I was recently involved in a transaction (sale of a condo) that turned out to be what is known as a "non-warrantable" property. I've been selling real estate for many years, and that was the first that I'd heard of the term, but apparently it is becoming more prevalent across the country and in California as well. It is estimated that between 450-500 HOAs in Southern California could be considered "non-warrantable".
So what does "non-warrantable" imply? In the case of the condo that I was selling, it was impossible to obtain financing -- not even "hard-money" lenders would touch it (lenders of last resort that charge very high interest rates for the privilege of lending the funds). The problem(s)? Deferred maintenance, low reserves, and the nail-in-the-coffin: the property was not insured for full replacement cost. In the event of major disaster (fire, for example) there would not be adequate insurance funds to rebuild the property -- that's a problem!
Oddly enough, there is a website that allows one to look to determine if an HOA is on the "blacklist". That's the good news. The bad news is that it is not readily available to lenders and/or Realtors -- the people that might benefit the most (or at least a lot!) from having access to this information! But it is available to Property Management companies and members of HOA boards, so at least there is access if one approaches the right people.
- Click Here to Link to the "Blacklist" Website
So what is the solution to ensuring that one's condo HOA isn't on the blacklist? Get involved! Keep an eye on your HOA's budget, spending, and how much is dedicated to reserves each month. Is the amount adequate? Insist that maintenance is conducted in a timely manner. Unfortunately, in many HOA communities the focus is on keeping HOA dues low, without considering the impacts:
- Click Here for Recent OC Register Article Re Non-Warrantable Condos
So if you're thinking of buying or selling a condo, it's best to contact a board member or the property manager for the HOA to determine if it will be an issue for your transaction!
So what does "non-warrantable" imply? In the case of the condo that I was selling, it was impossible to obtain financing -- not even "hard-money" lenders would touch it (lenders of last resort that charge very high interest rates for the privilege of lending the funds). The problem(s)? Deferred maintenance, low reserves, and the nail-in-the-coffin: the property was not insured for full replacement cost. In the event of major disaster (fire, for example) there would not be adequate insurance funds to rebuild the property -- that's a problem!
Oddly enough, there is a website that allows one to look to determine if an HOA is on the "blacklist". That's the good news. The bad news is that it is not readily available to lenders and/or Realtors -- the people that might benefit the most (or at least a lot!) from having access to this information! But it is available to Property Management companies and members of HOA boards, so at least there is access if one approaches the right people.
- Click Here to Link to the "Blacklist" Website
So what is the solution to ensuring that one's condo HOA isn't on the blacklist? Get involved! Keep an eye on your HOA's budget, spending, and how much is dedicated to reserves each month. Is the amount adequate? Insist that maintenance is conducted in a timely manner. Unfortunately, in many HOA communities the focus is on keeping HOA dues low, without considering the impacts:
- Underfunded Reserves
- Frequent Special Assessments to Cover Expenses for Which There are Not Adequate Reserves
- Numerous Deferred Maintenance Items
- Inability to Sell the Property to Buyers Who Require Financing (Most) -- Can Only Entertain Cash Buyers (or in some cases - much higher interest loans) - Usually at a Steep Discount!
- Click Here for Recent OC Register Article Re Non-Warrantable Condos
So if you're thinking of buying or selling a condo, it's best to contact a board member or the property manager for the HOA to determine if it will be an issue for your transaction!
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