As a condo owner, you have to follow the rules of the HOA. You don’t have control over the common areas, you have to pay your monthly dues and assessments, and you have to play by the rules of the condo association. You understood, when you bought the condo, that you’d be subject to certain restrictions.
What to do when selling your condo
But you, like most sellers and their real estate agents, probably aren’t aware about the potential red flags an HOA can cause until the condo has a buyer with a contract to purchase and that buyer can’t get a loan because of the HOA issues.
The red flags typically show up in the Condo Cert (also known as a Condo Questionnaire) document. The Condo Cert, required by the buyer’s lender, assists banks in assessing the health and financial status of the HOA. They want to be sure there is minimal risk in lending on a condo in the HOA. Here are three red flags that can pop up in the Condo Cert- each of which can screw up the sale of your condo.
1. There are too many renters in your complex. All banks believe a condo complex or building occupied primarily by homeowners is less risky than one with a lot of rentals. The thinking is that homeowners who live in their property are more likely to take care of it and have an active interest in maintaining common areas, compared to renters. Most lenders may not give a buyer a loan if the complex has too high a ratio of tenants to owners. Too often, you and the buyer have no idea how many renters are in the complex until the Condo Cert is completed and distributed.
2. One person owns multiple units. Another potential problem that shows up in the Condo Cert is when one person owns multiple units in the complex. Lenders don’t like this because if that owner defaults on his or her HOA dues or files bankruptcy, the financial effect on the HOA’s finances can be drastic.
3. There’s not enough money in the HOA’s reserves. The HOA’s financial health, described in the Condo Cert, can be another stumbling block. Does the association have enough money in a reserve account to pay for repairs to the roof or other common areas? Is the HOA properly insured? (Some lenders require a minimum of liability insurance in order for them to lend on a condo.)
Advice for Buyers
Realize you might hit a snag during the loan process. With the seller’s approval, be prepared to ask the seller to extend the time to get your loan approved. In some cases, you may even need to find a different lender, such as a local bank or credit union that would be more flexible than a big bank.
Advice for Sellers
Know as much as possible about the HOA, as early as possible. Ask your HOA president or management company how many renters are in the complex, or if one owner owns more than one unit. Work with your real estate agent to isolate and flag these issues before you go on the market. Otherwise, your days on market will increase. And if you go into contract and then are forced later to put the condo back on the market, your listing looks suspect.