FNMA and Condo Budget in Full Review

By Stephanie Diana Gast-Wilson

For those of you who are regular readers or follow my blogs I am a full time grad student at Southern New Hampshire University.  Within my quantitative analysis course we were asked to provide an example of a situation when you needed to use data and data analysis to drive a decision on you line of work.   Working in Condo Compliance the review of the HOA’s budget is a large part of the full review process.  The review of the budget can tell us a number of things about the project.  It also helps to see if in the event of a foreclosure if the project is a good investment for the company to have to resell.  Also this helps the borrower because not all people have the analytical skills to review the budget and see if in the long run the condo they have their heart set on is a good investment in the long run.   So, I thought this would be a good opportunity to discuss this often sticky topic for both borrowers and underwriters. 
First my “CYOB”, disclaimer.  Please discuss this topic with your financial advisor, and underwriter for additional information on this topic.  Also for more information on Condo Underwriting guidelines please see page 666 of FNMA seller guide https://www.fanniemae.com/content/guide/sel033115.pdf.
Now that is out of the way let’s get to the Nitti gritty.  A lot of my day is spent reading through budgets and a document called a “Reserve Study”.  For those who are not familiar with this document a reserve study is a budget analysis of a project taking into account long term maintenance goals, every item that has or may need to be purchased in the next 10-30 years and what allocations need to be made to the reserve to keep the project 100% funded.  Please be sure to check state laws in the off chance your state requires more or less funding to the reserves to be allocated.  You can find more info on Reserve study guideline at http://www.dre.ca.gov/files/pdf/re25.pdf. 
There are also items to verify that are listed on the budget such as if the amount spent on the insurance is noted and if the amount covers all aspects of the insurance as many projects have multiple coverages.  Also what is and what isn’t on the budget can also be extremely telling as well.  Such as projects that note a front desk, spa, hotel, ext., must account for these items as niceties and the full duties each has.  Also for things like hotel, spa, that counts as commercial space and the question of if the HOA runs these businesses must be asked.  Even if the HOA owns these things it needs to also be verified that this doesn’t make up more then 15% of the total income of the project.  If the project runs so many non incidental businesses it can’t be running as a condo but as more of a condo hotel.  This is an issue for another day. 
Assuming that the budget doesn’t reflect the presence of additional non incidental businesses there also needs to be investigation on the income line items to be sure that the HOA isn’t falsifying info on how many units have been delinquent in HOA dues and were thus repossessed through the foreclosure process.  (I do find it interesting that few people know that in a condo if you don’t pay your HOA dues, the HOA has the right to foreclose and take the unit back and you are still dealing with a bank level foreclosure).  However, the amount of money the HOA is making from renting out those foreclosed units while waiting for the bank to register that they have been foreclosed on (Often this is 6-12 months which; can really reek havoc on your credit as well) it can also indicate if the HOA is renting units out for the unit owners which is against the FNMA guidelines.  It can also be inductive of rental units being used as transient property. 
The budget can also reveal potential condotel like activity.  This can mean services that are like a hotel.  Like paid breakfasts, room service, cleaning services.  I have even seen a project who argued that coordinating the moving out of tenants that lease their units (which apparently included helping the renter find a new place and hire movers) was a service not any sort of assistance with renting of the units.  Again look at my article on condotels and research the lender guidelines with your underwriter. 
So let’s assume that we have a budget with none of those issues but; instead the total amount allocated to the reserves is not 10% of the total income of the monthly assessments or HOA dues.  Per FNMA we can check and see if the HOA has a reserve study that was done by a reputable company in the last 3 years and look at how much was recommended to be allocated for the fiscal year.  Sometimes they are allocating exactly what the reserve study recommends and this is below the 10% rule.  Per FNMA this is acceptable.  However, sometimes the HOA didn’t follow the reserve study and allocated less then 10% that year.  The reason HOA’s have often given me for this oversight is that they have Millions in the reserve account as it is so they don’t feel they should allocate anything to reserves.  Unfortunately there is more concerned with the HOA allocating an amount they feel is ample allocation each year showing that they are saving in the event of any hazard.  This further promotes the over all financial health of the project.
Hopefully you found this glance into the world of Condo budgets enlightening.  Remember sharing is caring also remember to follow us on facebook and twitter.  Also please feel free to leave comments or shout outs on topics you would like to see tackled on this blog.

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