Latest / Dishin' Dirt with Gary Pickren / New Condo Lending Rules: Why Your Buyer Can Qualify But the Condo Doesn’t

Transcript

New Condo Lending Rules: Why Your Buyer Can Qualify But the Condo Doesn’t · Dishin' Dirt with Gary Pickren

0:00
SPEAKER_01: Today, we're going to talk about something that I think is going to catch a lot of real estate agents completely off guard.
0:07
SPEAKER_01: And it starts with a scenario that's very simple.
0:09
SPEAKER_01: We see it all the time.
0:11
SPEAKER_01: You got a condo listed for around$400,000.
0:14
SPEAKER_01: It's a fantastic unit.
0:15
SPEAKER_01: It's got a great location.
0:17
SPEAKER_01: You've got all the comps to support the value.
0:20
SPEAKER_01: Property looks fantastic.
0:21
SPEAKER_01: No repairs are necessary that you can see.
0:24
SPEAKER_01: And a buyer comes along.
0:25
SPEAKER_01: And this buyer is absolutely perfect for you.
0:28
SPEAKER_01: Got an 800 credit score.
0:29
SPEAKER_01: They've got great income, plenty of money for a down payment.
0:33
SPEAKER_01: They've already been pre-approved a conventional mortgage with a lender that you absolutely trust.
0:38
SPEAKER_01: And they make this wonderful offer.
0:40
SPEAKER_01: You're ready to move forward, seller accepts it, and now you think you've got a done deal.
0:46
SPEAKER_01: But it's a big butt.
0:48
SPEAKER_01: The lender starts asking important questions.
0:51
SPEAKER_01: And these aren't questions about the buyer and the buyer's qualifications.
0:55
SPEAKER_01: They're asking questions about the HPR, but for our episode, we're going to call them the HOA.
0:59
SPEAKER_01: Start asking questions about the HOA.
1:01
SPEAKER_01: How much money does the association actually have in reserve?
1:05
SPEAKER_01: How much money are they putting each year into reserve?
1:09
SPEAKER_01: Do they even have a reserve study?
1:11
SPEAKER_01: And if they did have one done, when was it done?
1:14
SPEAKER_01: How old is it?
1:15
SPEAKER_01: What was recommended?
1:16
SPEAKER_01: And did you actually follow the recommendations in the study?
1:20
SPEAKER_01: Are there any special assessments that are about to come due or already due that could be contemplated in the future?
1:26
SPEAKER_01: Are there major repairs that are about to be necessary?
1:30
SPEAKER_01: Has an engineer ever inspected the building?
1:32
SPEAKER_01: If so, when was it?
1:33
SPEAKER_01: Were there any structural issues?
1:35
SPEAKER_01: Does a master insurance policy exist?
1:37
SPEAKER_01: What does it look like?
1:38
SPEAKER_01: And now suddenly everyone's realizing that the buyer qualifies for the loan, but the condo no longer qualifies for the loan.
1:48
SPEAKER_01: And that's what we're going to be talking about here today on Dish and Dirt, because Fannie Mae and Freddie Mack have made very significant changes to their condominium lending requirements in 2026.
2:00
SPEAKER_01: And yet there's another major change getting ready to come in January of 2027.
2:07
SPEAKER_01: So if you sell condominiums or you represent buyers who buy condominiums, you need to understand what's happened already and what's about to start happening again in January, because increasingly there are now two underwriting decisions in every condominium transaction.
2:23
SPEAKER_01: The first being obviously, does the buyer qualify?
2:26
SPEAKER_01: But the second one is does the condominium project itself still qualify?
2:31
SPEAKER_01: We're going to cover all of this and a whole lot more on this episode of Dish and Dirt.
2:37
SPEAKER_00: This is Dish and Dirt with Gary Pickering, South Carolina's only podcast dedicated to the real estate agent craft.
2:44
SPEAKER_00: And now the host of Dish and Dirt, Gary Picker.
3:00
SPEAKER_01: Now, before we begin our episode on condominiums, I do have a couple very important announcements, very great announcements to make.
3:07
SPEAKER_01: First, Blair Cato is welcoming Norton Getty.
3:10
SPEAKER_01: Norton Getty is joining our firm.
3:12
SPEAKER_01: We're very excited that he will be joining us as we expand our presence and our commitment in serving not only Myrtle Beach in the Grand Strand, but now into North Myrtle Beach as well.
3:20
SPEAKER_01: Norton has practiced in South Carolina since 1999, and he has spent several decades building a very respected real estate practice in the North Myrtle Beach area.
3:29
SPEAKER_01: He's represented buyers, he's represented sellers, developers, business owners, as well as several builders.
3:35
SPEAKER_01: And he also is known throughout the Realtors Association and the community for his involvement and his real estate education.
3:41
SPEAKER_01: Norton's going to bring a tremendous amount of experience, obviously.
3:44
SPEAKER_01: He's got a lot of strong relationships and a very deep understanding of the Grand Strand and the market and Blair Cato.
3:51
SPEAKER_01: So we're very excited.
3:52
SPEAKER_01: We couldn't be more excited to welcome Norton Getty and his team to begin this next chapter of Blair Cato in Myrtle Beach.
4:00
SPEAKER_01: Now, secondly, I'm happy to announce, and I'm very happy to support, a brand new real estate podcast in South Carolina.
4:07
SPEAKER_01: The South Carolina Realtors Association, Nick Cromitis, has a new podcast, and I am hopeful that you will join me in supporting it and making it the second best podcast about real estate in South Carolina.
4:19
SPEAKER_01: Now, of course, Dish and Dirt will continue its amazing and unprecedented run as the number one ranked real estate podcast in South Carolina, but there's plenty of room for Nick at the table to be number two.
4:30
SPEAKER_01: Number two is not bad at all, Nick.
4:31
SPEAKER_01: It's like being vice president.
4:33
SPEAKER_01: It's like being the Buffalo Bills.
4:34
SPEAKER_01: You can do it.
4:35
SPEAKER_01: It's really great.
4:37
SPEAKER_01: Lastly, Blair Cato is expanding.
4:40
SPEAKER_01: Once again, we're opening more offices.
4:42
SPEAKER_01: We're going to have a major announcement about new locations coming this fall.
4:48
SPEAKER_01: So pay close attention to social media and this podcast, and we'll be announcing the next locations where Blair Cato will be expanding into.
4:58
SPEAKER_01: Now, let's get on with the show today, and let's start with the big picture.
5:02
SPEAKER_01: Most real estate agents understand mortgage underwriting from the buyer's perspective.
5:06
SPEAKER_01: We understand income, debt income ratios, credits, assets, employment issues, appraisal, the things that you've dealt with every day as a real estate agent working with your buyers.
5:17
SPEAKER_01: But condominiums have always been a little bit different, and now they're getting to be significantly different because when someone buys a single family home, they and only them are responsible for their maintenance.
5:29
SPEAKER_01: They're responsible for their own roof, their foundation, their exterior.
5:33
SPEAKER_01: They're responsible for maintaining their insurance, taking care of all the maintenance.
5:37
SPEAKER_01: But when you buy a condominium, you're suddenly financially connected to the entire project and everybody inside the project.
5:46
SPEAKER_01: The roof might not belong to you.
5:48
SPEAKER_01: It might actually belong to the association.
5:50
SPEAKER_01: The elevators might belong to the association.
5:52
SPEAKER_01: Your parking garage could belong to the association.
5:55
SPEAKER_01: Even your exterior walls typically will belong to the association.
5:59
SPEAKER_01: But when those things need to be repaired, where's that money going to come from?
6:04
SPEAKER_01: Ultimately, the money's going to come from the owners, the collective owners of the project, of the condominium.
6:11
SPEAKER_01: So Fannie Mae and Freddie Mack don't solely look anymore just at whether your borrower represents an acceptable credit risk.
6:19
SPEAKER_01: They're now going to evaluate whether the condominium project itself represents an acceptable risk.
6:25
SPEAKER_01: And here's how I would explain it: you have a buyer with an 800 credit score while living in a house with a 500 credit score.
6:32
SPEAKER_01: Now, buildings obviously don't have credit scores, but conceptually, that's what I think we need to think about.
6:36
SPEAKER_01: Is you have a financial condition for the buyers.
6:39
SPEAKER_01: Do they meet the level of acceptable risk for the lender that they're willing to loan money, believing the money will be paid back?
6:46
SPEAKER_01: But now you also have the financial and physical condition risk and analysis of the condominium project.
6:53
SPEAKER_01: Will the condominium be able to take care of significant issues, damages, and maintenance?
6:58
SPEAKER_01: If not, the lender may not be willing to loan money on that unit.
7:02
SPEAKER_01: And a problem with either one of those today can now potentially affect financing.
7:08
SPEAKER_01: There's a bigger story behind these changes.
7:10
SPEAKER_01: The mortgage industry has become much more concerned about aging condominium buildings, particularly the deferred maintenance, or your structural safety, your inadequate reserves, special assessments, and whether the associations actually have the financial ability to even maintain the buildings.
7:27
SPEAKER_01: Lenders don't want to take the unit as security for a loan if the unit's going to be in disrepair.
7:34
SPEAKER_01: And we only have to look back at 2021 in Surfside, Florida, when the Champlain Tower South collapsed.
7:41
SPEAKER_01: It was a condominium unit that had deferred maintenance, and the entire building collapsed, killing several people.
7:47
SPEAKER_01: And it put a tremendous spotlight on these issues of deferred maintenance.
7:53
SPEAKER_01: I think it demonstrated the potential consequences when you have an aging condominium building that has significant structural problems, tremendous repair costs, and no reserves to pay for it.
8:04
SPEAKER_01: And since then, Fannie Mae and Freddie Mack have progressively tightened project eligibility standards, particularly when they're dealing with critical repairs, deferred maintenance, special assessments, inspections, and reserves.
8:16
SPEAKER_01: And so now we are seeing another evolution of those requirements.
8:20
SPEAKER_01: Let's talk about what has actually changed.
8:22
SPEAKER_01: One of the biggest 2026 changes took effect for applicable loans applications beginning August 3rd, 2026, just a few weeks ago.
8:31
SPEAKER_01: Fannie Mae retired what was known as the limited review, and Freddie Mac also retired its corresponding streamlined review.
8:39
SPEAKER_01: Now, unless a project qualifies for some other exemption or some other waiver, you're generally moving toward the full and established project review.
8:49
SPEAKER_01: So why does an agent care?
8:51
SPEAKER_01: Because generally speaking, more project review means a lot more project information.
8:57
SPEAKER_01: And more information definitely means a lot more opportunities to discover problems that will kill your deal.
9:03
SPEAKER_01: Maybe they don't have enough reserves.
9:04
SPEAKER_01: Maybe their insurance is inadequate.
9:06
SPEAKER_01: Maybe they have a deferred maintenance problem.
9:08
SPEAKER_01: Maybe there's a special assessment which is going to affect their debt-to-income ratio or their ability to pay.
9:13
SPEAKER_01: Maybe it's an engineering report that shows problems.
9:15
SPEAKER_01: Maybe there's pending litigation.
9:17
SPEAKER_01: And that's why I don't want agents thinking, oh, I don't have to worry about the development.
9:21
SPEAKER_01: We closed a conventional loan there just last year because everything changed just a few weeks ago.
9:27
SPEAKER_01: It's very nice that you closed a deal in that condominium.
9:30
SPEAKER_01: Maybe you represented the seller when they bought the property.
9:32
SPEAKER_01: But that doesn't necessarily tell you today whether the next loan will qualify.
9:37
SPEAKER_01: The rules have changed.
9:38
SPEAKER_01: The association has changed.
9:40
SPEAKER_01: Their insurance requirements have changed.
9:41
SPEAKER_01: The repairs have either happened or not happened.
9:44
SPEAKER_01: Budgets have changed.
9:44
SPEAKER_01: Maybe they don't have enough money anymore.
9:46
SPEAKER_01: Assessments got approved.
9:47
SPEAKER_01: Maybe they've been levied.
9:48
SPEAKER_01: A condominium development isn't permanently stamped, FENI may approve forever.
9:54
SPEAKER_01: It may be approved one month and not approved the next.
9:57
SPEAKER_01: Eligibility is going to have to be evaluated under the applicable requirements and current circumstances at the time of the sale.
10:05
SPEAKER_01: Now let's go to the rule that you probably heard the most about the 15% reserve rule.
10:10
SPEAKER_01: Now, this is a rule, it's all the headlines, and everybody's probably getting it wrong.
10:14
SPEAKER_01: The headlines and social media posts make it sound like every condominium association in the United States suddenly has to have 15% of its money sitting in a savings account.
10:23
SPEAKER_01: And that's not accurate, and it's not really an accurate way to describe it at all.
10:27
SPEAKER_01: There's another important point.
10:33
SPEAKER_01: Under the new Fannie Mae and Freddie Mac standards, the standard replacement reserve allocation increases from 10% to 15% of an annual budget assessment income for applicable applications beginning on January 4th of 2027.
10:49
SPEAKER_01: So if somebody tells you today that Fannie changed the reserve requirement to 15% on August 3rd, that's actually not correct.
10:56
SPEAKER_01: There are two dates you have to remember here: August 3rd and January 4th, 2027.
11:02
SPEAKER_01: We'll come back to August 3rd in a second.
11:04
SPEAKER_01: But let's understand this 15% number a little better.
11:07
SPEAKER_01: Suppose a condo association collects a million dollars a year in assessments.
11:13
SPEAKER_01: Under the 10% standard, you're talking about$100,000 that has to be allocated toward replacement reserves.
11:20
SPEAKER_01: But after January 4th, that's going to go to 15%, which means$150,000 has to be allocated.
11:28
SPEAKER_01: That's a difference of$50,000.
11:31
SPEAKER_01: So where does that$50,000 come from in the association's budget?
11:36
SPEAKER_01: There's only so many possibilities.
11:38
SPEAKER_01: One is they have to increase the assessments to cover it.
11:40
SPEAKER_01: Secondly, they could reduce other expenses, which means cutting out services.
11:44
SPEAKER_01: Or third, they're going to have to just simply restructure their budget.
11:47
SPEAKER_01: And that's why this isn't merely some obscure mortgage underwriting change that you don't have to worry about.
11:52
SPEAKER_01: This could eventually affect HOA dues.
11:55
SPEAKER_01: And if HOA dues increase, that's going to affect affordability.
11:59
SPEAKER_01: It can affect marketability.
12:01
SPEAKER_01: And ultimately, when something affects marketability, it obviously affects values.
12:06
SPEAKER_01: Here's another distinction I think that agents need to understand.
12:09
SPEAKER_01: This isn't simply saying the HOA has to have 15% of cash sitting in its reserve accounts.
12:15
SPEAKER_01: The standard we're talking about concerns the association's annual budget allocation to replacement reserves.
12:21
SPEAKER_01: Those aren't necessarily the same thing.
12:23
SPEAKER_01: And there is another pathway.
12:25
SPEAKER_01: Instead of relying solely upon the percentage test of 15%, the lender may be able to rely on an acceptable reserve study.
12:32
SPEAKER_01: And this is where the August 3rd rule becomes extremely important.
12:36
SPEAKER_01: So let's talk about reserve studies.
12:38
SPEAKER_01: A reserve study is essentially an analysis of the major components the association will eventually need to repair or replace, and how much money the association should be setting aside now to pay for them in the future.
12:52
SPEAKER_01: Think about your roofs, your elevators, the HVAC equipment, the exterior component, parking structures, paving, pools, mechanical systems.
13:00
SPEAKER_01: Depending on the project, this could be potentially hundreds of thousands, if not millions, of dollars for future obligations.
13:07
SPEAKER_01: And the study looks at questions like: how old is the component?
13:11
SPEAKER_01: How much remaining useful life does it have?
13:14
SPEAKER_01: What's the replacement cost going to be?
13:16
SPEAKER_01: How much money does the association currently have?
13:18
SPEAKER_01: How much should the association be contributing each year to have enough money?
13:22
SPEAKER_01: And that's incredibly important information.
13:25
SPEAKER_01: And under the applicable Fannie and Freddie requirements, a qualifying study, reserve study can provide an alternative to simply using the standard 15 percentage allocation after January.
13:37
SPEAKER_01: But here's where the new rule has a lot of teeth.
13:40
SPEAKER_01: Beginning August 3rd, when the lender relies on a reserve study for this purpose, the project's budget must support the highest recommended reserve allocation in the study.
13:51
SPEAKER_01: So let me say that again.
13:55
SPEAKER_01: It's the highest recommended reserve allocation from the study.
13:59
SPEAKER_01: The baseline funding isn't acceptable for this exception.
14:05
SPEAKER_01: So why does baseline funding matter?
14:07
SPEAKER_01: I know some of you are thinking, what in the world's baseline funding anyway?
14:10
SPEAKER_01: Think of it like this a reserve study must present different funding strategies.
14:17
SPEAKER_01: One strategy might essentially say, here is the minimum amount that you can contribute while trying to keep the reserve accounts from dropping below zero.
14:26
SPEAKER_01: That's the basic concept behind baseline funding.
14:29
SPEAKER_01: It's living close to the edge, just like Bon Jovi said.
14:32
SPEAKER_01: The reserve account may approach zero, but theoretically, it doesn't go negative.
14:40
SPEAKER_01: Now, under these new standards, you can't simply rely upon that baseline funding recommendation for the reserve study exception.
14:47
SPEAKER_01: So here's another important wrinkle.
14:49
SPEAKER_01: Suppose you have a reserve study conducted and it gives the HOA three choices.
14:54
SPEAKER_01: Plan A is$100,000.
14:55
SPEAKER_01: Plan B says to contribute$150,000 and plan C says to contribute$200,000.
15:00
SPEAKER_01: Well, the HOA says, well, we like plan A because obviously it's the cheapest.
15:03
SPEAKER_01: For purposes of this lending exception, however, that's probably not going to work.
15:07
SPEAKER_01: The lender may need the association's budget to support the highest recommended allocation, which in this hypothetical is$200,000.
15:16
SPEAKER_01: That's a big deal.
15:17
SPEAKER_01: That's a lot of money.
15:18
SPEAKER_01: And having a reserve study isn't probably going to be enough.
15:22
SPEAKER_01: Here's what I think HOA boards really need to understand.
15:25
SPEAKER_01: Having the reserve study sitting in a file cabinet doesn't necessarily accomplish anything.
15:29
SPEAKER_01: The question becomes: are you actually funding it?
15:32
SPEAKER_01: Are you doing what the reserve study says to do?
15:35
SPEAKER_01: Freddie Mack reserve study requirements generally contemplate a study that inventories all the major components, evaluates reserve adequacy, it provides a funding plan.
15:45
SPEAKER_01: It addresses issues such as component age and remaining life.
15:49
SPEAKER_01: And it generally has been completed within the last 36 months by an appropriate independent professional, not done in-house, not done 10 years ago.
16:00
SPEAKER_01: But here's a phrase I want you to remember: the reserve study isn't the test.
16:05
SPEAKER_01: Funding of the reserve study is the test.
16:09
SPEAKER_01: So the HOA can't necessarily say, look, we're financially responsible, we paid an engineer and a reserve specialist.
16:14
SPEAKER_01: They tell us we need to have$300,000 a year saved, and we put$75,000 in the budget for that.
16:20
SPEAKER_01: The study may actually highlight that there is a funding deficiency in this condominium, and that becomes very relevant to financing.
16:27
SPEAKER_01: And I want you to think about it.
16:28
SPEAKER_01: If a lender is giving a loan to a consumer secured by a condominium for 30 years, they're concerned in 30 years, is this condominium project going to be bankrupt?
16:40
SPEAKER_01: Will they have enough money to replace the roof, to fix the air conditioner, and do all the things that are necessary to keep that collateral valuable for that lender?
16:49
SPEAKER_01: Now everybody's talking about the reserves.
16:51
SPEAKER_01: I think real estate agents should also be paying as much attention to what's called deferred maintenance and critical repairs.
16:57
SPEAKER_01: Fannie Mae has project eligibility requirements dealing with conditions affecting things such as safety, soundness, structural integrity, habitability, financial viability, and marketability.
17:08
SPEAKER_01: We're potentially talking about major issues involving things like balconies, foundations, elevators, waterproofing, electrical systems, parking structures, your seawalls, your stairwells, your load-bearing structures.
17:21
SPEAKER_01: And one particular interesting threshold under Fannie's critical repair standard involves certain unfunded repairs that exceed$10,000 per unit that should be undertaken within the next 12 months.
17:34
SPEAKER_01: So think about that for a second.
17:35
SPEAKER_01: Suppose you're selling a unit in a 100-unit building, and the association discovers$2 million worth of significant repairs.
17:42
SPEAKER_01: And guys, that's not really outlandish when you think about a 100-unit building.
17:46
SPEAKER_01: It could have major water problems in a unit that could be$2 million to repair.
17:51
SPEAKER_01: Now you have to divide that by 100 units.
17:54
SPEAKER_01: That means each unit has a responsibility of$20,000 per unit.
17:58
SPEAKER_01: So now you have several potential problems.
18:00
SPEAKER_01: Is the HOA going to pay for that?
18:02
SPEAKER_01: Which the HOA is nothing more than the homeowners.
18:05
SPEAKER_01: Is there going to be a special assessment of$20,000?
18:07
SPEAKER_01: Do they have enough reserves to pay for that?
18:10
SPEAKER_01: But perhaps most importantly for your transaction, does this condition affect the project's eligibility for conventional financing?
18:17
SPEAKER_01: Suddenly, this isn't merely an HOA problem, it's a resale problem for everybody in that 100 unit building.
18:23
SPEAKER_01: Now let's deal with another misconception.
18:25
SPEAKER_01: People hear the word special assessment, they immediately panic because special assessment doesn't necessarily mean that nobody can get a loan in the building.
18:33
SPEAKER_01: A lender just needs to understand what that assessment is.
18:36
SPEAKER_01: Why is it being imposed?
18:37
SPEAKER_01: How much was it originally?
18:39
SPEAKER_01: How much still remains to be paid?
18:40
SPEAKER_01: When will it be paid?
18:41
SPEAKER_01: But most importantly, what's the money going to be used for?
18:43
SPEAKER_01: Because the assessment for one purpose isn't necessarily equivalent to an assessment addressing an unresolved critical repair.
18:50
SPEAKER_01: And here's a phrase I think you should remember.
18:52
SPEAKER_01: The problem isn't necessarily the assessment.
18:55
SPEAKER_01: The problem is what the assessment is telling you about the condition of the building.
18:58
SPEAKER_01: If there's a$20,000 per unit assessment because the parking garage has significant structural problems, I care more about that than who's paying the$20,000.
19:07
SPEAKER_01: I care about the parking garage.
19:08
SPEAKER_01: Has it been repaired?
19:09
SPEAKER_01: What does the engineer say?
19:11
SPEAKER_01: Are there additional repairs necessary?
19:12
SPEAKER_01: Has the work been completed?
19:14
SPEAKER_01: Because that's going to be a major underwriting issue.
19:17
SPEAKER_01: Here's a scenario I think we're going to start seeing more often.
19:20
SPEAKER_01: You're under contract, the lender sends in the condo questionnaire.
19:23
SPEAKER_01: Somewhere during that process, the lender learns that the association has an engineering inspection 18 months ago, and now they're going to say, send us that report.
19:30
SPEAKER_01: But your HOA is going to say, I'm not giving you the report.
19:32
SPEAKER_01: That's confidential, that's ours.
19:34
SPEAKER_01: Because they think maybe it's going to create problems for everybody else.
19:37
SPEAKER_01: But they don't want people to know about it.
19:39
SPEAKER_01: Well, that's a problem because under Fannie's requirements, certain structural and certain mechanical inspection reports completed within the last three years have to be reviewed as part of their project analysis.
19:49
SPEAKER_01: If that report identified unresolved critical repairs, the project's going to have an eligibility problem until their required work is completed and appropriately documented.
19:58
SPEAKER_01: And refusing to provide the necessary information isn't going to magically make the problem disappear.
20:04
SPEAKER_01: If the lender can't obtain enough information to determine eligibility, that itself will prevent the lender from concluding the project qualifies for the loan.
20:13
SPEAKER_01: So think about the implications for a listing agent.
20:15
SPEAKER_01: You've spent 25, 30 days getting this ready for closing.
20:18
SPEAKER_01: Everybody's patent, your seller's got another contract, but the HOA is refusing to cooperate.
20:23
SPEAKER_01: They're not going to give the engineering report, and so the whole deal falls through at the last minute.
20:27
SPEAKER_01: That's going to be a big problem.
20:28
SPEAKER_01: Now, I don't want this entire episode today to sound like doom and gloom because it's certainly not.
20:32
SPEAKER_01: There's some good news here for some smaller projects.
20:35
SPEAKER_01: Fannie Mae did expand its waiver treatment for qualifying small condominium projects.
20:40
SPEAKER_01: That's good news.
20:41
SPEAKER_01: And that involves two to four unit projects and some qualifying five to ten unit projects that aren't part of a larger development or a master association.
20:49
SPEAKER_01: Freddie Mac made a similar expansion for qualifying small projects as well.
20:53
SPEAKER_01: So in some cases, smaller condominium developments may actually have an easier path to getting loans.
20:58
SPEAKER_01: But remember, a waiver of full project review does not mean there are no rules.
21:02
SPEAKER_01: Fannie Mae and Freddie Mac still gonna have fundamental eligibility requirements and applicable insurance requirements, and those are still gonna matter whether your client gets financing or not.
21:11
SPEAKER_01: Now, we could do an entire episode on the condominium insurance by itself, and we probably should do one at some point, because reserves aren't the only thing creating financial problems now for associations.
21:22
SPEAKER_01: The association master insurance policy can also affect whether the project has eligibility or not.
21:28
SPEAKER_01: Fannie Mae has specifically identified insufficient master property insurance as a significant source of project ineligibility.
21:36
SPEAKER_01: If the building burns down and there's not enough insurance to cover replacement of the building to protect the lender's security, they're not going to make a loan.
21:44
SPEAKER_01: And what this means for the consumer is you own your condo, you paid your mortgage every month, your unit's beautiful, you've done absolutely nothing wrong, but your association insurance has changed, the premiums have gone up, the coverage has gone down, the deductibles have increased, the association doesn't want to spend the money to obtain.
22:00
SPEAKER_01: Coverage that's going to satisfy the lending requirements.
22:03
SPEAKER_01: And then you decide to sell, and the buyer-lender starts reviewing your master policy, the individual unit didn't change, but its financial ability potentially did.
22:14
SPEAKER_01: And that's why HOA governance increasingly matters to property value.
22:18
SPEAKER_01: So let's make this practical.
22:20
SPEAKER_01: What should you do tomorrow after listening to this award-winning episode of Dish and Dirt?
22:24
SPEAKER_01: If you're going to take on a condominium listing, do not wait until you're under contract to start trying to find out what you can about this association.
22:33
SPEAKER_01: I'm not saying real estate agents should become underwriters by any stretch of the imagination.
22:37
SPEAKER_01: You should not be doing that.
22:39
SPEAKER_01: And I'm certainly not saying you should guarantee that a project qualifies for financing, even if it qualified two weeks ago with a different lender.
22:46
SPEAKER_01: You do not know.
22:47
SPEAKER_01: That is the lender's job.
22:48
SPEAKER_01: But you should go ahead and start asking the questions.
22:51
SPEAKER_01: I would want to know if I could obtain the HOA's budget.
22:54
SPEAKER_01: Do they have a reserve balance?
22:56
SPEAKER_01: What is it?
22:56
SPEAKER_01: Do you have a reserve study?
22:58
SPEAKER_01: Can we get a copy of it?
22:59
SPEAKER_01: Is there any structural engineering reports that have been done?
23:02
SPEAKER_01: Are there any assessments coming along?
23:04
SPEAKER_01: Any major repairs that have been done or need to be done?
23:07
SPEAKER_01: Can we get the board minutes for the last couple of meetings?
23:10
SPEAKER_01: How about the master property insurance information?
23:13
SPEAKER_01: Is there any significant pending litigation?
23:16
SPEAKER_01: Is there any notices about any structural safety inspection or code issues that you've received as a seller?
23:22
SPEAKER_01: I would be asking my seller all of this.
23:24
SPEAKER_01: Have you heard about anybody having trouble getting financing in this development?
23:27
SPEAKER_01: Because that question alone might actually tell you something needs to be investigated.
23:32
SPEAKER_01: The more of this information you get, the better you're going to be.
23:35
SPEAKER_01: Stop simply asking that one HOA question.
23:37
SPEAKER_01: How much are dues?
23:38
SPEAKER_01: I know that's important.
23:39
SPEAKER_01: But what's more important is what are those dues funding?
23:42
SPEAKER_01: If I'm a buyer and I'm looking at an older condominium project, particularly one with substantial common structural components, like most of them have, I'm getting the lender involved early.
23:51
SPEAKER_01: Have you recently financed a unit in this project?
23:54
SPEAKER_01: Can your condominium department go ahead and start reviewing the project early?
23:57
SPEAKER_01: I don't want to have to pay for inspections and appraisal and title work, all of that, only to find out that the project itself has a financing problem.
24:04
SPEAKER_01: So early project review could actually save everybody a lot of heartburn.
24:09
SPEAKER_01: Now let me finish by knocking down really quickly five myths.
24:12
SPEAKER_01: Myth number one is my buyer is pre-approved, so financing's fine.
24:16
SPEAKER_01: Absolutely not.
24:17
SPEAKER_01: Your buyer might be pre-approved, but that doesn't necessarily mean the condo is going to qualify.
24:22
SPEAKER_01: Myth number two, somebody got a conventional loan here six months ago, so we're fine.
24:27
SPEAKER_01: Well, that's not necessarily true either because rules have changed just a few weeks ago.
24:31
SPEAKER_01: Insurance requirements have changed, your budgets have changed, your buildings have changed, assessments have happened, engineering reports have happened, repairs have been come have become necessary.
24:40
SPEAKER_01: You need to evaluate the current transaction under the current circumstances.
24:44
SPEAKER_01: Number three, every HOA has to have 15% in the bank right now.
24:48
SPEAKER_01: No, that's not what the requirement says.
24:50
SPEAKER_01: We're talking about the standard annual replacement reserve budget allocation has increased from 10 to 15%, but that doesn't begin until January 4th.
24:59
SPEAKER_01: And there's also the reserve study alternate.
25:01
SPEAKER_01: Number four, we have a reserve study, so we're perfectly fine.
25:05
SPEAKER_01: Not necessarily because the age and the content of that study matters.
25:10
SPEAKER_01: And so does whether the association is actually funding those recommendations.
25:14
SPEAKER_01: Beginning August 3rd, the reserve study alternative became a lot more stringent.
25:19
SPEAKER_01: Myth number five, a special assessment automatically is going to kill the loan.
25:23
SPEAKER_01: And the answer to that's no.
25:24
SPEAKER_01: You have to ask why the assessment actually exists.
25:27
SPEAKER_01: A special assessment may be manageable.
25:30
SPEAKER_01: An assessment revealing unresolved critical repairs, however, is a very different issue.
25:35
SPEAKER_01: And if you're listening to this because you own a condo or you sit on an HOA board, here's the part I think you need to really pay attention to.
25:42
SPEAKER_01: Years of artificially low HOA dues can potentially come home to roost because owners love low dues.
25:48
SPEAKER_01: Sellers love advertising low dues.
25:51
SPEAKER_01: Boards don't want to tell their neighbors we're going up on your assessment.
25:54
SPEAKER_01: But there is a cost to chronically underfunding the future.
25:59
SPEAKER_01: The roof is eventually going to need to be replaced.
26:01
SPEAKER_01: The elevator is going to break, exterior is going to need painting.
26:04
SPEAKER_01: And you can postpone collecting money all you want, but you can't postpone those eventual expenses.
26:11
SPEAKER_01: And now, if you're inadequately financially planning for this, it's going to have another consequence.
26:16
SPEAKER_01: It could affect whether future purchasers can finance units in the project, which means people can't sell their units, which means the value plummets.
26:25
SPEAKER_01: And this is where I think this becomes a much bigger issue than simply mortgage underwriting.
26:31
SPEAKER_01: Imagine if you have two condominium projects that sit across the street from each other.
26:34
SPEAKER_01: They're essentially the same thing, the same unit, same size, same everything, but one has healthy reserves, they have a reserve study, they have long-term capital needs that have been met, good insurance, no major deferred maintenance.
26:47
SPEAKER_01: But condominium B has minimal reserves, they've been deferring maintenance.
26:51
SPEAKER_01: There's a major assessment coming because of this.
26:53
SPEAKER_01: They've got insurance problems, an engineering report that has already identified some expensive repairs.
26:59
SPEAKER_01: Are those condominiums now really worth the same amount?
27:02
SPEAKER_01: And the answer is they're probably not, because condo A can have a large pool of buyers who can't obtain the conventional financing, where condo B probably is going to be a cash-only type deal.
27:12
SPEAKER_01: And that's one of the basic principles of real estate is financing affects marketability.
27:17
SPEAKER_01: And marketability affects value.
27:19
SPEAKER_01: So I think we're entering a period here where sophisticated buyers, sophisticated agents are going to start paying more attention to something you can't see when you're standing inside that condominium.
27:29
SPEAKER_01: And that's the financial health of the association.
27:33
SPEAKER_01: So what I want you to remember here today from today's award-winning episode, Edition Dirt, is when you sell a single family home, you're largely selling the house.
27:41
SPEAKER_01: When you're selling a condominium, you're selling something else too.
27:45
SPEAKER_01: You're selling a piece of a financial organization.
27:48
SPEAKER_01: Your buyer is inheriting their share of that association's assets and liabilities and maintenance obligations, their insurance, their reserves, their future repairs, and increasingly, mortgage underwriting is recognizing that reality.
28:00
SPEAKER_01: So the next time you're working on a condominium transaction, remember there may be two qualifying questions.
28:05
SPEAKER_01: Number one, does your buyer qualify?
28:08
SPEAKER_01: And number two, does the condominium itself qualify?
28:11
SPEAKER_01: Because your buyer can have perfect credit, plenty income, great down payment, and can be completely ready closed.
28:17
SPEAKER_01: But an 800 credit score is not going to fix an underfunded HOA.
28:23
SPEAKER_01: And it's not going to resolve structural problems or problems with a master insurance policy.
28:30
SPEAKER_01: And that's why real estate agents need to start investigating the condominium project before the problem shows up in underwriting.
28:37
SPEAKER_01: All right, that's all the time we have for our show today.
28:40
SPEAKER_01: Next week, we're going to be talking about new guidance letters that have come out from the Real Estate Commission on limited exposure marketing.
28:49
SPEAKER_01: And I cannot wait to get into that, something we've been talking about quite a bit.
28:52
SPEAKER_01: The commission has issued its guidance and it's actually issued a form for you to use as well in those situations.
28:58
SPEAKER_01: So we'll cover all that and a lot more on the next episode of Tition Dirt.
29:01
SPEAKER_01: Y'all take care and have a wonderful weekend.
29:03
SPEAKER_01: See you next week.