What You Need to Know About Selling Your Condominium in Today’s Market
In today’s California condominium market not only should the seller prepare the unit for sale, but the seller should be prepared with certain information about the homeowner’s association–prior to listing. Do you as a seller know how many owners live in the association? Are you familiar with your association’s Conditions, Covenants & Restrictions (CC&R’s)? What about upcoming assessments for planned maintenance work on the common areas?
You’ve worked hard repainting your unit, cleaning the carpeting and possibly upgrading the countertops in your kitchen and bathroom, and you’re ready to have buyers take a look. Then perhaps you obtain an offer from a motivated and excited buyer and you open escrow and plan to close in 30 days. But wait, have you considered other issues that could impact your sale?
For instance, did you know that having less than a 50% owner occupancy ratio means you may need to obtain an offer from an all cash buyer? Unfortunately, many condo owners do not realize that with a higher number of rental units comes a lower probability of buyer mortgage financing. Many lending sources have a higher criteria than required under FNMA loan rules, and may require 70-75% owner occupancy before agreeing to your new buyer’s loan. At a minimum, 50% owner occupancy is required for FHA loans (this applies only if your building is FHA approved, by the way). In a 32 unit building for example, 16 renters will be too much. Lest you think otherwise, this situation is not unheard of and in fact exists in a very upscale area where the owners don’t want to let go of their units after they have moved on to a single family house. It has presented a lot of difficulties for those owners who wanted to sell. If you wait until you are in escrow for the buyer/buyer’s lender to find this out, much time will have been wasted and the transaction may end up cancelling. Wouldn’t it be wise to bring this issue up to your Board of Directors so that the general membership could review the policy for handling rentals?
Property owners should not be living in oblivion while allowing their association’s owner ratio to decline year after year. This could mean the difference between selling a unit while it still has equity or as a successful short sale, or forcing one into foreclosure because the owner has no other way out of their situation because no lender would grant financing and no all cash buyer could be found. A foreclosed unit in an association means a drop in collected owner’s dues and a possible increase for remaining members, or at the least a lack of contribution to normal operating costs. Plus, the market value of all units in that association may be impacted if it now becomes impossible to obtain financing, or cash buyers bring in “lowball” offers to a desperate seller. Typically, a lender’s HOA Certification submitted to the Board or property manager may ask how many owners, how many renters, and how many vacant units. You can circumvent wasted time by contacting your Board or property manager beforehand to obtain this information.
Let’s say the owner occupancy ratio is still fine, but there are delinquent owners in the building, possibly due to loss of employment, or units already in foreclosure. Did you know that if an association has over 15% of its owners 30 days (or more) behind in their association payments, the lenders will probably not make a loan until that number is decreased to less than 15%. In a smaller building of 30 units, that would take only 5 units. What if those particular owners are foreclosures held by a bank which is not paying dues until the unit sells, or owners who have abandoned their units and are unreachable? Has your Board of Directors suggested a remedy to assist current sellers in good standing? This is information you the seller should look into before you list your property. Why wait until you’re in escrow and then find out the lender won’t go forward due to this issue? Again, your Board of Directors (possibly the Treasurer) or your property manager representative should be able to quickly provide you with this information.
These are two of the biggest issues that a seller may confront, but others may include whether or not your association has a reserve study–how much money is set aside in your annual budget for reserves? Ideally it would be about 10%. Does your association have CC&R’s updated in the last 5 years, or are you still operating on your original documents that are probably very out of date with today’s laws? What is the pet policy in your building? Many buyers have pets and will need to know in advance what to expect, i.e., two dogs may not be allowed, but one dog under 35 lbs is allowed. Are you aware of any litigation within the association? This is a disclosure asked of California sellers in which lenders have a direct interest in the risk of lending there, depending on the particular issue.
In a homeowner association, the concept of “the greater good” is very close to the surface. Members of an HOA are bound together by a particular legal umbrella found in the California Civil Code that does not exist in a non-association neighborhood. Condominium living was and is really meant for the owners who plan on living there, and it may not work well for long-term absentee landlords, because now more than ever, the transfer of these units is greatly controlled for the first time by mortgage lending criteria.
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