1991 Uniform Condominium Code of Alabama

By Joe Savage, Real Estate Broker



Now that the 2013 Hurricane Season is winding to a close, I think I can talk about insurance without it appearing in poor taste or a scare tactic. While I am not an insurance professional, I have had many dealings with them in my current role as a real estate broker, and also when I managed the homeowner associations (HOA's) at The Beach Club from 2001-2005. Enough dealings that I learned to ask many questions that the uninitiated may have failed to consider. It is my intent in this and a subsequent article to share those questions so that you may ask them yourselves, in order to better manage your risk.

In 1991, the state of Alabama rewrote its condominium statutes. This rewrite is known as the 1991 Uniform Condominium Code of Alabama. It is commonly referred to in documents as the "Act" or the "1991 Act." It stipulated that all condominiums of a "stacked" nature, incorporating after 1991, must carry an "all-in" endorsement in their insurance. "Stacked" means just what it sounds like: one unit on top of another. All four condo HOAs at Plantation are of a stacked configuration. An "all-in" endorsement essentially adds to the coverage of the exterior, common elements (stairs, corridors, exterior walls, roof, etc.) by covering the interior, private elements, "...as they were on the day the developer first conveyed them." "As they were built," if you will. That would include walls, ceiling, flooring, cabinets, wiring, plumbing, appliances, electrical...everything that would be considered a "fixture" and would necessarily run with the property in the event of a sale. That would be just about everything except furniture and furnishings. The ACT, and thus this requirement, only applies to Plantation Palms, as it is the only condo HOA incorporating after the ACT was implemented in 1991.

The Declaration (governing document) of each of the other three condominiums dictates that the HOA "...obtain insurance upon the Property insuring it (including both Common Elements and all Units) against all risks." It is so written in the Declaration of all three other condos (see Article X.) To a layman like me, that sure sounds like the HOA has to take out a policy which effectively has an "all-in" endorsement as it is defined in Alabama; others may refer to this as an as-built endorsement.

Some confusion has developed about whether or not the three condominiums incorporated before 1991 have this coverage. In several recent sales, the lenders involved expressed concern that they were unable to confirm the presence of this coverage from the "Evidence of Insurance" documents provided by the respective associations insurance agents. Once contacted, the agents were unable or unwilling to categorically state that the interiors of the units would be covered in the event of a covered claim. In an email communication, they did "...confirm that the Association's master property policy follows the condominium docs when a claim is processed." This seemed to be acceptable to the lenders. However, the question you need to ask yourself (and perhaps your board of directors) is "Must I take out additional interior coverage to protect myself from the risk that my interior may not be covered by the HOA's current master policy?"

Next Article: The" HO-6"...What It Is and What It Isn't and Its Question

3rd Quarter Update

By Joe Savage, Real Estate Broker

The weather is beautiful along the Alabama Gulf Coast this time of the year. Shrimp Festival on the second weekend in October, Monarch butterflies are migrating through their flyway, temperatures are giving us a breather, but the gulf is still warm enough to take a refreshing swim. This is a time to come visit your property at the beach. Once November gets here, its all about the holidays, so take advantage of it now.

September closed out the third quarter, and as of September 30, there had been 34 sales for the year across the Gulf Shores Plantation. Of those, 12 were in the third quarter. That makes all three quarters consistent so far this year: 11 in the first quarter and 11 in the second quarter. There is currently one unit under contract in the MLS, and is projected to close near the end of the month. Prices have trended upward throughout the year, but we expect to see some deals hit the books in the fourth quarter. Someone purchasing a unit as we enter the lowest-use, lowest-rent period of the year typically expects some discounting as the quid pro quo for assuming the expenses from the seller for those months. Hopefully that discounting will not be too drastic.

Currently, there are 42 properties for sale across the complex: nine in Plantation East (two-1BR; seven-2BR); seven in Plantation Dunes (six-Sunsuites; one-2BR); 18 in Plantation West (four-Sunsuites; 14-2BR); seven in Plantation Palms (three-1BR; four-2BR); and one duplex for sale in the PUD. This is still a lower inventory than is common, with a balanced market being somewhere in the 10% of inventory for sale, or around 60-70 units. There is some concern for the percentage of units for sale in West (there are 107 units in west). This excess inventory could have an adverse impact on pricing in West, and beyond. That is, West and East are both wood-frame structures sharing the same setting and beach, and are of comparable age. With these similarities, sales in each are often used as comparable sales in the other when a mortgage appraisal is conducted. Thus, falling prices arising from a glut of offerings in West would very likely have a detrimental impact on prices in East, and even in Dunes to some extent, due to the similarity in ages of the three. GSP Development, by both its form and function, is necessarily intertwined and interdependent it is not likely that something can happen in one complex, and not have an effect on the other four.

This diminishing inventory can also be seen at neighboring Beach Club, as well as in Gulf Shores and Orange Beach. Conversations with other agents, property managers, and owners suggest that there is likely a shadow market of sellers out there, waiting for the price to get right before they take their property to market. Lets hope they all don't decide to do it at the same time!

Renter Perceptions: Why should I care?

By Joe Savage, Real Estate Broker

“I don’t rent…as far as I’m concerned, renters just tear the place up and make a lot of noise.”

“Why?” indeed. I invariably hear this 4-5 times a year . . . most often around annual homeowner meetings, when everyone gets together and talks about the budget and maintenance and all that jazz. The simple answer is, “Because it directly affects your property values. Yes, yours! Even if you don’t rent your unit.” 

When it comes time, the buyer of your unit may intend to rent it to help offset his expenses. Most buyers do. Incidentally, the first thing out of their mouths when considering a unit is, “May I see its rental history?” Even (and especially) if you don’t have a rental history, the buyer’s agent will work to find comparable rental histories in the complex for units like yours. So your renting neighbors directly influence the value of your investment. The stronger the rental history, the more desirable the unit, the higher price it can command. MHI’s research indicates that approximately 80% of Gulf Shores Plantation’s units are rented.

If you are interested in seeing the value of your investment grow, the question becomes “How do we strengthen rental performance?” This is where renters’ perceptions of where they have chosen to vacation with their families becomes critical, as repeat business is part and parcel of growing rentals. No business can survive solely on new business. It is imperative that a rental guest leaves with every intent of returning and with a desire to extol the virtues of his decision to his friends, co-workers and neighbors. You can’t buy word-of-mouth advertising…you have to earn it.

But here’s the catch: Most renters don’t even begin to understand that GSP Mixed-Use Development is comprised of four independent condos and a PUD. They perceive it as a “family resort,” with all amenities. When you start engaging in renter-unfriendly practices or policies, like double or overcharging for deeded amenities, conducting major repairs during “high” seasons, “territorializing” the property and breaking it up into what amenity can be used by which guest, that affects the values of ALL owners in ALL phases, because the impact on a short-term guest is simply that “Plantation isn’t what it used to be!” They don’t really understand Plantation East vs. Plantation Dunes vs. Plantation West, etc. (nor do they wish to be bothered with it) - they just know the experience has deteriorated and therefore they begin to look elsewhere. 

Same goes for buyers. Most buyers have arrived at their decision to buy at GSP Development because of their past visits as rental guests, and those visits typically involved a seamless, quality resort experience - and THAT is what they want to buy. When that stops, then the properties at GSP will no longer be a resort but will be just another condo like the stand-alone condos down on West Beach and Orange Beach. Then the Beach Club will be the only place left in Ft. Morgan for a “resort experience.”

“Why should I care about renter perceptions?” Well, I guess you shouldn’t . . . if you don’t care how much your investment is worth.

July 2013 Real Estate News

by Joe Savage, Real Estate Broker

This month’s article takes a look at the year-to-date market, as we are at the halfway point in 2013.

We’re going to take a two-part approach to this discussion: the “short form” here, for those of you who might get bored by statistics, and a full issue of Sandpiper Real Estate News with more detail for you numbers-buffs. The detail issue will be emailed, however, so if we don’t have your current email, and you want to receive a copy of this report, please email Lee Kramer at lkramer@mandokihospitality.com to update your email address or sign up to receive our newsletters.

We have seen a dramatic increase in the number of units sold at the Plantation. Last year, there had only been 14 sales in the first six months of 2012. This year, during the same time period, we have had 21 sales; a 50% increase over 2012. The lion’s share in the number of sales in Plantation West and the PUD. There was limited growth in Plantation East and Plantation Palms, and a slowdown in Plantation Dunes. More details in the follow-up report.

As to pricing and property values, we have seen a solid increase in the condominium sale price per square foot across the property, from a median of $157 per square foot in 2012, to $168 in 2013; thus, we are selling more units, and at better prices. (Note: Sales in the PUD are not included in these calculations.) I will discuss the per-complex, per-floorplan data detail in the follow-up report.

It appears that 2013 has begun quite auspiciously for sellers at GSP, and especially for sellers listed with Mandoki Realty. Mandoki Realty brokered 11 of the 21 sales so far this year, and has been able to progressively increase the sales prices when other agents are leaving money on the table. If you want to sell your unit, and sell it at its best price, you can do no better than to list it with the ONSITE agent—Joe Savage at Mandoki Realty!

REAL ESTATE NEWS
By Joe Savage, Real Estate Broker

The ACRE (Alabama Center for Real Estate) at University of Alabama has published its statistics for April 2013 for Baldwin County condominiums, and they show some pretty good news for the area.


TOTAL CONDO SALES: This is just the raw number of condo sales in April. These are up 9.4% from March 2013, 8.6% from April last year, and 32.4% when compared to the five-year average of April sales for period 2008-2012! It appears the demand has returned.


MEDIAN SALES PRICE: This is the middle sales price…it is not an average. This is the sales price that has half of sales prices above it, and half below it. It removes the skewing effect that super high-priced sales and super low-priced sales (“outlyers”) would have on an average calculation. April 2013 was up 16.3% over March, 8.2% over April last year, and 9.4% over the previous 5-year April average (it’s ok to use the average here, as by using the median sales price, we have already adjusted for the “outlyers.”) It appears that the buyers have gotten the message that we’ve already hit bottom and are on the way back up.


ABSORPTION RATE: This is the inventory-to-sale ratio, and provides a good little snapshot statistic as it speaks to both supply and demand by dividing how many condos are for sale by how many sold for the month. It’s commonly referred to as the “absorption rate” as it projects how long it would take to absorb the current inventory at the current pace of sales. The bigger the number, the slower the market; the smaller the number, the hotter the market. ACRE considers the market to be in balance with an absorption rate of 6-7 months. April’s absorption rate was 7.0. That’s down from March’s 8.0 and WAY down from the 5-year average of 18.0! Demand is up, supply is down…that is likely conspiring to push that median sale price up, market-wide.


Now, this is for ALL of Baldwin County, including Daphne and the Eastern Shore as well as middle and north Baldwin. It is only a monthly snapshot, and so it is not realistic to try to get a comparable set of stats for GSP that could be considered valid. After June is complete, we will have a half-year of performance, and I will be compiling a set of year-to-date stats to see how GSP is faring relative to the market in general. Stay tuned!

CONDO QUESTIONNAIRE: What You Don't Know CAN Hurt You - Part III

by Joe Savage, Real Estate Broker
This is the final installment of the three-part series about the Condo Questionnaire required by lenders who are considering making a loan for the purchase of a condominium unit, which loan would later be sold to Fannie Mae or Freddie Mac, Government Subsidized Entities (GSE) the secondary markets. This month, we cover items in the questionnaire which deal with the condominium’s risk.


There are items in the questionnaire which deal with Home Owner Association (HOA) risks, and how it manages them. The most common forms of risk management are insurance: property, liability, and fidelity. The GSE wants to be sure that the HOA is carrying enough insurance that it won’t suffer damages which could in turn adversely affect its loan collateral…the unit. The GSE require that the insurance “bundle” purchased by an HOA includes coverage for damages to the physical property (Property & Casualty,) damages from a liability claim from someone suffering an injury or damage on its property (Commercial General Liability,) and damages from theft or crime committed by its officers or employees (fidelity bond.) The GSE has guidelines for what percentage of the value of the property is actually insured, and what the deductible must be. If too little of the value is insured, or there is too high a deductible, that affects the amount of risk the HOA (and, by extension, the GSE) is taking, it will affect underwriting decisions.


The other type of risk the GSE are interested in is litigation risk. That is, there is a very specific question about whether an HOA is “…subject to pending litigation.” It doesn’t matter whether the HOA is the defendant in the litigation, or the plaintiff. Mostly, the GSE are looking for two kinds of litigation: 1)Suit for Damages in which the HOA is the defendant (liability, “slip-and-falls”, wrongful death,) and 2)Suit for (Latent) Construction Defects in which the HOA is the plaintiff (HOA sues builder/developer for construction defects.) In the former, the HOA stands at risk of a hefty judgment which could cause unusually large assessments to be levied against its homeowners, and could cause “run-off” of homeowners unable or unwilling to pay. In the latter, there is an implication inherent in the suit that the structure is simply not sound, and may require high expenses to set it right…especially if the builder were to go bankrupt and be unable to pay a judgment for the HOA. Litigation is very complex, however, and most underwriters are not attorneys, so this is a questionnaire item that can derail a loan in a blink. Unless an underwriter can fully understand and be willing and able to defend his/her decision to approve the loan in the face of pending litigation…well, as I said last month, “…it’s easy to say ‘no.’” …and if a buyer can’t get a loan because of unacceptable risk--pending litigation or inadequate insurance--then prices invariably gravitate to “cash purchase” levels, and that can put a serious crimp in property appreciation.


In summary, we are currently experiencing all-time lows in mortgage interest rates; but, we are also experiencing all-time highs in lender risk-aversion…a “tight credit market.” This results in many people wanting to borrow (to buy or refinance) but with few lenders willing to loan except in the most safe circumstances. In order for prices to appreciate in any particular condo complex in such an environment, loans must be available for purchases of its units. Thus, its HOA must be vigilant and proactive in managing the perception by lenders of the complex’s “warrantability”…the likelihood that the lender will be able to sell such loans to the secondary market.

CONDO QUESTIONNAIRE: What You Don't Know CAN Hurt You - Part II

by Joe Savage, Real Estate Broker

This is a continuation from last month about the Condo Questionnaire required by lenders who are considering making a loan for the purchase of a condominium unit, which loan would later be sold to Fannie Mae or Freddie Mac, the GSEs (Government Subsidized Entitiesthe secondary market.) Last month, we discussed the section of the questionnaire dealing with the status of the condominium and its homeowner association (HOA.) This month we will talk about items which deal with the nature of the condominium.
This questionnaire is used by Fannie and Freddie to determine the nature of the property. They do not want to make loans on apartment complexes or resort hotels that are masquerading as a condominium. They ask questions about whether hotel services are available on the condo property, or if the HOA is actively involved in short-term rental activities. Things like a check-in desk on property, daily maid service, revenue sharing, and limited owner use are all hallmarks of a condotel or condohotel. It is very difficult to get a loan from Fannie or Freddie on these types of properties. A high percentage of pure investor-owned rental units is another cue that the condo may just be an apartment complex that the unit owner really never intends to stay or use the unit at all just press it into rental service.


We will not address time shares because none of the Plantation properties are a time share, but comment that the GSEs do not look favorably on loans for the purchase of time shares.


None of the condominiums at the Gulf Shores Plantation are condotels or apartment complexes. There is no checkin desk on any property (MHI operates its registration center on its own private property, no differently than any other property management company in town). There is no limit to how often an owner may use their property, and the HOAs are not involved in any rental activities as it might pertain to private units or common amenities. Almost all of the units are second homes and are actively used by their owners at least a minimum of 14 days a year. There are some investors who own units at GSP, but they amount to less than 10% of the units.


All four condominiums at GSP are legally formed condominiums which meet the necessary criteria for the GSEs. However, that does not mean that an underwriter cant misinterpret the questionnaires contents if it is not completed in such a way as to prevent such misinterpretation. In GSPs situation and setting, it could be easy for an underwriter to merely dismiss the condos in the development as resort hotels and avoid the chance they may get in trouble for agreeing to loan on them. Thus, it is critical to the value of each homeowners investment that care and time be taken to ensure that an underwriter be helped to understand the true nature of the condominiums at the GSP.

CONDO QUESTIONNAIRE: What You Don't Know CAN Hurt You - Part I

by Joe Savage, Real Estate BrokerA leading factor in price appreciation in real estate is the availability of credit. Buyers have to have good credit histories or they can't borrow the money for a mortgage. Lenders must be solvent and have an appetite for the risk a loan represents. These days, banks make very few residential mortgage loans which they actually keep on their books. Rather, they sell the loans to the "secondary market" to make an immediate, albeit smaller profit and get their loan money back so they can loan it again.

These days, since the collapse of the "shadow banking industry," this secondary market is dominated by Fannie Mae and Freddie Mac, the Government Subsidized Entities (GSE). This becomes an issue which affects condo property values because a lender must feel that a particular condominium is warrantable; that is, it will meet the high underwriting standards set by the GSE's, or they won't loan for purchases in that complex. Their reasoning is simple: If a lender originates a loan on a property, and sells that loan to one of the GSE's, and on the loan's review the property is found to be unwarrantable, the GSE will make the lender buy the loan back. This is a very undesirable situation for mortgage originators.

The GSE's have neither the manpower nor the organization to inspect every condominium. Therefore, they develop guidelines that assist lenders' underwriters to determine if the complex is warrantable. From these guidelines, lenders construct a "Condo Questionnaire" which is forwarded to the Home Owner Association (HOA) or its manager for completion. The success of a condo sale can often swing on how this questionnaire has been completed, as well as how the underwriter interprets the results relative to the GSE's guidelines and the level of "compliance risk" that any variances might represent.

This and the following two articles will discuss the key issues addressed in typical Condo Questionnaires and how they affect the underwriting decisions, and thus property values. If you can't finance a purchase easily, sale prices adjust to accommodate cash purchases, higher interest rates, higher down payments, or all three.

Besides wanting to know where a condominium is located physically, the questionnaire seeks to determine the completion status of a condominium and its governing body…its HOA. Questions amenities and other common elements and areas. There are often questions about whether the particular HOA's amenities are owned by the HOA fee simple or are leased from the developer or some other third-party. The GSE's don't want to loan on a condo that isn't fully built-out, isn't in the control of its homeowners, or may be unduly subject to the vicissitudes of leasehold arrangements for its amenities.

REAL ESTATE NEWS By Joe Savage, Real Estate Broker

As of this writing, I am still doing the research and crunching the numbers for the whole coast, Ft. Morgan area, and Plantation in 2012. However, here are some preliminary numbers from some of my first passes at the data (these sales data reflect only condominium sales on the Alabama Gulf Coast as reported on the Baldwin County Multiple Listing Service)

There were a total of 697 sales in calendar year 2012, compared with 561 sales in 2011. The median price per square foot for 2012 sales was $256.12 as compared with $238.65 in 2011. However, there were a significant number of initial (“closeout”) sales at one of the last new condos built out during the “boom.” At that complex, there were 105 new-unit sales in 2012, as compared to only 50 in 2011. More importantly, these “conversion” sales were at prices ranging up to $1.9+ million. It is likely these sales may have artificially skewed the price per square foot upward. That is, the median price per square foot may be inflated inappropriately by including the “glut” of these close-out sales in a new condominium. Not including those sales, the 2012 median price per square foot came in at $246.00 as compared to $227.00 in 2011 using the same methodology.

The good news? Whether you include those close-out sales or not, there seems to have been a notable increase in both number of beach condos sold in 2012 when compared to 2011, and prices didn’t have to suffer to get that increase in transactions. In fact, prices went up. These are all good indicators that we may be returning to an appreciating market which with luck will continue into 2013 and beyond!