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.