Shoot yourself in the foot

I feel “under the gun” today.  I just had coffee with a very nice representative of Old Republic Title Company and during our discussion he mentioned having read this blog.  He also said it appeared I updated it regularly.  Ack!  The pressure.  Ommmmmmm.  OK, I’m better now, but definitely feel the need to pull out a draft I was working on and get it into everyone’s eager waiting hands.

Disclaimer – I spilled coffee on my desktop keyboard this morning.  It’s been sent through the wash and rinse cycle (just kidding, sort of) and is now drying out.  I am typing on my laptop, connecting remotely and making all “soorts” of keyboard errors on the smaller keypad.  Bear with me, leave me your cryptic editing notes and I promise I’ll fix the “ishews” later!

Today’s topic?  How to kill a really excellent deal.

The setup:  a condo in a complex where two recent REO (bank owned) sales set the bar about 100K less than what had previously been market value.  Everyone who wants to sell is now looking at a short sale because of what the units will appraise for.  To have a bank consider a short sale, the owner must be in default.  Although I would never recommend anyone stop paying their mortgage, the reality is if you’re not behind, you don’t get a short sale (at least not currently – that could change).

The owners now not paying so they can short sell, also in some cases stop paying their homeowner association dues.  “Why bother?  I’m not going to live here and I’m taking a huge hit on my credit rating anyway,” is probably pretty typical of the thinking which goes on.  [Cue ominous Jaws theme]

And now owner M, a client of mine, has an offer on their condo.  It is a listing price offer with a buyer qualified, taking an 80% loan.  Lenders love people who come in with 20% down!  We have lien holder approval and a closing date of next month.  No problem.  Tally Ho!  Buyer hightails it to the lender to get the wheels in motion when all of a sudden, everything squeaks and grinds to a seeming halt.  The lender has talked to the management company and of the 104 units, 40 of them are 30+ days delinquent on their dues.  The lender (and it’s currently an industry standard) can’t lend if the delinquency rate exceeds 15%.  There would appear to be no loan, and no sale.

My clients are working on the issue so I hope to have a positive outcome for you on an update, but in the meantime, here are some things to tuck into your education hat:

  1. If no one can sell, the result for active listings is foreclosure or bankruptcy.  Bankruptcy might have to be considered, depending on your state laws, if you have more than one lien to clear.
  2. If all the units currently for sale in a complex are taken back by the bank, the value of all units will decrease.
  3. The bank does not pay the HOA back dues until closing generally, so the cycle becomes self perpetuating until the majority are bank owned or original owners.
  4. If, for example, the original owners purchased at around 200K, and the bank owned bar has been set at 88K (which in this case it has), the original owners are now looking at potential neighbors who could not afford the higher cost, but who can manage at a much lower rate.  This may or may not be desirable to them, but given the current financing status, is out of their hands.

To the agents in blog-reading land, it is in your client’s best interest to continue paying their HOA dues, even if they are not paying their mortgage.

Buyers, whether owner occuppied or investor, ask the question during your due diligence period.  If it’s still what you want and it’s priced reasonably for your needs, work with your agent and the HOA to get the owners’ educated and the problem cleared before financing.

Sellers – pay HOA dues, otherwise you literally could be shooting yourself in the foot financially!

Post script – my clients are not one of the 40 in arrears.  They have a really good agent who recommended they keep paying their dues!

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