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Category: Get the Co-op in order

The 10% Solution

November 15th, 2011 — 4:20pm

An important factor in buying or selling an apartment is whether the building itself has been approved by one of the three government entities (or quasi-government entities) involved in the home lending industry.

Approval allows a purchaser’s loan to be either sold by the lender to Fannie or Freddie (buyers of home mortgages) or be insured by the Federal Housing Administration (the “FHA,” a loan insurer).  Approval is important even for the “all cash” buyer because their eventual buyer might need a loan and sellers need to know if their building is approved when figuring out how to market the apartment. Continue reading »

Over the years, Fannie Mae, Freddie Mac and the FHA have been implementing more restrictive guidelines to obtain approval.  A recent change requires a lender to review a condominium’s budget to determine that it is adequate and, among other things, provides for an amount equal to 10% of the annual operating budget to be set aside in a reserve fund for capital expenditures and deferred maintenance[1].

This new requirement is applicable to all condominiums, but in the case of a new condominium (gut and non-gut rehab), a reserve study is mandatory requirement for approval.

A reserve study is an in-depth evaluation of a the useful life, remaining useful life, current repair and replacement costs for each reserve component, a review of future funding and an analysis of existing reserve funds.  The reserve study will detail anticipated replacements or repairs to common-area elements and recommend an annual reserve funding to cover future capital expenditures.

If the condominium’s budget does not meet this 10% requirement the condominium might still be approved if a reserve study confirms that the financial condition of the development is stable (FHA Mortgagee Letter 2009-46b , Section V(11)).  If Fannie, Freddie or the FHA is satisfied with the financial condition of the building and that the reserves are adequate despite having less than 10% of the condo’s budget in a reserve account, the requirement can be waived.

In today’s market, many sponsors and developers obtain pre-approval by Fannie, Freddie or the FHA thereby opening their projects to purchasers who will be using Fannie, Freddie or FHA loan products.

Given the current economic climate, it seems prudent for sellers to strive to have their buildings meet the new reserve requirement and for buyers to focus in on this issue.  One can determine if the FHA has approved a condo at although the site is a bit cumbersome to navigate through.

By Jerome J. Strelov and Nahum M. Palefski

[1]              The new guidelines discussed in this post apply mainly to condominium developments.  The guidelines are not mandatory for co-ops, but could be applied on a case by case basis by the various approving entities.

Comment » | Financial Statements, Financials, Get the Co-op in order, The Buyers World, The Sellers World

What to Do When There Aren’t Any Records!!

May 28th, 2011 — 5:10pm

The Blank Slate: It comes up every once in a while- often in the 4-story brownstone type co-op.  The handshake is made and the seller’s lawyer sends the contracts.  The buyer’s lawyer calls to make an appointment to review the minutes and guess what? There aren’t any minutes or maybe there are just a few from a couple of meetings a few years ago when they bothered to keep the minutes.  Even worse, the building is self-managed so there is no manager to get information from.  What’s a buyer to do? Continue reading »

The easy answer is run for the hills- find another co-op-just forgetaboutit!!!  But what if you simply love the apartment and just have to have it?

One solution is do as much due diligence as is possible and then see how you feel. Start by having a frank face-to-face  discussion with the seller about what has been happening at the co-op.  Find out if there are any major repairs or renovations planned- try to weed out problems (i.e. thefts, strange neighbors, lawsuits, leaks, when the mortgage is due, what sort of repairs are upcoming, etc.)  Definitely have both your apartment and the entire building inspected by a reputable engineer so you can really find out what is going on with the structure of the building and your unit.  Take a VERY close look at the financials over several years and have a call with the co-ops accountants. Have your lawyer search for litigation about the building.  Check out the Department of Buildings website- see if there are violations, open building permits, etc. Try to make sure that the renovations the seller was so proud of and you are paying a pretty penny for were done legally. Speak to as many other owners as you can (especially those surrounding the unit) –separately- basically you will be interviewing them and not the other way around. If after all this you want to move forward, at least you are doing so with somewhat of an open eye.

A word of advice if you are in one of these smaller somewhat mismanaged co-ops.  Do what you can to make all of the apartments more appealing to buyers.  I don’t see any reason for anyone to lose a buyer or get less of a price because the Board doesn’t keep minutes.  Make sure that the board meets at least once a month and appoint someone the scribe to keep an official set of minutes.  That will make it easier on the buyers and increase the marketability of every one’s unit.  It is all good-except that it is a bit more work than you may have been doing in the past.

Comment » | Do Your Diligence, Get the Co-op in order, Simple Solutions

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