Fannie Mae underwrites the vast majority of mortgages in the United States today. Reacting to the condominium market meltdown, Fannie Mae (FNMA) substantially overhauled their condo underwriting rules, effective Jan. 1, 2009. The new rules require a 70% sell out threshold for new construction project, tough rules governing condominium finances, and new insurance requirements, among other tighter standards. The net effect is that condominium lending has gotten substantially more difficult to obtain, and the real estate industry and some lawmakers aren’t happy about it.

Pending Litigation Involving Safety, Structural Soundness or Habitability

The new guidelines exclude condominium financing for “projects in litigation, arbitration and mediation that arises out of a dispute as to safety, structural soundness or habitability.” Fannie Mae underwriters now look closely at any pending litigation involving the condominium, especially concerning its construction and common areas. I’ve seen several loans denied and canceled recently over pending condo litigation, regardless of the merits of the lawsuit. According to the Fannie Mae FAQ, if the litigation is minor and covered by insurance, lenders can ask Fannie for a waiver or exception.

So how can buyers and realtors protect themselves here?

• First, prior to signing the purchase and sale agreement, make sure you ask the seller and the listing broker (preferably in writing to create a record) whether there is any pending litigation involving the condominium. Realtors should follow up with the board of trustees or management company. Attorneys can obtain access to the state trial court database to search for pending litigation.
• If there is pending litigation, borrowers need to inform their lender, and get an answer whether this will affect the financing.
• If you cannot get an answer by the signing of the purchase and sale agreement, use a clause in the agreement where the seller certifies there is no pending litigation (and assessments) affecting the condominium.
• Buyers’ attorneys should also use a catch-all Fannie Mae contingency clause which gives the buyer an out if the condominium ultimately is Fannie non-compliant. This should give some additional protection to the buyer, especially where these issues often arise on the eve of closing and after the loan commitment deadline.

The Pendulum Has Swung The Other Way

What’s troubling about the new rules is that many condominiums are involved in litigation, some of which is meritless or frivolous unit owner suits. A lot of lawsuits are covered by the condominium master insurance policy so there is little risk of real loss. That Fannie Mae would summarily deny financing to these condominiums is disturbing to say the least. Overall, I believe that the pendulum has swung way too far. I wrote about this back when the rules were first implemented (still our most popular post), and it’s still true. But it’s the reality. Buyers and their advisers need to be aware of the situation.

Helpful Links:

Fannie Mae Condominium Review FAQ

The June 1 changes are part of a new effort by mortgage giant Fannie Mae to cut down on slipshod underwriting by lenders and frauds by borrowers. Fannie’s so-called “loan quality initiative” will result in lenders pulling last minute credit reports and additional verifications of borrower information. These last minute credit checks could result in a closing delay, pricing adjustment, or, worst, loan approval cancellation.

• The last-minute credit report will be designed to find out whether a borrower has obtained — or even shopped for — new debt between the date of the loan application and the closing. If borrowers have made applications for credit of any type — for furnishings and appliances for the new house, a car, landscaping, a home equity line, a new credit card — the closing could be put on hold pending additional research by the lender. Our advice: save the trip to Home Depot, Restoration Hardware and Crate & Barrel until after the closing.
• If you’ve taken out new loans that are sizable enough to affect the debt-to-income ratio calculations used in your original mortgage approval, the deal could fall through. The added debt load could render you ineligible for the mortgage because you suddenly appear unable to handle the payments without a strain on your household budget.
• Many lenders already pull second credit reports right before the closing, but the Fannie Mae mandate will likely result in a markedly increased number of lenders pulling second credit reports and performing other last minute verifications.
• Borrowers should be counseled to avoid obtaining or applying for new credit, or even increasing utilization of existing credit, before their closings. Lenders may view this added debt as a strain on a household budget sufficient enough to make a once qualified borrower now appear unable to handle the payments. If these new loans are sizable enough to affect the DTI (debt-to-income) ratio calculations used in the original mortgage approval, then the deal could fall through.
• Under the terms of the standard purchase and sale agreement, a borrower who loses his financing  just days before the closing due to LQI issues could potentially forfeit his deposit. Buyer’s attorneys should think about how to address this in their P&S riders.
• The mortgage and real estate industries are still trying to adjust to the dynamic changes in the economy, making it more important than ever to seek out professional, knowledgeable mortgage brokers and to seek counsel from experienced attorneys specializing in real estate law. In the end, the best advice may just be avoidance; borrowers will be best off not obtaining any additional credit in the time between the application for a mortgage and the date of closing.

• Do not waive the walk-through! You snooze, you lose, if there are subsequent problems.
• Always go with your agent.
• Bring your camera, Iphone, etc. to document any issues
• Turn on/off all major appliances to see if they are working properly
• Check under decks–sellers often leave nasty stuff behind
• Scour the basement, check for water seepage and stuff left behind
• Check repairs if the sellers agreed to make any
• Turn on and off every light fixture
• Run water & look under sinks for leaks
• Check garage door openers
• Have broker test alarm system
• Open and close all doors
• Flush toilets
• Inspect ceilings, wall and floors
• Run garbage disposal and exhaust fans
• Test heating and air conditioning (even if off season)

After The Walk-Through

When the buyer arrives at the closing, the first thing I always ask is how did the walk-through go? I can usually tell how it went by whether the buyers (and their agents) are smiling or frowning when entering the closing room. The good thing is that no matter how poorly it went, the attorneys are almost always able to draft a hold-back agreement or some other solution to enable the transaction to close as scheduled. This is just another reasons why buyers and sellers should have experienced real estate counsel at the closing.

• Buyers must be under contract on or before April 30, 2010, and close on or before June 30, 2010. Buyers will need to attach to their 1040 tax returns a copy of the signed purchase contract and HUD-1 Settlement Statement.
• There’s been quite a bit of debate as to whether a signed offer to purchase or signed purchase and sale agreements is sufficient for the April 30 deadline. I’ve been erring on the side of caution by recommending getting the P&S signed by Friday, but some realtors and attorneys disagree and say that a signed offer is enough. I’d like to see some formal IRS guidance here. The IRS rules require the names of all parties on the “binding contract,” and the offer typically is addressed to “owner of record.” If Realtors are going to use the offer, ensure that all parties names are legibly shown on the offer. Bottom line: consult a tax attorney or CPA on tax credit issues, and contact us to get your purchase and sale agreement done by Friday.
  
• The maximum credit amount remains at $8,000 for a first-time homebuyer –– that is, a buyer who has not owned a primary residence during the three years up to the date of purchase.
• The new law also provides a “long-time resident” credit of up to $6,500 to others who do not qualify as “first-time home buyers.” To qualify this way, a buyer must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence.
• The new law raises the income limits for people who purchase homes after Nov. 6. The full credit will be available to taxpayers with modified adjusted gross incomes (MAGI) up to $125,000, or $225,000 for joint filers. Those with MAGI between $125,000 and $145,000, or $225,000 and $245,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.

New Requirements

Several new restrictions on purchases that occur after Nov. 6 go into effect with the new law:

• Dependents are not eligible to claim the credit.
• No credit is available if the purchase price of a home is more than $800,000.
• A purchaser must be at least 18 years of age on the date of purchase.

For all qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 tax returns.

A new version of Form 5405, First-Time Homebuyer Credit, is now available here. A taxpayer who purchases a home after Nov. 6 must use this new version of the form to claim the credit. Likewise, taxpayers claiming the credit on their 2009 returns, no matter when the house was purchased, must also use the new version of Form 5405. Taxpayers who claim the credit on their 2009 tax return will not be able to file electronically but instead will need to file a paper return.

Here’s an IRS produced video outlining the program.

Disclosure Dilemma

Sellers who’ve been affected by the flooding are asking themselves and their realtors how they should handle the inevitable question from buyers: did your basement flood? Under Massachusetts disclosure law, while sellers are under no obligation to volunteer information, they must answer truthfully to any question posed directly by buyers regarding the condition of their property. Real estate agents are held to a higher standard. They must affirmatively disclose any fact that may have a material impact on whether the buyer would purchase the property. You better bet that whether a home experienced water penetration is “material.”

So, realtors and sellers would be wise to come clean if a home was affected by the recent flooding. The key is how to present the flood damage in the best possible light. Which brings me to the next topic…

Get It Fixed, And Done Right

How did you repair the water damage, and are you taking any steps to prevent it from happening again? Tough questions, because this was a 50 or even 100 year storm event. A flooded basement two weeks ago may never get a drop of water again.

Regardless of whether you are now going to invest in a perimeter drain/sump pump system, homeowners should hire licensed contractors who will pull permits to repair all flood damage. Having it done right will prevent even greater headaches later in the form of mold, dry rot and the like. As my friend general contractor George Lonergan of Lonergan Construction points out, pulling permits gives  sellers the ability to show buyers that flood damage has been repaired correctly by licensed and qualified contractors with sign offs from the local building inspector.

Lastly, I want to point out to buyers that they shouldn’t simply walk away from a home which experienced flooding or has a sump pump system. Many properties in river watershed communities like Wayland, Sudbury, and Natick for example have historically been subject to flooding and wet basements. Seeing a well run and working dry basement system/sump pump/french drain is a good sign actually. What you don’t want is what looks like a dry basement which later floods and then requires a sump pump system later on.

Also, the IRS and Mass. Department of Revenue announced tax filing extensions to May 11 are available to flood victims in the above affected counties. The extensions are automatic for all filers.

Very important:  If you are considering applying for aid, document all damage and repair efforts. Take photographs and video of the flooding and resulting damage. Keep copies of all receipts for sump pumps, air blowers/fans, equipment, contractors, plumbers, electricians, etc. Keep copies of all estimates for repairs. Basically, treat this as any other insurance claim.

The federal aid package includes:

• Rental payments for temporary housing for those whose homes are unlivable. Initial assistance may be provided for up to three months for homeowners and at least one month for renters. Assistance may be extended if requested after the initial period based on a review of individual applicant requirements. (Source: FEMA funded and administered.)
• Grants for home repairs and replacement of essential household items not covered by insurance to make damaged dwellings safe, sanitary and functional. (Source: FEMA funded and administered.)
• Grants to replace personal property and help meet medical, dental, funeral, transportation and other serious disaster-related needs not covered by insurance or other federal, state and charitable aid programs. (Source: FEMA funded at 75 percent of total eligible costs; 25 percent funded by the state.)
• Unemployment payments up to 26 weeks for workers who temporarily lost jobs because of the disaster and who do not qualify for state benefits, such as self-employed individuals. (Source: FEMA funded; state administered.)
• Low-interest loans to cover residential losses not fully compensated by insurance.  Loans available up to $200,000 for primary residence; $40,000 for personal property, including renter losses. Loans available up to $2 million for business property losses not fully compensated by insurance. (Source: U.S. Small Business Administration.)
• Loans up to $2 million for small businesses, small agricultural cooperatives and most private, non-profit organizations of all sizes that have suffered disaster-related cash flow problems and need funds for working capital to recover from the disaster’s adverse economic impact.  This loan in combination with a property loss loan cannot exceed a total of $2 million. (Source: U.S. Small Business Administration.)
• Loans up to $500,000 for farmers, ranchers and aquaculture operators to cover production and property losses, excluding primary residence.  (Source: Farm Service Agency, U.S. Dept. of Agriculture.)

How to apply for assistance: Those in the counties designated for assistance to affected residents and business owners can begin the disaster application process by registering online at www.disasterassistance.gov/ or www.fema.gov or by calling 1-800-621-FEMA (3362) or 1-800-462-7585 (TTY) for the hearing and speech impaired. The toll-free Teleregistration numbers will operate Monday through Friday from 7 a.m. to 1 a.m., on weekends – Saturday and Sunday from 7 a.m. to 10 p.m., until further notice.

HO-6 Now Required By Lenders

Under the new Fannie Mae (FNMA) and FHA overhaul of condominium lending guidelines, lenders are now requiring that condominium unit owner borrowers obtain HO-6 policies. Sounds like common sense, but HO-6 policies weren’t required by lenders, and many condominium unit owners were under the mistaken impression that the master condominium insurance policy covered all damage to the interior of their unit as well as damage to furniture, appliances, etc. That isn’t so. In most cases, that master insurance policy covers common areas such as the hallways, roof, basement, elevator, boiler, and common walkways, for both liability and physical damage–but not the inside of units.

Coverages

HO-6 policy benefits include:

• Coverage for damage to personal property such as furniture, computer equipment and clothing
• Fill in the gaps of the master insurance policy and cover losses under master policy deductibles
• Personal liability coverage
• Interior walls and floor coverings coverage
• Coverage for improvements or upgrades (most master insurance policies only cover the original condition and value of the unit).
• Usually has small deductible and fairly inexpensive

Under the new lending rules, an HO-6 insurance policy must provide coverage for no less than 20% of the condominium unit’s appraised value.

High Deductible Protection

Another benefit of obtaining an HO-6 policy is that in certain situations, it will provide gap coverage caused by the often high deductibles on a master insurance policy. These days, condominium associations have been cutting costs by increasing their deductibles, anywhere from $10,000 to even $50,000. What’s more, condominium documents often provide that the unit owner is responsible for losses falling below the deductible. A well-tailored HO-6 policy will protect you in this situation. Here is a good article about the tug-of-war on deductibles.

Special Assessments

HO-6 policies can also provide coverage for unexpected special assessments. Special assessments are one-time, often hefty, capital expenditures imposed on all unit owners for major repairs or improvements. Think $50,000 roof replacement project. HO-6 policies can also cover lawsuits against the association.

The HO-6 policy is a must have for every condominium owner!

10 Questions You Must Ask Before Purchasing A Condominium Unit

To borrow from a famous phrase, not all condominiums are created equally. Some condominiums are very well run; some are quite poorly run and underfunded. Buyers interested in purchasing a condominium unit must do their homework:  not only about the condition of the individual unit they are interested in purchasing, but on the financial health and governance of the condominium as a whole. Remember, you are buying into the entire project as much as you are the unit, and your decision will impact your daily living and your ability to re-sell.

Here are the 10 questions buyers should ask when deciding to purchase a condominium unit:

1. What is the monthly condominium fee and what does it pay for? The monthly condominium fee can range quite dramatically from condominium to condominium. The fee is a by-product of the number of units, the annual expenses to maintain the common area, whether the condo is professionally managed or self-managed, the age and condition of the project, and other variables such as litigation. For budgeting and financing you need to know the monthly fee and exactly what you are getting for it.
2. What are the condominium rules & regulations? Condominium rules can prohibit pets, your ability to rent out the unit, and perform renovations. Make sure you carefully review the rules and regulations before buying.
3. How much money is in the capital reserve account and how much is funded annually? The capital reserve fund is like an insurance policy for the inevitable capital repairs every building requires. As a general rule, the fund should contain at least 10% of the annual revenue budget, and in the case of older projects, even more. If the capital reserve account is poorly funded, there is a higher risk of a special assessment.
4. Are there any contemplated or pending special assessments? Special assessments are one time fees for capital improvements payable by every unit owner. Some special assessments can run in the thousands, others like the Boston Harbor Towers $75 Million renovation project, in the millions. You need to be aware if you are buying a special assessment along with your unit.
5. Is there a professional management company or is the association self-managed? A professional management company, while an added cost, can add great value to a condominium with well run governance and management of common areas.
6. Is the condominium involved in any pending legal actions? Legal disputes between owners, with developers or with the association can signal trouble and a poorly run organization. Legal action equals attorneys’ fees which are payable out of the condominium budget and could result in a special assessment.
7. How many units are owner occupied? A large percentage of renters can create unwanted noise and neighbor issues. It can also raise re-sale and financing  issues with the new Fannie Mae and FHA condominium regulations.
8. What is the condominium fee delinquency rate? Again, a signal of financial trouble, and Fannie Mae and FHA want to see the rate at 15% or less.
9. Do unit owners have exclusive easements or right to use certain common areas such as porches, decks, storage spaces and parking spaces? Condominiums differ as to how they structure the “ownership” of certain amenities such as roof decks, porches, storage spaces and parking spaces. Sometimes, they are truly “deeded” with the unit, so the unit owner has sole responsibility for maintenance and repairs. Sometimes, they are common areas in which the unit owner has the exclusive right to use, but the maintenance and repair is left with the association.
10. Insurance. The condominium should have up to $1M or more in coverage under their master condominium policy. Condominiums over 20 units should also have fidelity insurance to protect against embezzlement. For your own protection, you should always buy your own individual HO-6 policy covering the interior and contents of your unit, because the master policy and condo by-laws may not cover all damage to your personal possessions and interior damage in case of a roof leak, water pipe burst or other problem arising from a common area element.

A good real estate attorney will help you with this “due diligence.” As part of our standard condominium representation, we will review the following condominium documents and issues:

• Master Deed and amendments
• Declaration of Trust/By-Laws, Rules & Regulations
• HOA Covenants/Restrictions
• Unit Deed and Floor Plans
• Condominium Budget and Capital Reserve Fund
• Fannie Mae/FHA Compliance Provisions
• Condominium Annual and Special Meeting Minutes
• Pending or Contemplated Special Assessments or Litigation

We will also build in provisions into your purchase and sale agreement to protect you in case there are unanticipated or undisclosed issues with the condominium which affect your willingness to move forward with the transaction.

Given the overwhelming number of realtors in the marketplace, choosing the right one can be overwhelming. Here are my tips to selecting the best Realtor. It’s best to use all the tools available to find the best fit.

Step 1: Search, Create A List, Do Your Due Diligence.  You’ll want to obtain as many as 5-10 names. Take it seriously and do your due diligence.

• Word of Mouth. Ask people you trust for recommendations. Ask your friends, family, financial planner, attorney, or local politician. Call local agencies and ask who their top producers are.
• Ask Around Town. Good Realtors are actively involved in their communities, serving on town boards, school communities, new family networks, and chambers of commerce. These brokers know the neighborhoods like the back of their hands. They know the market. They can tell you who just sold, bought, and what listing expired. They know the best elementary schools. They know whether the quiet street in the summer turns busy when the school buses start rolling down. Find them.
• Use the Internet. The Internet is an incredibly powerful tool to find potential Realtors and vet recommendations. Understand that all savvy, sales oriented Realtors have a web presence and they know how to leverage internet marketing and social media. Google the town/city and “homes realtors” and see what comes up. If you have a name of a Realtor, Google them and check out their website or blog. Check out his listings and just solds. Read their articles on ActiveRain, a realtor blog site. Check their Facebook or Twitter pages.
• Use Multiple Listing Service as a Tool. Virtually every Realtor website enables you to access Multiple Listing Service (MLS) information. With MLS access, you should be able to get a sense of which Realtor has a high number of listings and sales in the town or neighborhood you desire. You will also see how the Realtor markets a listing. Is the listing well presented? Are the photographs high quality and sufficient? Is the home staged? Are the descriptions captivating and accurate?
• Check License/Designations. You can check a Massachusetts Realtor’s state license status here on the Real Estate Board of Registration site. An indication of additional expertise is whether the Realtor holds a special certification such as Certified Residential Specialist (CRE), Accredited Buyer’s Representative (ABR), Certified Real Estate Brokerage Management (CRB). Click here for more info about these certifications.

Step 2: Interviews. Armed with the above information, a buyer or seller should narrow the pool with phone or personal interviews, and ask the tough questions.

• Basics. Are you a full time broker? How many years experience do you have? What is your educational background and real estate training?
• Listings. How many listings have you had in the last 2 years? How many sales of those listings? How many expired listings have you had in the last 2 years? What causes do you attribute to expired listings? How long, on average, do your listings take to sell?
• Marketing. What’s your marketing strategy for new listings? What’s your pricing strategy? Do you recommend home staging? What marketing outlets do you find most effective, i.e, print advertising, MLS, online, direct mail, etc. Can you provide us with a Comparative Market Analysis (CMA)?  What type of research tools to you use? Would you recommend a broker’s open house or public open house for our listing?
• Preparation. A good test of a Realtor’s acumen is whether he comes well prepared to your meeting. Is he armed with market data, listings, research, trends and the like? Does he have an initial pricing strategy? Does he have a game plan for searching properties?
• Type of Agency?  Some Realtors represent solely buyers. Some focus only on sellers. Most cater to both. But there are different agency rules for each type of representation. By law, your Realtor must explain which agency you are operating under, and review and have you sign the Massachusetts Mandatory Licensee-Consumer Relationship Disclosure form. We’ve prepared a handy fact sheet on broker agencies which you can download here.
• Communication. Are you available to us when we need you? Do you use an assistant? Can we contact you after hours? By email or text? Are you good with demanding clients? How many current clients do you have? Being accessible and responsive separates the good realtors from the average.
• Recommendations. Do you have written recommendations from clients or can we contact your 3 most recent clients?

Step 3. Select your Realtor. Go with your instincts. Remember, a good Realtor does not tell her client what he or she wants to hear. You are looking for independent, professional advice.

Feel free to print out this list and use it as a handy guide as you interview and select your Realtor. If you want some names of several excellent realtors in all of the major areas and towns, shoot us an email.

Is an individual unit owner liable if someone gets hurt in the condominium’s common areas?

The answer is most likely not. This is good lead in to the concept of “common areas.” When someone buys a condominium unit, they also obtain an undivided share of the condominium’s common areas and facilities. Common areas typically include obvious things such as building entrances and exits, lobbies, interior stairways, pools and workout rooms. They also include not so obvious areas such as the space between adjoining units, telecommunication wires, and the roof. As outlined in the “master deed,” each unit owner “owns” an undivided share (expressed as a percentage) of all the common areas. But the condominium association has responsibility over managing and maintaining the common areas. Recognizing that unit owners have very little control over common areas, the Massachusetts Condominium Act provides that only the condominium association can be sued for claims related to common areas. The condominium association should have a master liability insurance policy in place in case anyone gets injured on common area property. If however, the claim is so substantial that all common funds, property and insurance proceeds have been exhausted to pay the claim, individual unit owners could be held liable for the balance due, if any, but only up to their respective percentage interest in the condominium. Now, if your unit has a private deck or porch (which is not a common area) with a faulty railing, you could be held responsible if someone fell. For all these reasons, unit owners should absolutely obtain an “HO-6″ policy for their own liability and an umbrella policy on top of that.

I own a condominium unit and rent it out to students. Am I responsible for my tenant’s noise and disturbance problems?

The answer is yes. While a precise response would depend on the provisions of the condominium’s bylaws, typically, a unit owner is responsible for the actions of tenants. Most often, a condominium’s bylaws and house rules are binding on unit owners, resident family members and tenants. If a tenant violates a house rule — by making excessive noise — the unit owner is responsible for all consequences. The condominium association can require the unit owner to evict the tenant; if the unit owner fails or refuses, the condominium association may be able to take separate legal action against the owner and levy stiff fines. If the bylaws provide, the unit owner may be responsible for reimbursing the condo for legal fees and other expenses incurred in connection with his tenant’s eviction. Disgruntled unit owners can also pursue “nuisance” claims against unit owners who rent to noisy tenants. This is a tricky issue with an absentee unit owner who cannot verify the nature of the complaints. Surely, however, renting to noisy tenants will earn you no favors with your fellow unit owners.

Condominium Living 101

My advice to folks considering purchasing a condominium is to recognize that you are buying into a rather unique form of ownership and community. You will be giving up certain rights taken for granted in single family dwelling life — the right to absolute silence, privacy, and control over all aspects of the property — in exchange for perhaps more amenities, convenience, less maintenance, and better location and price. In some cases, you will also be entering into the uniquely democratic (or in some condos, totalitarian) form of governance, rife with politics, fighting and name-calling–think that Seinfeld episode down at the Del Boca Vista Condos. But seriously, the majority of condominiums are well run. But before you buy, it’s imperative that you and your real estate attorney thoroughly review the condominium documents and budget to ensure you’re not buying into a Seinfeld-esque nightmare.