Caught in the Crosshairs-Owners in HOAs and Condos

Caught in the Crosshairs  – The HOA and Condo Owners Rental and Sales Conundrum

Can owners in an HOA or Condo Association move to cheaper digs and save their homes by renting to others? Can they sell, even if willing to take a hit on the price? Many people are looking for solutions and ways to cut expenses while trying to weather the economic times. Can homeowner associations survive if owners cannot rent and collect money to pay assessments? Can homeowner associations survive (especially condominium associations as those may be the hardest hit) if they aren’t certified for FHA financing and don’t allow or limit rentals?

Many Californians, and in fact many homeowners across the country, are caught in the crosshairs of agencies’ and associations’ struggles to survive, all triggered by the domino effect of devastating economic times. The purpose of this blog is to explain some of the problems caused by recent legislation and the lending industry. The reason I am writing this? I am getting a lot of frustrating emails from owners who are caught in the crosshairs. I wish I had more solutions. In some cases, staying put when the instinct is to cut and run makes sense. In any event, sometimes understanding the problem calms people down so they can look for a practical solution (which is not suing the Board!).

Problem # 1 – Owners who have trouble selling because buyers want to get FHA loans and the association does not have FHA certification.

FHA – now (but who knows for how long since it is government funded and funds are running out) is currently the main funding source for residential loans. FHA and FNMA and FHLMC are tightening up their loan criteria, bitten by billions of dollars in loans gone south. “Spot” FHA Certification has gone away –project certification is required and the standards are high. One of the criteria relates to limitations on owner occupancy ratios. Many owners complain that their associations are not seeking compliance. Some think it’s just a matter of paying for the certification. Some want to sue the Boards if they do not seek compliance. In many cases the boards have investigated the criteria and decided not to apply because they see some restriction they believe will bar them from getting certification. Some HOA Boards that do not apply because the expenditure would not assist all owners since most are not trying to sell. A board is not required by law to apply for certification.

So let’s admit many owners cannot find viable buyers when FHA is not a loan funding option.

Problem #2 If there is a strict rental limitation, lenders are also cut out of the purchase pool. That makes it even harder to sell!

LOOSE OR NON-EXISTENT RENTAL LIMITATIONS: The California legislature has changed the rules on rental limitations and it is next to impossible for any association today to impose a percentage rental restriction that applies to all owners after January 1st. This, of course, puts a lot of HOAs above the required owner occupancy ratio set by FHA, FNMA and FHLMC and thus may inhibit sales, but at least leaves open the option to rent.

EXISTING RENTAL LIMITATIONS. Some HOAs and Condo Associations have recorded rental limitations that were effective before January 1st that prevent owners from leasing unless they can provide a viable economic hardship and extract a temporary right to lease or exception to the quota limits. Boards set different criteria for considering hardships. Some are more lenient than others. The dilemma for a board is if it approves rentals based on hardship, that often puts them over the quota limit set for the rentals, which often takes the association out of the running for FHA certification, but if the board does not liberally approve hardship leasing, then it puts the owners out of the ability to look for a cheaper place to live and lease out their unit.

Problem #3 – So some owners are unable to sell because of the lack of FHA certification criteria and also prevented from renting their units because of the HOA or Condo rental restriction.

Here is the email explaining one owner’s dilemma that triggered this blog, which no doubt is an all to common complaint.

“… we have a couple questions for you. We have listed our  unit for sale and moved out. Our condo is on the market and in less than a week we had a great offer. Now comes the crappy part. 1. We found out that the  association decided not to pay the bill so that FHA loans can be acquired in  our complex so someone who wants to buy in there cannot use an FHA loan. A conventional loan requires a certain percentage of owner occupied units. We will not be below the percentage of this. We tried  to get  a Lease Limitation in place but believe the process was sabotaged by people  now on the board. Do we have grounds to sue them? If we can’t sell our place because of them we will be so upset!”

Yes, I get it. These folks may not be able to sell their unit because the HOA does not have FHA certification and probably will not anytime soon because the HOA does not have a rental restriction. It is important to note however that getting the certification is not just a matter of spending some money. You cannot “buy it”.   And, believe it or not, it could be worse. These owners could be in a situation where they were unable to sell AND unable to lease their unit after moving out. If the HOA did not apply for FHA certification or failed to meet the criteria under some other category such as a shortage of reserves or high delinquency rate, and had approved a tight rental restriction geared to keep the rentals low, the owners would surely be caught between a rock and a hard place.

But please remember, the Board did not single-handedly create the current economic slamdown! And many directors try to do what is best for the community, while dealing with serious shortfalls due to difficulty in collecting assessments from owners wholeft without paying assessments. The goal in many associations is strongly in favor of trying to protect the community of owners who want to stay and weather the storm.

Keep in mind that being caught between a rock and a hard place is not just reserved for owners.  It is a reality for many boards too when considering whether to apply for or try to fix things in order to try and qualify for FHA certification given the requirements and costs and also when considering how tough to be about hardship exceptions.

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