The most important and succinct information one can receive regarding the financial health of a condominium building is the information provided to lenders from a questionnaire. The questionnaire is often called Homeowner’s Association Certification or something similar, and lenders submit them to condominium buildings, as a condition of making a loan on a unit in the building. It’s very simple. If you’re a potential buyer of a condominium, you should demand to see the results of the questionnaire before your right to cancel a contract expires.
Don’t be confused. The questionnaire is not part of the condo docs one receives after a contract is ratified, in which there is a three-day review period (review period may differ in different jurisdictions). Your lender can get you the information from the condo questionnaire after he or she receives it. However, in most instances your right to cancel the contract will have expired before your lender receives the completed questionnaire and is able to get the information to you. There are ways (too numerous to mention in this blog) you can make sure you receive the information before your right to cancel expires. Your Realtor or lender should be able to help you regarding this matter. If needed, I’d be glad to help as well at joe@joeberman.com.
Now, why is the information from the questionnaire important? The following are 3 important items addressed in a condo questionnaire and not in condo docs and why they are important.
1) The number of owner occupied units verses investment units. These figures are very important. Getting a loan for a purchase in a building with an investor ratio over 50% is much more difficult than in a place where the investor ratio is under 50%. Usually, a down payment of at least 20% is required. Because buying in the building is more difficult, the value of all the units in the building goes down. The reason one would want to know the exact ratio, is that if the building has, for example, a 49% investor population, he or she would be eligible to buy the particular unit with a low down payment, an FHA loan (3.5% down payment) or something similar. However, at 49%, the ratio could easily advance to 51% investor. When the ratio flips to 51% investor, the ability to get mortgages diminishes, as does the value of the property.
2) The number of units sold/under contract. Absolutely essential information when buying in a new building. Developers of new projects generally do everything they can to guard their sales figures. If you’re buying into a new 100 unit building with, for example, only 2 units sold and 3 under contract, you better be getting a stupendous discount for the risk you are taking.
3) Number of units with delinquent condo fees. Another important piece of information in determining the financial health of the condo building. Guess who pays the fees of the people who are delinquent? That’s right, the rest of the condo association. Additionally, a high condo fee delinquency rate is usually a predictor of more bad news to come. When a person is in financial trouble, the condo fees go first, usually followed by the mortgage, meaning future short sale or foreclosure. There’s nothing worse for the value of a property than to be in a building with a lot of short sales and foreclosures.
There are many ways to reduce risk in the purchase of a condo. By being diligent and aggressively seeking pertinent information, one can make an informed and smart decision. Upscale finishes and fancy buildings begin to look downscale and dumpy when the financial situation is dire. Make sure you like the condo and the building is in good financial shape. Everything else will take care of itself.
Tomorrow’s blogpost – A review of cheap jug wines. Some are actually pretty good!
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