Despite all the lovely roads and fire trucks we encounter every day, people still like to complain that their taxes aren’t being put to good use. It would seem they’ve never heard of an FHA loan. These aren’t mortgages issued by the Federal Housing Authority, rather ones insured by them. This insurance enables the lender to offer terms with significantly reduced down-payments, sometimes as low as 3.5% of the purchase price. And while the program explicitly exists to aid home buyers and not investors, it can still provide a significant boost to property values. FHA approval is critical so don’t let condo delinquencies hurt you.
If a building has FHA approval, the low down-payments could attract more potential buyers, creating “seller’s market” conditions. Furthermore, approval means sellers can offer higher list prices, confident that financing will be available. Together these factors will almost certainly mean higher property values within the entire project.
Of course, the old saying applies: “there is no such thing as a free lunch”. The FHA doesn’t provide the insurance without stipulations. In the case of condominiums, the building itself must meet certain requirements and be approved. You can find out if your property is already eligible by visiting the HUD website. The duty for achieving this status falls squarely on the board of directors and management. Just as it is their duty to address condo delinquencies that may hurt, in order to keep the association running smoothly.
So what should a Condominium do if they want their project FHA approved and eligible? Here are the first steps:
- Make sure the Condo is in a mapped location.
- Complete HUD Form 92250 for environmental review.
- Complete HUD Form 92010 for an Equal Opportunity Employment Certificate.
- A letter describing the project, including number of units, facilities, and type of structure.
- Provide proof of the location.
Easy enough, but what are the actual requirements?
The FHA likes to see “stability”, which they measure by how many units are owner-occupied. If a building is owned primarily by investors, property values are likely to fluctuate, which the FHA does not like. A unit is considered “owner-occupied” if it is not rented or occupied by a tenant, listed for sale or rent, or has a buyer who has paid escrow but intends to use the property as an investment. This can be a touchy subject, but if your governing documents allow for unlimited rentals you can expect to be that getting FHA approval a little more difficult. However, if you’ve paid for a reliable escrow service, like this San Diego Escrow Company for example, you should have all of the appropriate legal documentation. This should mean that the FHA will be able to brand your home investment as “owner-occupied” eventually. Although, even if unlimited rentals are not allowed, the FHA will not look kindly on a rental rate of 50% or higher.
There are financial requirements as well:
- The project has replacement reserves of at least 20% of the budget.
- No more than 10% of the units are in arrears (more than 60 days past due on assessments). These condo delinquencies can hurt.
- The condominium has three years of acceptable financial documents.
- The project is at least 12 months old.
This is where the board really needs to step up. It should go without saying that any board worth its salt keeps solid financial statements, and though the temptation to keep assessments low is very real, a board should always be striving to fund reserves. So that just leaves managing condo delinquencies.
If your condominium exceeds the permitted amount of past due accounts, something must be done. A uniform collection policy is a great place to start, as it provides the framework for handling delinquencies. Unfortunately, policy isn’t always enough and sometimes action must be taken. The traditional avenue has always been legal. Retain an attorney, file a lien, and foreclose has been the default course of action for condo delinquencies. While this strategy may work, it is costly, laborious, and time consuming. With the average foreclosure taking months, it could be a long time until you hit that 10% target. Even if the board does foreclose, the unit will most likely be rented, a factor that can work against approval. What is needed is a condo collections strategy that involved a collection agency.
If your goal is the timely, efficient, and simple reduction of delinquencies you should consider enlisting a specialized collections agency. These institutions have no ulterior motives as their interests are aligned with the association, and it is their job to collect past due assessments in the timeliest manner possible. Many if not all condo collection agencies work on a form of contingency where they will not get paid unless they collect. Some have even developed specialized technology and training methods that enables them to accomplish this singular goal.
So there are some forms to fill out, and some timed requirements to meet, but as far as the board is concerned the power to raise property values hinges on their record keeping, their determination to fund reserves, and their willingness to try a new and bold approach to the collection of delinquent assessments.
Mitch Drimmer is a respected thought leader in his field and has led numerous continuing education classes in collections, His articles have been published in key trade journals and newspapers, and he is a speaker at educational seminars. Drimmer is also a former board member of the Florida Community Association Professionals (FCAP) and earned his company the distinguished FCAP Reader’s Choice Award for collections four years in a row. Throughout his career, Drimmer has worked with community associations to help them see their way through tough times, especially during the real estate crash. He is a passionate advocate for community associations and has participated in the legislative process over the years trying to bring fair and equitable legislation that serves community associations.
Drimmer earned a BA in History from Hunter College and served as CEO of Drimmer Industries, Inc. in New York City for 35 years.