HOA defaults derail financing

REThink Real Estate

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Feb. 18, 2010

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REThink Real Estate

Tara-Nicholle Nelson
Inman News

Q: I'm looking to buy my first home, and I found this one condo complex in town that I fell in love with. They are only a couple of years old, but they're selling for about half of what they sold for when they were new -- and there are still some never-lived-in units being sold by the developer. I was outbid several times, and then my broker and I started to see a lot of the units we had lost come back on the market.

We found out that the homeowners association (HOA) dues delinquency rate is 29 percent, so most of the contracts are falling apart because the lenders won't do the buyers' loans. Now there are a ton of units over there at even lower prices than before, but it seems like no one can really buy them. Are there any alternative ways to buy a condo when the HOA delinquency rate is this high?

A: Your situation illustrates why I constantly advise condo owners to slash every other discretionary expense before they fall behind on their HOA dues. Almost nothing devalues a condo unit and makes it unsellable faster and more irretrievably than being located in a complex whose HOA dues delinquency rate is higher than 15 percent.

With higher than a 15 percent delinquency rate, most lenders won't fund loans on the property, though there are some who don't even have a delinquency-rate guideline for buyers with oodles of cash down and impeccable credit. (Their theory is that these buyers are so unlikely to walk away from their investment in the property that the HOA delinquency issue is moot.)

The only alternative financing methods I know to workaround the delinquency-rate issue are to put more than 20 percent down and find a lender who will waive the issue, as a result, or to pay cash and circumvent all lending requirements whatsoever.

These days, lenders are all about minimizing the risk that the buyer will walk away from their unit and/or run up big liens and other bills that are secured by the unit, like back property taxes and past-due HOA dues. Mortgage banks are spending literally millions upon millions of dollars bringing foreclosed homes current on property taxes and HOA dues, which they often must do before they can resell a bank-owned property.

Condo complexes that have higher than a 15 percent rate of delinquency on HOA dues are seen as risky by lenders.

The risk is partially illuminated by this hypothetical: What happens if the underfunded HOA can't pay its bills (e.g., roof and exterior building maintenance, grounds maintenance, security, etc.)? It can do only one of two things: dip into its reserves and/or hike up everyone's HOA dues.

Dipping into reserves exposes the HOA in the event any major repairs are needed; in that event, the HOA will be forced to impose a large special assessment against each unit owner, which increases the risk the unit owners will fall behind on something -- including their mortgage payment.

Lenders also find high-delinquency-rate developments risky because delinquencies can create a snowball effect. The more socially acceptable it is in a community to fall behind on HOA dues, the more likely people will do so when they run low on funds.

Additionally, the other owners in an HOA with a high delinquency rate are often forced to pay higher dues to keep the association afloat in light of the dues not being paid by their neighbors. That puts the squeeze on them, then they stop paying, too, and you can see how it snowballs from there.

One thing you might want to check on in your particular situation is whether the delinquency rate is being properly calculated. Many lenders do not require units that have never been owned by anyone other than the original developer to be counted among the non-dues-paying or "delinquent" units. If your broker can contact the HOA bookkeeper directly, it is certainly a worthwhile line of inquiry to find out whether the delinquency rate could be reduced by eliminating developer-owned units.

Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

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