Financing Special Assessment on Condo

9 Replies

The HOA board for my my condo just approved a special assessment however the confirmed amount still needs to be determined. They sent out an estimate of $36,000 for a 3 bedroom condo which is what we own. They initially proposed to allow home owners to pay the special assessment over 5 years. They will also be increasing the HOA dues. This is the first condo I purchased and will definitely be my last. Prior to the special assessment approval, I did obtain special assessment insurance but it will only cover certain items.

One of the community members suggested the HOA take out a loan. Does anyone have experience with their HOA taking out a loan to pay for a special assessment and how this transferred on to the home owners? Also looking for advise on to pay for the special assessment as an individual home owner. What questions and due diligence should I be doing as the HOA board determines the final number for the special assessment.

Other questions is when to sale the condo?  It is located in Denver and is appreciating 10% per year.  My tenant just renewed a year's lease.  I am thinking the best course of action is to request my tenant to move out within a reasonable time and sale the property vacant.  I am assuming the property will not be of interest to an investor with this large of a special assessment.

Any Realtor worth his/her salt will ask you to pay for the assessment at the time of sale. If you are paying it one way or the other, I'd find the cheapest option. 

If you must sell, make sure the tenant is out. Hopefully, you have something in your lease that allows you to get the tenant out or you might have to offer cash for keys, etc. 

@Jennifer Ward I've been investing in condos since 2002 and have never seen such a large Special Assessment, What is the HOA doing that calls for $35K for your Unit? Is this a repair or are they adding something new? Was this is something that was never addressed in the Reserve and Repair Analysis report?
Originally posted by @Ray Johnson :
@Jennifer Ward I've been investing in condos since 2002 and have never seen such a large Special Assessment, What is the HOA doing that calls for $35K for your Unit? Is this a repair or are they adding something new? Was this is something that was never addressed in the Reserve and Repair Analysis report?

 I'm buying a condo with a looming $32K assessment. 70 year old boiler pipes, etc are starting to fail. Management didn't address it in the reserve study, so no money has been set aside. 

If the special assessment has already been declared, then it's really tough to walk that back, but not impossible.  I'll go into that a bit more below.

Once the special assessment is declared, you as the seller will have to disclose it and it's the type of thing that you'll either have to pay at closing or pass along to the buyer in exchange for a lower selling price.  

That said, yes - there are lots of banks that will lend to an HOA providing the HOA meets the lending requirements (X amount in reserves, usually plus no other looming major repairs, etc).

Your dues will still go up to cover the loan, and that increase is likely to be permanent rather than a temporary Special Assessment payment. Neither scenario is great, because the increased dues or dues + special assessment are used to qualify the borrower to qualify for the purchase. That HOA payment can be the difference between qualifying and not, for the borrower.

Sounds like your HOA board needs new management because this situation sucks out loud. Go through your governing documents and find out how to remove a board mid-term. If you and your neighbors are upset enough, you can easily gather the proper number of signatures to call for a special meeting to remove the board.

Be prepared to then take a board position and start crunching number to figure out a better solution.  Prior boards clearly let the property deteriorate - this is not a situation that happens quickly.  So if this board has been in place for a while (more than about 3 years), get them out.  If they're relatively new, then it's possible they just couldn't find another solution and this really is the only option.

As far as selling, I'd actually keep a renter in and sell it as a turnkey solution to an investor.  Due to the Special Assessment or higher dues, I think that many buyers will have a tough time qualifying for the loan and/or they'll know that they can get a better place for the same money due to the Special Assessment.  An investor likely has a more long term view and will understand that some lower cash flow now in exchange for some really great appreciation in 5 years might be a really good play for them.

It's also not a bad play for you.  If you can weather this out, maybe you can reap that appreciation instead of another investor???  Don't forget, lots of people are now going to be dumping their properties as well, which will depress the price very quickly as people compete to sell asap.  Another interesting play might be to try to pick these up as the price plummets over the next 6 months....

@Matt M. , I would be interested to know the negotiation details of that deal?  Are you paying for the assessment or the seller?

Thank you @Linda Weygant for your thorough reply. Your second assumption is correct, it is a new board and they are basically cleaning up the mess from the previous board. There was only 140k in reserves and the recent staircase replacements took most of the reserves. Now they are facing system plumbing issues with clay pipes that need to be replaced. The HOA dues have not changed in over a decade I believe. They were very low, $240 for 3 bedroom, which is why we initially purchased the property but hindsight that should have been a red flag. They recently raised the dues by $66. I need to ask how much of the dues goes towards the reserve.

Being that there are a number of issues that need to be addressed, could the board issue one special assessment at a time vs. approving one large assessment? Not sure if this would make much difference but I am thinking if I were to sale the property it may. 

Good advice and info @Linda Weygant . So @Jennifer Ward it sounds like the new board is trying. They need three things at this point: an annual budget for "operating costs" - the month to month things they normally cover like insurance and landscape maintenance. They need a full bid on all the repairs needed to bring the property into good condition (essentially the special assessment amount needed). It sounds like they have wiped out their reserve account so they may or may not qualify for a loan. They may need to prioritize the repairs and knock them out one at a time as special assessment dollars come in. Lastly, they need a reserve asset study - most likely professionally prepared (I know - they won't want to spend the money). This lists all the items that they are responsible for replacing or repairing over the next 20 years - including the cost of replacement and some padding for inflation. Then they take this list of items, divide the annual amount needed to save for each, and then set an amount that needs to go into reserves so that this doesn't happen in the future. So here is what your $306 monthly payment might look like:

$200 / mo = operating costs

$50 / mo = payments for special assessment

$56 / mo = reserve funding

Colorado has some pretty strict laws mandating appropriate accounting and reserving by HOAs to protect property owners (along with a whole lot of other rules). Your new board needs to be aware of these. Sounds like the old board just wanted to be popular by not raising the assessments - which wasn't a wise decision. You property owners need to back your new board and insist that they do the tough stuff (which won't make them popular). Overall, if you can hang in there, a well run and well financed community adds value to your property. 

Originally posted by @Jennifer Ward :

@Matt M., I would be interested to know the negotiation details of that deal?  Are you paying for the assessment or the seller?

I'm paying it. Technically it hasn't been "approved," and my purchase price factored it in. 

Handling a large unfunded expense can be dealt with several ways and usually with a combination of approaches. You've mentioned a regular assessment increase plus a special assessment. These two actions are the common approach. There is also a suggestion of an HOA bank loan which is a slightly less common approach but often utilized and can be used in concert with the first two approaches. Nothing says that the HOA can't mix all tools in combination. In your situation, however, I noticed that the HOA is offering a 5 year payment plan for the special assessment. 5 years is already a large portion of the possible terms of bank loan and might be the total term of a loan, so it makes little sense to take a loan and pay the loan's extra interest and fees. If a potential loan term is significantly longer than 5 years, then more consideration might be given to the loan, but then a longer loan term will have higher costs.

You asked how the loan repayment is passed on to the owners. The answer partially depends on the restrictions that exist in your governing documents and possibly by local statute. But generally, the assessment will just be increased sufficiently to cover the loan repayment. The loan repayment may also be covered by special assessment, so don’t think that just because there is a loan, that there won’t still be special assessments. The bottom line is that the owners are going to pay for the repairs no matter how the repairs are funded. With a large special assessment, it is possible that the owners will be forced to take out their own loans. 

Here are a caution and recommendation for this situation. First the caution; make sure that the Board doesn’t reduce the reserve contribution to either offset a loan repayment or to lessen the burden of the special assessment. The reserve fund is already in trouble, so don’t make it worse. The reserve obligations aren’t going away just because there is a loan or special assessment. Second the suggestion; have a professional Reserve Study performed that includes the various approaches. Hopefully in those various approaches, one is less painful.

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