buying condo if condo assoc has no reserves

[GsR]

I'm looking at buying a condo where the condo association voluntarily has no reserves. The building seems to be relatively new and in good shape, and I understand the risks involved. The problem is, I'd be using an FHA program since debt to income will be higher than conventional mortgages allow. As far as I understand, FHA and no reserves are not compatible. Agent suggested I look into portfolio lenders. I can only put down 10, maybe 12%. No chance I'd be putting down the 20% many lenders require. Do I have any other options?

It's a great unit, and it would be a pity to let it get away...

[bubbagti]

Does the association just use assessments to combat the lack of reserves?

If this is your first place I would think hard about what this type of association management means to you. Often these assessments are thousands to tens of thousands of dollars and they have to be paid by you. They are recorded and assessed to the property if you don't pay, so even if you sell the property they get their money before you do. There is a reason FHA requires some sort of reserve requirement, IMO HOA's that have no reserves are not HOA's that I would want to be associated with.

To address your question, I do believe that you can acquire a "reserve study" by an independent third party that will "rate" the reserves of the HOA and the security of the HOA's liquidity. If the HOA that you want to purchase literally has 0 in reserves, this reserve study will not help you.

You can hit up family, friends, distant relatives, tap into any investment accounts you have, or pursue private money lenders to secure the extra 8% to come up with the 20% total. Given that your DTI is already relatively high, having to borrow additional money for your down payment, and then belonging to an HOA that has 0 in reserves the amount of risk you are assuming is substantially high.

[jnm2.0t]

It's a great unit, and it would be a pity to let it get away...

There are plenty of great units that will come along, don't feel like you need to jump on this one.

[BetterByDesign]

That means you have to have reserves to make up for an incompentent association.

No.

[GeoffD]

That means you have to have reserves to make up for an incompentent association.

No.

The flip side of this is that the condo board doesn't have a big pile of money sitting there burning a hole in their pocket. They're not going to blow money on unnecessary projects since that requires a special assessment and those are typically scrutinized closely.

You're going to pay it one way or the other. Personally, I prefer an occasional assessment for large projects rather than having to constantly pay into a capital fund. In normal times, I can get a far better return on my money than a condo association can get in a local bank savings account.

[BetterByDesign]

The flip side of this is that the condo board doesn't have a big pile of money sitting there burning a hole in their pocket. They're not going to blow money on unnecessary projects since that requires a special assessment and those are typically scrutinized closely.

You're going to pay it one way or the other. Personally, I prefer an occasional assessment for large projects rather than having to constantly pay into a capital fund. In normal times, I can get a far better return on my money than a condo association can get in a local bank savings account.

So either they have no clue what they are doing or they know exactly what they are doing.

Faaantastic.

[2Cor]

I'm in an association with low reserves. The situation was and is quite simple. We had enough money to do what was needed and didn't charge more. Some people owe additional monies but that's another subject altogether. The only way to find out about the association is to talk to unit owners and board members.

[NZTIGUAN]

Without wanting to sound rude it sounds to me as if you simply cannot afford this property, end of.

Cheers

[GeoffD]

Without wanting to sound rude it sounds to me as if you simply cannot afford this property, end of.

Cheers

The OP has a 2011 GTI in his signature and says he has a debt-to-income-ratio problem so he has to use the FHA first time home buyer program. Sounds to me like the root cause problem is the 2011 GTI.

[NZTIGUAN]

The OP has a 2011 GTI in his signature and says he has a debt-to-income-ratio problem so he has to use the FHA first time home buyer program. Sounds to me like the root cause problem is the 2011 GTI.

Yep, OR he's got champagne taste but a beer budget !!

Cheers

[ChrisMD]

There are plenty of great units that will come along, don't feel like you need to jump on this one.

Agreed. I think you're getting in over your head.

Your DTI is too high for a conventional loan.
You don't have a lot to put down.
The association has no reserves so you will be billed for 1/xx of all capital expenditures (where xx is the number of units in the association). Capital expenditures are not cheap.

This is just not adding up well.

It would be one thing if the association was brand new and thus had no reserves simply because time hasn't passed to allow reserves to be built up. In that case, the buildings would also be brand new and wouldn't need major, non-insurance-covered repairs yet. But you said they have no reserves by choice. That's not great. Maybe the board members and some other residents can afford to write a check when repairs are needed but I can almost guarantee that not every resident can do that. They probably have some residents who are behind already just on regular dues. When people can't pay, that negatively affects the association and the buildings. Yes, they file liens against the delinquent properties but the association still doesn't have the use of that money until the owners sell or refinance.

Speaking of insurance-covered repairs, what is the deductible on the master policy? If the board set it really high in order to save more money, then you'll also get a bill for your share of the deductible on a completely unexpected repair that is covered by insurance (storm damage, etc). Your individual condo policy might cover your share of the master deductible, but you need to know that.

Someone mentioned reserve studies. This is when an outside company (usually an engineering firm) evaluates the buildings/community, repairs that will be needed well into the future, when they will be needed, and how much those repairs will cost. Then they break that down basically into a budget that tells the association how much money needs to be aside each year so that the association has the money to cover a new roof, new elevators, new paving in the parking lot, repairs to retaining walls and whatever else as those expenses come due. I'd be wary of an association that is not meeting the study (or doesn't have one) but I'd also be wary of an association that is far exceeding the study.

Reserve studies are required by law for associations in many states. And yes, FHA will not insure loans in condo communities that aren't FHA approved and part of the approval process involves the finances. It would be bad news for the government to insure loans in associations that can't afford to repair the buildings.

Keep in mind that reserves are for capital expenditures. Non-capital expenditures aren't paid out of reserves so they also need additional money for the maintenance items. If the association is only charging residents for taxes, insurance, utilities, and things like that, but ignoring routine maintenance the same way they're ignoring capital expenses, that's not good either. While those routine costs would be a lot less than a new roof, they will be much more frequent.

[GsR]

The OP has a 2011 GTI in his signature and says he has a debt-to-income-ratio problem so he has to use the FHA first time home buyer program. Sounds to me like the root cause problem is the 2011 GTI.

The car makes up only about 5% of my DTI. A friend and I were throwing around the idea of me buying out the car with part of the down payment (about 6000 left on the lease) so that my DTI looks better, but it's not going to make that much of a difference in this particular case.

The root of the problem is indeed the price of the condo. Am I comfortable with paying that much for a condo? Not really. But the fact remains that it's way better than every other unit I've looked at so far. I've been watching the market for well over a year now, and in the particular location where I'm looking to buy, the prices have bottomed and are going up. Supply is short, and it's quickly turning into a seller's market.

As far as this unit goes, the no reserve issue will probably prevent most mortgage lenders from lending to me, base on what I've been told. Unless the seller does anything to rectify the situation, I'm most likely not going to go through with it. (for better or worse)

[hugoaswho]

A standard Condo reserve fund is around $500,000.

do they have a plan for funding the reserves through maintenance fees? usually there's a % of condo fee they are paying to replenish the reserves.

it depends on how many units there are and how quickly they need the reserve funded.

Also usually it's in the bylaws that a condominium has a certain $ is set aside for reserve.