Community Associations Face New Challenges in 2012

As more homeowners choose to live in condominium and other planned communities, it is important to keep an eye on recent developments affecting ownership and lifestyle considerations. With the ever-changing legislation related to the financing and governing of common interest communities, in 2011, several issues presented themselves to developers and property owners.

Reserves

Given the state of the economy and declining housing values, it is critically important that each association have an up-to-date reserve study performed by a qualified firm to ensure adequate reserve funds for maintenance of common areas to fund a large-scale capital improvement project, like repaving a road or replacing a roof. Owners will be issued a special assessment to pay for the project in addition to the normal assessment, if the reserve funds are inadequate. Lenders may be less inclined to finance potential buyers, if the reserve funds are deemed inadequate. Freddie Mac, Fannie Mae and the Federal Housing Administration have stringent reserve requirements for condominium lending, and the annual budget must include at least 10% allocated to replacement reserves. Any amount less than 10% must be supported by a reserve study less than one year old.

Budget

Now is the time to make sure that your association’s budget is properly done. In addition to the issues spelled out in the reserve study, pay careful attention to the association’s outstanding debts and liabilities, as well as the percentage of homeowners that are not paying their assessments. If a large percentage of homeowners are not paying, which is fairly common in many communities given the current state of the economy, this may have a negative impact on a potential buyer’s ability to obtain a mortgage to purchase a home in a condominium association. Freddie Mac, Fannie Mae and the Federal Housing Administration, which purchase and/or insure a majority of mortgages, place a 15% cap on assessment delinquency rates in order to approve lending for homes in the community.

Number of Investment Properties

Associations should keep track of the percentage of homes that are actually owner-occupied versus leased to tenants. A high level of rental properties in a community can have a negative impact on a potential buyer’s ability to obtain a mortgage to purchase a home in a condominium association. Freddie Mac, Fannie Mae and the Federal Housing Administration currently require a 51% owner occupancy rate in order to approve lending for homes in a community. Associations can amend their community documents to take investment properties into account.

As more homeowners choose to live in condominium and other planned communities, it is important to keep an eye on recent developments affecting ownership and lifestyle considerations. With the ever-changing legislation related to the financing and governing of common interest communities, in 2011, several issues presented themselves to developers and property owners.

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