Condo Owners Take Note - New Reserve Requirements!

If your condo building has 10 units or more, read on. Whether or not you're planning a sale, this could have implications for you. 

New Fannie/Freddie lending guidelines were released in August. Condo lenders will no longer be able to give an HOA a "limited review" when making a loan. Instead, they'll be taking a close look at each building before deciding to help a buyer with their purchase.

One of the most critical new guidelines is an increased minimum for HOA reserves. They've gone from 10% to 15%. Meaning that an HOA must have on hand at least 15% of the recommended reserves based on a reserve study. 

Two things: 

• Your HOA should absolutely already have at least 15%. 

• Most buildings don't. 

Do you know where your HOA stands? 

50% reserves or more used to be kind of an arbitrary minimum we would look for when recommending a building to our clients. Of course it's case by case, but that will give you an idea. 10+ years ago it wasn't unusual to see reserve accounts that were 80% funded.

Now, many Bay Area HOAs don't even make the 15% minimum. 

Most homeowners want the security of maintaining a healthy reserve account to cover the cost of future maintenance and repairs in the building. But costs of materials, insurance, labor and more have increased faster than peoples' tolerance for increasing HOA dues. So now most Bay Area HOAs that we see are chronically underfunded. 

And it just became very difficult for buyers to buy in buildings that have a shortage of reserves. 

I'm not selling, so why should I care? 

In a word: Property Values. (ok, two words)

If the buyer pool for your neighbor's condo is limited to cash buyers or buyers willing to search for creative lending, the sales price will take a hit. A lower sales price directly affects your value, and it can take time for a building to recover from a series of undervalued comps. 

Not to mention: Low reserves could lead to future shortfalls, special assessments, and even delayed repairs in your building. 

So… What should I actually do about all this? 

Check out the latest board meeting minutes and financials, just to know where you stand. If things don't look great? Get involved. Maybe even sit on the board, if you don't already. Make sure that HOA dues are rising enough to keep up with costs and also grow the reserve account. It'll be a great investment in the future of your asset.