Funding reserves is a key indicator for buyers of a condo association’s financial health.
By Jeff Lazerson | firstname.lastname@example.org | MortgageGrader.com | March 12, 2022
Almost six years to the day before 98 people died last June 24 in South Florida’s Champlain Towers condo collapse, six people died in Berkeley when an apartment balcony gave way and fell 50 feet to the ground.
Festering dry rot due to shoddy workmanship caused the June 16, 2015, collapse.
As a result, California enacted two balcony inspection laws, Senate Bill 721 in 2018 and SB 326 in 2019.
Buildings with three or more units with wood balconies, decks, stairs and walkways 6 feet or more above the ground require a deep dive inspection and resulting repairs by Jan. 1, 2025.
Apartments would then have to be reinspected once every six years, and condos would have to be reinspected once every nine years.
In addition, condo associations are required to conduct reserve studies every three years to determine how much the association needs to set aside for future maintenance. Visual inspections are required as part of those studies.
Condo buyers need to pay attention to this to avoid getting a surprise down the road in the form of a special assessment requiring an additional bushel of money for deferred maintenance. Think water proofing, dry rot and termites.
“I don’t think (condo owners and buyers) have a level of awareness. Special assessments can run into the tens of thousands of dollars per unit,” said Jeff Beaumont, condominium homeowners’ association attorney at Beaumont Tashjian. “Beach cities, because of salt in the air, can have $100,000 special assessments. I’ve seen it many times.”
Tragically, the Champlain Towers collapse occurred after owners balked at efforts to levy $15 million in special assessments for urgent repairs, ranging from $80,000 for a one-bedroom unit to more than $336,000 for the penthouse.
Alex Del Toro, president of The Termite Guy, replaced 35 balconies five years ago at a Los Angeles building for the owner of the Berkeley apartments involved in the 2015 collapse. It cost $25,000 per balcony.
“Depending on cubic footage and square footage, termite tenting fumigation can range from $1,500 to $3,000 per unit,” said Del Toro.
January 2025 will be here before you know it.
The HOA needs to hire a licensed engineer to inspect the entire complex. Then once the report is completed, it must get bids for any needed repairs. The worse the deferred maintenance, the longer it is going to take to complete. Don’t forget the COVID induced materials shortages and supply chain challenges.
“The engineering report can run $10,000 to $30,000 for a smaller HOA of four to 10 units,” said Erik Rivera, president of Manhattan Pacific Management. “A recent 60-unit inspection was $65,000.”
Few HOA’s have even started the process. And there is a finite number of qualified inspectors to fight over. That will guarantee longer wait times and higher inspection fees.
Law firm Adams-Stirling provides legal support for more than 1,000 California condo HOA’s.
“(Just) 10- 20% of these condos have been inspected so far,” said Nathan McGuire, a partner at the firm.
“Noncompliance will likely expose the board to liability should something unfortunate happen, but the true consequences may be market forces,” added Robert Nordlund, founder and CEO of Association Reserves.
“Property and liability insurance could get cancelled. Non-compliance answers on the Fannie Mae or Freddie Mac condo addendum questionnaire will likely result in lenders unable to sell the mortgage to Fan or Fred, making it more difficult for buyers to buy and for owners to refinance,” Nordlund said.
What happens if the HOA board mandates a special assessment on the existing condo unit owners? What happens if you get tagged with a $50,000 or $100,000 bill? God forbid if you are a senior on a fixed income, and you can’t cough up the funds.
Assessment bills are due in 30 days. Non-judicial foreclosure is allowed or not paying assessments.
Usually, special assessments are put to a vote of the owners. But the condo board can unilaterally hit the owners with an assessment for health and safety emergencies.
Instead of one big bill for each owner, there is a market for HOA financing from bankers.
Let’s say a 20-unit HOA is short $500,000 to repair wood rot and waterproofing, which amounts to $25,000 per unit. Some owners may not have the cash.
The HOA can take out a 10-year amortized note at perhaps 6%.
The monthly payment would be $5,551. If you divide that by 20 owners, the additional assessment comes to $277.55 per unit, on top of the existing HOA dues.
McGuire, the Adams-Stirling law partner, advises condo shoppers to look not just at the unit they’re thinking of buying, but also at the association’s finances. Scrutinize the covenants, conditions and restrictions, the articles of incorporation and the bylaws.
Most importantly, read the annual budget report reserve summary plan. Look for the summary of reserves or the summary of funding reserves.
“If the reserve funding plan is close to zero, that’s bad,” McGuire said. That means the HOA hasn’t been raising HOA dues to set aside a needed reserve.
Just three in 10 HOAs in the nation have at least 70% or more of the amount needed in their reserve funds, Nordlund said. About an equal number have less than 30% in their reserve.
If you are shopping for a condo, ask your financial expert to look at the reserve study. Hire the best home inspector you can find.
If you own a condo now, and you have heard nothing from your HOA about balcony law required inspection, I’d start asking questions about their plans.
Freddie Mac rate news: The 30-year fixed rate averaged 3.85%, 9 basis points higher than last week. The 15-year fixed rate averaged 3.09%, 8 basis points higher than last week.
The Mortgage Bankers Association reported an 8.5% increase in mortgage application volume from the previous week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $647,200 loan, last year’s payment was $288 less than this week’s payment of $3,034.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA at 3.5%, a 15-year conventional at 3.25%, a 30-year conventional at 4%, a 15-year conventional high-balance ($647,201 to $970,800) at 3.875%, a 30-year conventional high-balance at 4.375% and a 30-year purchase jumbo at 3.875 %.
Eye-catcher loan of the week: A 30-year purchase, adjustable jumbo mortgage, locked for the first 10-years with an interest-only payment at 3.375% without points.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or email@example.com. His website is www.mortgagegrader.com.
Jeff Lazerson - Mortgage Columnist since 2011