2010 Jul 29th

Think Your Condo is In Good Financial Shape? Think Again.

Fannie Mae Rules the Daypile of money

Since the credit crisis Fannie Mae has come out with new lending regulations that are having real impact on Hoboken condo buyers.  Here is a brief overview of the pertinent issues:

One entity cannot own more than 10% of the total property.   This is apparently to keep one party from having too much control and risk and to prevent “vulture buyers” from taking over the property.

There cannot be more than 20% non-residental space. Most mixed commercial-residential use projects, like Maxwell Place,  will be affected by this.

The Condo Association must have at least 10% of its budgeted income designated in a capital reserve fund for replacement reserves and adequate funds budgeted for the insurance deductible. This is an issue in many of Hoboken’s older condominium associations.  For years these associations, especially the self-managed ones, have kept woefully inadequate reserves and operating budgets. Many 2 and 3 unit condo buildings have no reserves at all.

Fidelity insurance will be required for condos with 20 or more units, ensuring that association funds are protected. This requirement is being extended to include established condominiums.

No pending litigation involving the structural soundness, safety or habitability. Borrowers may ask for a waiver if they can establish adequate insurance coverage for the litigation or otherwise little or no risk of loss to the association.

Borrowers must  obtain an HO-6 condominium insurance policy on their unit unless the condo master policy provides interior unit coverage; coverage may not be less than 20% of the assessed value. An HO-6 policy typically covers personal property, personal liability, and the physical unit from the walls and in. Many policies also include special assessment coverage or the option to include a special assessment coverage rider.

The Condo Association must have adequate flood insurance. Nowadays, that means replacement value coverage.  Few Hoboken condos have sufficient coverage.  The buyer/borrower may be able to buy a supplement to the condo policy to close the gap in coverage.

This is just a quick overview of the current rules.  Buyers often ask me what the maintenance fee includes or why it is so high.  This is part of the reason.   Paying a management company to professionally manage the building and be sure these requirements are properly met is another.  I have seen deals fall apart every day due to inadequate reserves,  insufficient flood insurance and lack of records.  While it may not matter much to you as a unit owner of you’re not selling today, owning in a building with financial inadequacies hurts the marketability of your property and thus its value.  So in the long run, it matters to all condo owners.

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  1. BettyBoop

    Speaking of HO-6 condominium insurance: is there a general rule as to how much coverage one should have? I have heard so many different opinions that I’m officially confused. If I purchased my condo for $450,000 how much coverage should I really have?

  2. lori

    You should speak with an insurance agent.

  3. JC

    thanks ofr the info…As I said..I live in a self managed 4 unit brownstone with a condo association only 2 years old. One unit owners takes care of cleaning/snow removal, another garbage, the third manages contractors if needed and the fourth all administration. Obviously we all have more than 10% ownership. However the building’s annual budget really isn’t too expensive. Let’s say its $10,000 per year including a few bucks for reserves. 10% of $10,00 is only $1,000 that I should have at any given time in my reserve fund? It seems low, but if those are the rules I’ll take it.

  4. Joe

    FYI – just went to the tax board for my appeal today. Got a 20% reduction in yr 1 (2010), and another 14% in year 2 (2011). I am sure they will just raise the rate in 2011, but just thought I would pass this along to anyone interested.

  5. Craig

    Some of these requirements cited by Lori matter even if you’re not selling today. My lender recently sent a letter requesting proof that the flood insurance policy for the building had been renewed as soon as the old policy had expired. If I didn’t show proof of renewal, they would have imposed stiff penalty fees.

    BettyBook – Lori is correct that you should consult an insurance agent. But generally, the bank will require coverage to fully replace the interior structure and finishes of the unit as they were at current costs – this is usually called full replacement value coverage. It is not stated as a set dollar amount. Basically whatever it costs to restore the interior of the unit to its original condition at the time of the claim is what you get. This does not include coverage of your personal property and liability, which is extra.

    JC – I believe the 10% ownership limitation kicks in for certain sized buildings only. It would not apply to a building as small as yours. Even if $1000 meets the minimum reserve required in your condo’s case, that ain’t enough. You’re not going to be a happy camper if that’s all your HOA has in reserve when it comes time to replace your building’s roof.

  6. rich

    The 10% ownership is 10% or one unit.. If there are three units of course you can own 33 1/3%.

    The means that one person can own two units unless there are 20+ units. The problem with this rule if a builder owns a 3 family building and wants to sell you one of the condos he will still own two of them. I think two of the units would have to be in contract before you could get a mortgage.

  7. Kimberly

    We recently had to increase our coverage for our 6-unit building (built in ’87). One unit owner that bought within the last few years was contacted by a bank that BOUGHT his mortgage on the SECONDARY MARKET, and although he had closed years prior he had to produce a flood policy that was up to FEMA-snuff or pay for his own at a rate determined by the bank.

    I had been under the impression that we had to cover 100% of the replacement value of the building. Our flood policy had a replacement value of XXX. However, I came to later learn that the replacement value is not equal to that of what is on the flood policy. It turns out that the true replacement value is that of which is on your GENERAL INSURANCE (FIRE) Policy, which increases each year with inflation. This makes sense if I am the insurance company because the flood policy replacement value(written in ’87) was the same as it is today, and the general fire policy’s replacement value was more than double from its inception.

    Thought I would share since it took us a bit to figure it out. Donna (from Muller Insurance, our General Fire) had to explain it to our agent that originally sold the flood policy. She is a wealth of knowledge, seriously.

  8. whynot

    I agree with JC. For all of this financial talk, it seems like a real stretch:

    “Let’s say its $10,000 per year including a few bucks for reserves. 10% of $10,00 is only $1,000 that I should have at any given time in my reserve fund? It seems low, but if those are the rules I’ll take it.”

    Come on – $1,000 can cause that many issues?

    :( :( :(

  9. JC

    Does anybody have any insignt on how much a roof would be on a typical 20 ft wide brownstone? Thnx

  10. SS

    Great post Lori. I’m in the process of re-financing my unit in a 100-unit bldg and all lenders are requesting all this info and more. Number of units rented out. Number of maintenance delinquenices over 30 days, copy of the recent budget, minutes of meetings, etc. It’s no longer just about your ability to pay the mortgage. It’s so much more than that.

  11. Ayhan

    A girlfriend in my grade 12 class died in a car crash durnig our senior year. (1966)The car she was a passenger in did not make a curve in the road and rolled in the ditch. She died at the scene but the person who was driving lived. This song, sung by the Cavaliers, played constantly on the radio after this crash. It is a definite flashback the minute I hear this song. Very, very sad.

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