is responsible for the deductible amount required on a claim for only one unit? --Jim

DEAR JIM: From my experience, the deductible is usually considered a common expense. That means that even if there is a claim for only one unit -- and even if that unit owner's negligence was the cause of the claim -- all of the owners have to pay the deductible.

Typically, this is specifically spelled out in the declaration or the bylaws of the condominium. Usual language: "the insurance deductible is a common expense."

That doesn't mean it cannot be changed. Many of the condo associations that I represent in the Washington, D.C., area have amended this language to impose what we call "strict liability." If the problem arises in a unit, regardless of fault, the unit owner has to pay the deductible.

And, if the unit owner has his/her own condo insurance coverage (called an "HO-6" policy), that policy will pay the bulk of the deductible -- minus, of course, the deductible for the HO-6 policy.

Let's give an example: The typical deductible for a master insurance policy is between $5,000 and $10,000. If there is a fire in a unit (or if a washing machine hose bursts) causing major damage throughout the complex, the unit owner will have to pay the deductible. But his HO-6 policy has a small deductible -- usually no more than $500. So, the HO-6 pays most of the master deductible and the owner pays no more than $500. A win-win for all.

Keep in mind that the master policy covers common-element damage, but will pay for repairs to the walls and ceilings of a unit. However, the master policy will not pay for damage to an individual unit, nor will it cover theft or fire of your personal belongings. In fact, many master policies will refuse to pay for what is known as "betterments," i.e., new flooring, an upgraded kitchen. This is even more reason to have the HO-6 policy.

But, two caveats: I strongly recommend that every condo owner obtain an HO-6 policy. If possible, I would like to see a bylaw requirement to this effect.

Second, the condo will have to amend its legal documents to change the deductible requirement. This will require a supermajority vote, either a two-thirds or three-fourths vote. That means that the board will have to mount an educational campaign to explain why such an amendment is beneficial for all owners.

DEAR BENNY: How can a homeowners association change its status from nonmandatory, making it a mandatory association?

There are roughly 497 lots in our subdivision, and approximately 95 percent of these lots have already been built on. The people who are members of our association would like to change the association from nonmandatory to mandatory, making every property owner a member of our association.

Our annual dues are $30. This low cost of the membership is because the work is done by the members of the association.

What is the procedure for making our association mandatory so that every property owner would be required to join the association?

Every time this comes up at our semiannual meetings no one seems to have the answer. Would it require a certain percentage of the property owners to agree to this change? Each property owner receives notification on where and when the semiannual meetings will be held together with the proposed agenda of the meeting.

If you can't give us an answer to this question, perhaps you can advise us on where we can get a legal answer. --Kay

DEAR KAY: Jim Slaughter, a North Carolina attorney, fellow member of the College of Community Association Lawyers, and friend of mine, gave me this response:

"Generally, we see voluntary associations become mandatory planned communities through the preparation of a declaration/restrictive covenants with language to create a community association (an obligation that runs with the property, creates an association, requires payment of common assessments to pay for common property expenses) signed by members who wish to belong.

"The incentive for owners to sign is typically loss of any prior services if they don't (join), which might include a pool, clubhouse, tennis courts, landscaping, cable, Wi-Fi, or even water from a community system. In situations where there are few services provided, it may be difficult to get owners to consent to such restrictions."

Bottom line: There is no magic bullet. You need an attorney to draft the legal documents that would create a mandatory association. Then, you have to mount a good old-fashioned "political campaign," just as if you were running for office. Get a committee of interested owners who will go from door to door asking owners to sign up.

You cannot force owners to join. But, as Jim points out, make sure they understand that failure to join may deprive them of association benefits.

The Community Associations Institute (CAI) is a trade association composed of community associations, property managers, attorneys and others involved with such associations. You should contact them for assistance, including suggestions for attorneys in your area, online at www.caionline.org.

 

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