Condo Association Management Blog

Well it is NOT a REQUIRED law BUT to meet FHA new requirements, HUD will only inusre loans in a condominium if reserves are for 10% of budget and if insurance deductible is budgeted for. Since FHA does 40% of all new loans, probably very improtant for your copndominium to comply if you want to sell or refinance units. Fannie Mae and Freddie Mac also require this so that's probably 95% of the financing market.

Mr. Marcus comment is correct. If your association does not meet this standard no sale of a unit utilizing an FHA approved mortgage shall not be possible. Using a conventional mortgage will cost the buyer more and thus make it harder to negiotiate a sale in these economic hard times. Of course the seller could make it attractive to the buyer by lowering the asking price. Shoukld this approacjh work it would serve to lower the market price of any other unit(s) on sale in that association. I would therefore suggest that the raise proposed by the board be adopted. It would be to benefit of all unit owners to do so.

What is the position re mortgages being granted or refused if the association is providing funding for reserves with a bank line of credit instead of the by the conventional reserves funding method,i.e.instead of assessing the owners in advance in an annual budget which estimates spending on the statutory reserves items for the year ahead?.  
 
Would that make it harder to mortgae the units?

Appropriately sized Reserve contributions for condo associations typically are in the 15-40% range of the association's total budget. FHA's requirement that an association should budget at least 10% towards Reserves is not excessive. That small of a contribution should be presumed to be inadequate. Raising your Reserve contributions from x% to 10% is a good idea, and is arguably a step in the right direction of the Board responsibly providing for the normal repair and replacement needs of the common areas.

Not sure how FHA would view a bank line of credit but don't think they would accept it as "budgeting 10% of budget for reserves". But you could ask a lender or HUD. 
 
 
 
Stephen Marcus 
 
Marcus Errico Emmer & brooks 
 
Braintree, Massachusetts 
 
781.843.5000 
 

Is there a penalty for submitting a first-time condo association's application to HUD that has false financial information on it? My board has recently submitted an application which I find amazing because my Minnesota board will not designate the money we have in our "checking account" to specific reserve categories. They don't want to do this in case they "might need the money for something else." I have been arguing about this for years and gotten nowhere. Hopefully our application will be turned down so the board can see how they are not meeting state and federal laws concerning adequate financial condo association management.

John, 
 
 
 
I don't think the bank line of credit in lieu of a reserve account is a very prudent way of providing reserve funding. IMO, if you should need reserve funds for anything using the line of credit amounts to obtaining a loan and perhaps necessitating the need for a special assessment. It's much better to fund an actual reserve account with monthly contributions. I live in a single family HOA of 1,702 homes. We use a portion of our reserves for something each year. I don't think our members would like having to pay a special assessment each time we have a reserve expenditure!

Mr. Nordland-A properly prepared reserve plan is not based upon a percentage of that associations budget. Rather it is the end result of an engineering evaluation of the major suvsytems that must operate properly to permit unit owners to enjoy the use of their property. Roofs, boilers, air conditioners, pagving iof parking lot etc. The result of this analysis sets the total funding requirement for the reserver and this is what HUD will look at. Furhter ,I doubt that any funding of the reserve which involves borrowing in any form shall be acceptable because such a strategem merely serves to increase the costs of the unjit owners in fuunding thier reserve.

I agree with Mr. Nordland. Before a plan should be put into place, it is very important to have a qualified engineering company perform a replacement reserve study which will give the association a blueprint of what to expect as far as future funding needed for repairs to common property. We can help with this tracy@bluerayengineering if any questions.

The reserve amount defined as a result of an adequate engineering study does not necessariy meet the HUD requirement of 110% of the budget. These are two different requirements. It is possible that the reserve amouynt defined by the engineering study could be less than the HUD 10% requirement. That is very possible for newer construction. Then the decision as to adding to the amount the engineers defined with additional money to meet HUD requirement has to be faced. Not meeting the HUD 10% goal would make resales or even initial sales more difficult because their mortgage guarantee wopuld not be available to buyers and sellers. It's your money-only you can decide what to do in such a case.

Our board of directors, without notice, has just added new reserves, for items with no life span, and in order to fund them want us to agree to underfund the mandated reserves. How can we stop this?

Does anyone have the legal requirement for condo associations to maintain a separate operating budget from a reserve budget to meet FHA and HUD requirements?