In a post written back in July "Condo Special Assessments-A New Twist in Today's Market" my warning to buyers who were considering buying a condo in Northern Virginia was to pay careful attention to the association budget. In our current market and with the changing lending environment it seemed like good advice. Sure enough one of my buyers just found out what lenders think of underfunded association budgets.
In a condo developments completed in the last three years in Northern Virginia it isn't unusual to find a high investor to owner ratio. Contracts written in 2003 with high hopes of a flip in 2005 were smashed when the housing market started its downward slide. As a result flippers found themselves as landlords losing hundreds of dollars a month and with adjustable rate mortgages resetting in 2008 and 2009. As a result the perfect storm was brewing on the horizon for condo budgets to take a beating.
The first thing most lenders in Northern Virginia do is look to see if the condo you are buying is on the "approved" list for funding. If not they will request the completion of a condo questionnaire by the association management to determine whether the building should be approved for your loan. The first red flag the lender looks for is the investor to owner occupied ratio. If the number of investor owned units is high they may flat out reject the loan application or for my buyers they took it one step further.
In this case the next step was to ask to see the actual condo association budget to determine if they had the reserves required in order to cover expenditures. What the examination of the budget uncovered was a significant number of owners behind on their association dues, an underfunded budget for normal maintenance and a budget that would leave a majority of the owners in the hot seat should a major expense occur. Foreclosures were on the rise in the building, evident by the number of liens on units and as a result the buyers heard the dreaded words.......
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