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Small amount in reserves may mean that the 75% unit holder is trying to bump up his rental income by not saving for the upcoming expenses.
When expensive works are needed, he might sell his units and move away, leaving the remaining owners with heaps of special assessments.
Exactly, and who wants to live under yet another dictatorship?
It might be fun to stop by on a weekend to talk to some of the current residence just to get more perspective and verify the property records to be sure you were given correct information. Also, there are plenty of threads here discussing the HOA horror shows...RUN!
I recently looked at a condo unit in an old building that has about 20 units total. While touring the unit, I met the building caretaker and begin to ask questions about the HOA. I learned that one particular owner is higher in the hierarchy than the caretaker, because they own 75% of the units in the building and is renting them out. Apparently, the HOA still has meetings monthly but this one owner is the only person who attends them. I also did some research and learned that this person owns their own property company. Furthermore, the building has a very small amount of money in their association reserves. The unit itself is gorgeous and this is in a great location. I think I am able to afford it regardless of the ratio of renters to owners. I don't mind lots of renters in the building and would prefer that to attending numerous HOA meetings and listening to people nitpick about the rules because they have nothing better to do with their lives.
Is this is situation that is workable or should I run the other way?
I recently looked at a condo unit in an old building that has about 20 units total. While touring the unit, I met the building caretaker and begin to ask questions about the HOA. I learned that one particular owner is higher in the hierarchy than the caretaker, because they own 75% of the units in the building and is renting them out. Apparently, the HOA still has meetings monthly but this one owner is the only person who attends them. I also did some research and learned that this person owns their own property company. Furthermore, the building has a very small amount of money in their association reserves. The unit itself is gorgeous and this is in a great location. I think I am able to afford it regardless of the ratio of renters to owners. I don't mind lots of renters in the building and would prefer that to attending numerous HOA meetings and listening to people nitpick about the rules because they have nothing better to do with their lives.
Is this is situation that is workable or should I run the other way?
You'd be basically buying into an investment with someone who holds all the cards. If that's what you're okay with, then go for it. I'd run the other way.
And gigantic cudos to you for doing your research. Well done.
Exactly, and who wants to live under yet another dictatorship?
It might be fun to stop by on a weekend to talk to some of the current residence just to get more perspective and verify the property records to be sure you were given correct information. Also, there are plenty of threads here discussing the HOA horror shows...RUN!
If you want to buy an apartment in a multi-family building - as the OP wants to do - you have to belong to an HOA. Unless the building is a co-op, which can be even worse. Condos and co-ops are often the only purchase opportunity in downtown areas and major cities. It's not helpful to tell people to run from any HOA since they have no alternative. It's more useful to explain the factors to watch out for.
Is that owner who has 75% of the units also on the board of directors? Depending on the HOA bylaws (and/or other governing documents), a majority vote by owners may not be required on all matters such as use of reserves. It all depends upon how the HOA was set up.
Let's say he is not a director and that a majority vote by owners was required to tap into reserves or levy a special assessment. The board decides that a new paint job of the building is necessary. Since this guy would be paying for 75% of the cost, he has a lot to think about. Obviously.
Let's say there is no vote required by owners and the board decides to repaint. If the reserves cannot cover it and there is a special assessment, can he afford it or will 75% of the building go into default? In the meantime, with no funds to get the painting done, the rest of you are stuck, paying your share of the assessment and no painting is done.
The biggest red flag for me is low reserves in the first place. You have done above and beyond due diligence to investigate the HOA. Tipping my hat at you for that! Have the reserves always been low or has there been some large capital expense for something recently that tapped into the reserves and it will just take time to build them back up?
You mentioned talking to the "caretaker" ... I guess that to mean there is no property management company working for the HOA and that it is the HOA board who manages it all, the day-to-day business as well as dealing with rule violations and any potential unruly renters, collecting fees/dues, keeping all books, etc.. Although most financial documents are only available to owners, and not to potential owners, if you could see a budget or a financial statement, then you could see how well money is managed.
As the above poster mentions this is a detriment to obtaining financing, although a quick call to your lender can verify.
There are lots of complexes that went this route when the market crashed the last time.................still great places to live but might be difficult to sell if you needed to if the ratio does not change.
Good Luck
I know when I tried to buy a condo, the VA wouldn't approve it because too many of the units were rented. Mortgage people don't like to see a complex with more than 20% renters (I'm pulling that particular number out of thin air).
Think about it - if you buy this condo with plans to actually live in it yourself, how is it much different than living in an apartment complex?
Under its current guidelines, FHA insures single-family condominium loans for units in developments where at least 50 percent of the units are owner occupied. The Final Rule maintains that limit but also puts into place a system via which FHA will set its owner-occupancy threshold at a rate between 30 and 75 percent, subject to adjustments to reflect market developments. FHA originally proposed setting the lower band of possible thresholds at 25 percent but determined that such a low range could jeopardize the health of its mortgage insurance fund.
Under its current guidelines, FHA insures single-family condominium loans for units in developments where at least 50 percent of the units are owner occupied. The Final Rule maintains that limit but also puts into place a system via which FHA will set its owner-occupancy threshold at a rate between 30 and 75 percent, subject to adjustments to reflect market developments. FHA originally proposed setting the lower band of possible thresholds at 25 percent but determined that such a low range could jeopardize the health of its mortgage insurance fund.
The majority ownership disqualifies this complex before we even get to owner-occupancy percentage.
Single Investor Ownership: For properties with more than 20 units, no single investor, entity, or related party may own more than 10% of the units within the project. For properties with 20 units or less, no individual owner, entity, or related party may own more than one unit.
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