The Smooth Loan Process #2010-27

You Want To Buy A Condo? (or should I say con-d'oh!)

 I'm officially putting condos in the category of ridiculous. In general, I like to believe that Fannie Mae and Freddie Mac have a pretty good grasp on what they're doing. Of course, I'm not talking about their management or leadership but their loan guidelines make sense for the most part. Except when it comes to condos! I never imagined I would say this, or even worse, put it in writing but I would rather finance a condo FHA than deal with Fannie or Freddie.

Here's the story:

Our perfect buyer decides he wants to buy a condo close to work. He lives in California and commutes to Arizona. Rather than stay in hotel, he wanted something small with low maintenance to stay in while he was in town. He has no mortgage on his house in California and no debt. Excellent credit and was planning on putting a 25% down payment. His payment would be 4% of his gross income. Can you imagine having a house payment that is 4% of your income? That would be sweet. So what's the problem?

The condo he found that suited him had 15.1% of the homeowners that were currently 30 days past due on their association assessments. Fannie and Freddie only allow for 15.0%. Not, 15.0001%. 15%. There were two homeowners too many that were past due out of 397. By Fannie's rules, that makes this property a piece of junk that is not financeable. Rules are rules so fine. We'll deal with it.

My first call was to the HOA manager. She informed me that the delinquency rate was not actually as high as they were reporting because they were still counting the properties that had been foreclosed and resold but in the sale, the previous owner still had a balance owing. They just needed to write off the old balances as a loss and the delinquency rate would reduce to about 5%. Great, right? No...we would be so wrong.

We waited a month as instructed by the HOA manager and sent her a new condo questionnaire to complete (which costs $100, by the way). I was giddy with excitement for the results. When the new questionnaire arrived, we found that delinquency rate had soared to 25% What?!?! How could this be? How could nearly 40 people go past due in just one month's time?

Back on the phone to the HOA manager. It turns out that she forget to tell me that her management company had just taken over the HOA from a different management company. Many of the homeowners had automatic debits from their accounts to pay their HOA dues. With the change in management company, many of the homeowners were now paying the wrong management company or their automatic debits had stopped and they had not made arrangements to start making payments to the new management company. D'oh!

Our buyer's journey on this property has now ended. I found out the other day that the delinquency rate in this subdivision has now dropped below 15%. Once the HOA manager sent notices out to the homeowners that were paying the wrong management company, the owners made the arrangements to pay. All of this about 30 days too late for our buyer.

So in the course of two months time, the property went from almost financeable to not a chance to no problem.

In fairness, an insolvent HOA will have a significant negative impact on the property value. The intention of Fannie is to ensure that they are not financing properties with an insolvent HOA. That makes sense but somewhere along the way, common sense left on a back packing trip through Europe to go 'find itself'. Let's hope it comes back soon to join the rest of us in the real world.

The Smooth Loan Process lesson for today: Spend the time and money to investigate a condo before you put your offer on the property.

Harold Perkins
Galaxy Lending Group, LLC
602-595-1233
Harold@Perkins.com

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