At least three in four home buyers obtain a professional home inspection to determine the physical condition of a home before they close the deal, but most home buyers aren't as likely to pay attention to a condominium community's financial condition when it is just as necessary.
"It is amazing that people don't spend much more time on a condo purchase when they are becoming "business partners" with strangers in a multi-million dollar real estate development partnership," said Robert M. Nordlund, president of Calabasas, CA-based Association Reserves, Inc.
"Buying a condo or town home is a lot like buying a share in a closely held, publicly-traded, non-profit real estate holding corporation. You don't just buy a home, you effectively enter a partnership and bad business surprises -- just like deferred maintenance surprises -- can cost you"
Without careful attention to financial details, you could overlook the troubled financial status of the one in three homeowners associations (HOAs) that are unable to meet major repair and replacement obligations because of insufficient reserves, according to Association Reserves.
What's The Appraiser's Reponsibility?
Fannie Mae required the use of their updated residential appraisal forms on November, 2006. The new Condominium form (1073) added some expanded sections to the Project Analysis section of the report. The section that came in without much fanfare but has created much discussion amongst appraisers is this section:
I [did/did not] analyze the condominium budget for the current year. Explain the results of the analysis of the budget (adequacy of fees, reserves, etc.) or why the analysis was not performed.
The Fannie Mae Single Family Selling Guide [XI, Chapter 3: Special Appraisal Considerations] says
"To determine project eligibility, a lender often needs access to certain project information that is not always readily available—such as information about the project's insurance coverage, legal documents, or budget; the payment status of owners' association (or cooperative corporation) fees; and the ownership and occupancy status of individual units within the project. For this reason, we allow the lender to rely on the appraiser, the owners' association (or cooperative corporation), the management company, the real estate broker, and the project developer as sources for information, although we expect the lender to make a diligent effort to ensure the accuracy of the information obtained from these sources. Project acceptance—and the availability of financing—often depends on the willingness of the owners' association, cooperative corporation, or management company to obtain and provide requested information."
Beyond that, there has NOT been any guidance on just exactly what the appraiser's "Scope of Work" is with regards to this analysis.
Some appraisers have just been working from basic information like the current condo fee and a visual inspection of the complex. In my opinion, just comparing one HOA's monthly assessment to another's is meaningless without knowing what is actually being paid for. The answer requires reviewing the other HOA's actual budget. There are a variety of factors that can account for differences in assessment levels including:
- Age of Property. The older it is, the more expensive it is to maintain.
- Number and Type of Amenities. A pool alone can increase the annual budget 20%.
- Reserve Funding. Proper reserve funding requires setting aside 20-40% of the monthly assessment. An actual Reserve Study will reveal the proper funding level.
WHAT'S YOUR OPINION? Give me your comments!
- Are appraisers "qualified" to analyze condominum budgets?
- What is our level of due-diligence with regards to obtaining financial records?
- What liability do appraisers have with regards to their analysis?
Additional Condominium Homeowners Association References:
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