Community associations have no legal obligation to help owners sell their units, but these are difficult times. Home values have dropped. Buyers are scarce. Lenders are scrutinizing the finances of both borrowers and associations.
“It’s getting so hard to sell anything right now,” said Jim Stoller, president of The Building Group management company in Chicago. “All the banks and mortgage lenders are denying loans rather than making them. They are coming back to us for more and more information, sometimes three and four times, and then the deal doesn’t close.”
In many cases, it’s the association being turned down, not the buyer, he said.
Lenders aren’t taking chances on associations that show even a hint of fiscal weakness. They’re on the lookout for circumstances such as deferred maintenance, litigation and low reserves that lead to hefty assessment increases. Those increases ultimately could cause borrowers to default on their loans.
Association leaders can take steps to help reduce loan denials in their communities. They don’t have to, but remember: Everyone needs to sell someday.
Here are some action items to consider:
Put money into reserves. Some well-meaning associations budget for future major repairs and replacements, but when the monthly bills arrive, they don’t have the dollars to transfer into reserve accounts.
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That’s an indication the budget is unrealistic. Either too many expenses were unscheduled or too many owners aren’t paying their assessments, or both.
“If this is happening in multiple years, then the association is usually getting behind in accumulating reserves,” said certified public accountant Brad Schneider, of CondoCPA in Elmhurst. “They will either need a loan or will need to pass a special assessment when a capital project is necessary.”
Lenders are paying attention, he explained. Government agencies that back mortgage loans, such as the FHA and Fannie Mae, require associations to put 10 percent of their annual budgets into reserves. If the associations fall short, sellers will likely sit on their properties until cash buyers show up.
Step up collections. Even the best budget is useless if owners don’t pay assessments. Delinquent assessments are a significant problem in most associations. They’re a problem for sellers as well. FHA and Fannie Mae won’t approve loans if more than 15 percent of owners are more than 30 days late.
“You can’t just hope people will pay,” said Timothy Snowden, deputy director of property management for Heil, Heil, Smart & Golee in Evanston. “Associations need to tackle delinquent assessments in a proactive manner.”
His recommendations: Adopt a firm collections policy with no exceptions. Turn delinquent accounts over to the association attorney, usually when they are between 30 and 60 days late. Evict nonpayers. You can make up some income by renting out the unit of an evicted owner, but move fast before the lender forecloses.
Snowden added that because some owners will never pay up, associations should budget a contingency amount to handle the loss.
“It is difficult for boards to increase assessments when unit owners are having a difficult time, but if an increase for the paying unit owners is necessary, it needs to be done,” said Schneider.
Take care of the property. Common areas that don’t show well negatively impact the sale of units. Delayed maintenance is cheaper now but costs more later on. If money is tight, choose projects that keep buildings weather-tight. Water infiltration and mold are costly to remediate.
“Lenders are more sophisticated today than they were five years ago about the long-term needs of a property,” said Stoller.
Be helpful to lenders. No one wants extra paperwork, but that’s the way of doing business today.
“We’re telling our associations to dot their I’s and cross their T’s,” said Stoller. “They have to be transparent in their operations and they have to work with lending institutions to provide data they need to approve loans.”