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November 18, 2010

Pre-Foreclosures, Short Sales Weaken HOAs

Condo complexes and homeowners associations (HOAs) can be complicated entities in this day and age. A building with high short sale—and pre-foreclosure/foreclosure— levels can sometimes indicate a troubled HOA.

Monthly HOA dues sometimes go unpaid in these situations, leading to weaker HOA reserves. And that isn’t good for building maintenance or resale value, as it’s important to maintain properties to keep them liveable and attractive to potential owners. There’s nothing worse than living in a condo property that has a poor reputation in the real estate community.

So do some digging around if you’re interested in purchasing a unit in a particular building. If you find that there are one or more units in pre-foreclosure or on the market as short sales/bank-owned, heed the red flag and do your due diligence times two on all the critical HOA documents. The HOA board president or property management company typically fills out a condo financial statement, which will indicate how much money is in reserves for the HOA. Make sure it’s a healthy amount in relation to the building size and needs, and certainly cross reference the reserves with the operating and upcoming expenses.

Find out if the HOA has agreed to cover monthly dues for any particular units. I witnessed this scenario in 2009 in a SoMa building, and the neighbors covering the dues were starting to feel the strain. (A couple months of covering dues is one thing, but six months to a year or longer tries everyone’s patience and bank accounts.) In the end, you don’t really need the headache of stepping into a financially disadvantaged building. After all, HOA dues are not tax deductible, and you want to make sure the money you do pay (which is not refundable, either) is going toward maintaining the property.

Your ability to get the best loan program possible is crucial, especially with interest rates being so low these days. Be aware that some banks won’t lend on buildings with more than one short sale condo on the market or in escrow. Check with your lender of choice to see if this is its policy. It would not be fun to have your offer accepted on a unit, only to hear two days later that your lender choices have suddenly narrowed.

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