HOA delinquency rate a cause for concern?

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HOA delinquency rate a cause for concern?

Haresh Patel
Investor · Irving, TX · Member since 2015 · 34 posts · 16 votes
An off-market deal fell into my lap for a condo in DFW area. I know the seller and this is last of his rental properties. His ask is very reasonable and ~20% below market (basically wants his outstanding mortgage and closing costs etc). He has had a long term tenant (more than 8 years) and tenant wants to continue to live there. Numbers are good, 1.3% of price every month with Scope to increase to 1.6% based on market rates. Property is 10 years old and in decent B minus neighborhood. pretty safe area when you look at crime stats, but not great schools. It's more like multiple four-flexes. 4 two-storey condos on a slab with a common roof. Everything was going fine till the mortgage company raised a red flag. Delinquency rate for HOA is at 28%. it's a small community with less than 50 condos. I won't get a loan on it but seller willing to do a sellers note or financing if I am still interested. Would you buy given the HOA situation? HOA is professionally managed but seems like no incentive to pay since no real penalty on late payers (e.g. 10% every year). Worried about HOA going belly up in case of large repairs like foundation issues. Suggestions/advice?
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Steve Racicot
Investor · Manchester, NH · Member since 2016 · 164 posts · 83 votes
9y

@Haresh Patel Get a copy of the budget, and 2 years of Financials. That should tell you what is going on at least financially. If 28% of the community of 50 Units (14 Units) are late or not paying their HOA Fees, then that is a potential problem. After you have the financials, you should attend an HOA meeting or even reach out to the Board to find out what they are doing to resolve the issue. The property Manager may provide you some insight as well.

Do your due diligence, and get documentation or it could cost you lots of $$ in the future, if things need repairs, etc.   

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  • Steve Racicot
    Investor · Manchester, NH · Member since 2016 · 164 posts · 83 votes
    9y

    @Haresh Patel Get a copy of the budget, and 2 years of Financials. That should tell you what is going on at least financially. If 28% of the community of 50 Units (14 Units) are late or not paying their HOA Fees, then that is a potential problem. After you have the financials, you should attend an HOA meeting or even reach out to the Board to find out what they are doing to resolve the issue. The property Manager may provide you some insight as well.

    Do your due diligence, and get documentation or it could cost you lots of $$ in the future, if things need repairs, etc.   

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  • Billie Miller
    Real Estate Agent · Denver, CO · Member since 2014 · 151 posts · 101 votes
    9y

    Can you get a list of the units that are delinquent on their HOA dues? If so, you should mail them and ask if they want to sell you their property. Buy up the delinquent units, so you add more rentals or flips to your portfolio and lower the delinquency rate!

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  • Jeff Bridges
    Investor · Hyattsville, MD · Member since 2012 · 822 posts · 441 votes
    9y

    Think about it. 10 year old property means most buyers bought in 2006-2007 right before the floor dropped out on prices. Many owners are likely still underwater and can't sell for more than their mortgage. Perhaps there were already forclosures in your complex, but I'm sure some stayed put. Find out how underwater they are by looking up what they sold for in 2006-07 and what they are worth now. These are the folks that are delinquent and might have also walked away from their mortgages or waiting for foreclosure. Sometimes the bank catch up on dues once they foreclose, but it doesnt help the HOA fix foundation problems today. Your seller wants out because he knows more than he is willing to share about the state of affairs in the complex. I think it would be safer to buy elseware because so many owners in the complex were affected by buying at the wrong time/ peak and the complex financial status is being hurt by that issue which won't get solved overnight.

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  • Haresh Patel
    OP
    Investor · Irving, TX · Member since 2015 · 34 posts · 16 votes
    9y

    Thanks @Steve Racicot. Good advice!

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  • Haresh Patel
    OP
    Investor · Irving, TX · Member since 2015 · 34 posts · 16 votes
    9y

     Thanks Billie and Jeff.

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  • Zach Scheer
    Investor · West Hartford, CT · Member since 2015 · 102 posts · 29 votes
    9y
    In some states community associations can put a "Super Lien" on units that are in foreclosure. Meaning their lien will set precedents over the mortgage company or anyone else. This usually includes the fees that are owed to the company, but can also include attorney fees and the like. Like Jeff said this won't help immediately but if your state allows this you know those fees will be paid.
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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    9y
    Originally posted by @Haresh Patel:
    An off-market deal fell into my lap for a condo in DFW area. I know the seller and this is last of his rental properties. His ask is very reasonable and ~20% below market (basically wants his outstanding mortgage and closing costs etc). He has had a long term tenant (more than 8 years) and tenant wants to continue to live there. Numbers are good, 1.3% of price every month with Scope to increase to 1.6% based on market rates. Property is 10 years old and in decent B minus neighborhood. pretty safe area when you look at crime stats, but not great schools. It's more like multiple four-flexes. 4 two-storey condos on a slab with a common roof.

    Everything was going fine till the mortgage company raised a red flag. Delinquency rate for HOA is at 28%. it's a small community with less than 50 condos. I won't get a loan on it but seller willing to do a sellers note or financing if I am still interested.

    Would you buy given the HOA situation? HOA is professionally managed but seems like no incentive to pay since no real penalty on late payers (e.g. 10% every year).

    Worried about HOA going belly up in case of large repairs like foundation issues.

    Suggestions/advice?

     HOAs generally get worse over time, not better.

    If it's so bad that you can't get a normal mortgage on it, assume it'll be the same case for your buyer's X years from now. Not once have I gone to retail owner occupant homebuyer with "ya, so, turns out this HOA is a pile of garbage, meaning you can't get a government subsidized 30YF with a good interest rate. It'll have to be an ARM with a higher interest rate" and NOT had them come back to the seller wanting a steep price reduction, if not out of the deal entirely.

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