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Association Governing Documents - Know the Rules

How familiar are you with your association governing documents?  When is the last time you reviewed your Covenants, Conditions and Restrictions (CC&Rs), Declaration of Covenants, Easements and Restrictions or Master Deed? If you are not familiar with the rules and regulations that govern your community, now’s would be a great time become familiar with them. Some owners may be unaware that when he/she purchases a lot or unit within a community that is governed by an association, he/she automatically become a member of the association; that is, membership is not optional.  This is why it is very important for buyers to first review association documents and obtain information about owner assessments before purchasing a home or unit within a community.  As a member of the association, residents are required to comply with the rules and regulations that govern the community.  If a buyer has concerns regarding whether he/she will be able to accept and comply with the restrictions and policies in the community, perhaps this is the not the proper place to call "home". Association governing documents are legally binding rules and regulations that each owner agrees to when he or she purchases a unit or lot within the community.  Owners can not "opt out" of the rules and regulations as set forth in the CC&Rs.  Owners are responsible for understanding the governing documents within their community and for sharing the information with potential new residents.  If an owner rents out his/her home, the owner should notify the association or management company and make sure that his/her tenant understands the regulations in the community as well. If you are not familiar with the CC&Rs of your community, you should make an effort to review the documents and become familiar with the restrictions so you don't unintentionally violate them.  Restriction violations could lead to fining, suspension of use of community amenities and - in extreme cases, litigation.  All communities that are governed by an association have restrictions such as: allowance to parking recreational vehicles on the property, requirements regarding dwelling modifications (including exterior paint colors, shingles, siding, etc), landscaping design, and fence, mailbox, pet and pool restrictions.  While some owners may consider CC&Rs more of an annoyance than a benefit, they are necessary.  Governing documents play a crucial role in keeping the association running smoothly and ensure that the members are treated fairly and equally.  CC&Rs were created to ensure the quiet and safe enjoyment of the residents and to ensure that the common elements of the community are properly maintained (through the collection of owner assessments).  In short, CC&Rs assure that the harmony and aesthetics of the community are preserved, which ultimately impacts owner value. If you don’t have a copy of your community's governing documents, you should contact  your management company or association to request a copy today.

FHA Certification – What You Need to Know

The U.S. Department of Housing and Urban Development (HUD) issued a Mortgagee Letter (2009-46B) on November 6, 2009.  This letter specifies the requirements for condominium associations to obtain Federal Housing Administration (FHA) mortgage insurance certification.  These new requirements eliminate “spot loan” approvals (Mortgagee Letter 1996-41) and now require that entire condominium projects are FHA certified.  Therefore, if a potential buyer is in need of an FHA backed loan, the condominium association must be FHA certified. Why is this significant?  This is significant because the number of FHA insured mortgages have increased significantly over the past few years.  In 2007, only approximately 5% of mortgages were FHA insured; this number grew to nearly 20% in 2008. What is significant about FHA insured mortgages? FHA mortgage insurance protects lenders in the event that a borrower defaults on their mortgage.  FHA loans are guaranteed bank loans by the federal government which serve as an insurance policy to lenders.  Approximately 35% of all available money for loans comes through FHA. In order for borrowers to obtain a standard FHA insured mortgage loan, borrowers must invest a down payment of 3.5% but less than 20% towards the purchase of a unit. Borrowers who invest a down payment of more than 20% do not need a FHA insured loan. Why is this significant for my community? Because of the increased need of FHA insured mortgage loans, communities may have difficulty selling units if the project is not FHA certified.  This affects the marketability of a community. Should the board of directors in a community decide not to pursue FHA certification for their community, the board lends itself to liability due to the potential reduced marketability of the community. What is the cost for FHA certification? There is no cost to apply for FHA certification with the government.  However, the certification process should be prepared by a legal professional, as there are legal implications if the association provides incorrect information.  The cost to become FHA certified varies by project because of the varied amount of work involved to prepare all the proper documentation for the certification process.  The decision of whether to undertake this expense lies with the association board of directors and not the individual co-owners. What are the requirements for a community to obtain FHA certification? Below are the key project eligibility requirements which apply to all condominium project approvals per the HUD Mortgagee Letter 2009- 46 B:
  • The project must consist of two or more units.
  • The project must be covered by the proper insurance (flood, hazard, liability, fidelity).
  • No more than 10% of the units can be owned by a single investor.
  • No more than 15% of the total units can be in arrears (more than 30 days past due) in paying the association payments.
  • A minimum of 50% of the units must be owner occupied.
  • At least 50% of the total units must be sold prior to endorsement of a mortgage on any unit.
  • Mortgagees must review the homeowner association budget and determine that the budget is adequate to ensure that sufficient funds are available to maintain the amenities of the community.
  • The community must have a reserve fund which consists of at least 10% of the budget.
  • Only 30% of the total units in a project may hold FHA loans.
  • The community must maintain a reasonable percentage of tenant rentals (20-25%).
  • The co-owners must have insurance coverage for the interior of the unit.
  • Association documents must be in order and comply with HUD and all federal and local laws and regulations.
In accordance with HUD Mortgagee Letter 2009-46 B, FHA certification is not applicable to the following:
  • Condominium Hotel or “Condotels”
  • Timeshares or segmented ownership projects
  • Houseboat projects
  • Multi-dwelling unit condominiums
  • All projects deemed to be used primarily as residential
  • Site condominiums
  • Residential homes
FHA recertification is required every two years. To view the Mortgagee Letter 2009-46 B in its entirety, visit: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/09-46bml.pdf

Why Do Associations Need Reserves?

Major components and equipment must be replaced in every community from time to time.  Expensive repairs such as roofs, streets, common area and/or entranceway elements and community pools eventually require repair or replacement regardless of whether or not associations plan for these expenses in advance. Reserve studies estimate the useful life and replacement costs of various association elements so that associations have the needed information and tools required to plan for replacement of major components well in advance of when the repairs are needed. A reserve fund is a dedicated savings account that the association establishes for this purpose.  The money invested into this account is used solely to fund the replacement or repair of the major association components as outlined in the reserve study.  A portion of the money collected from owner/co-owner assessments is transferred into the reserve account on a periodic basis (i.e. monthly, quarterly). There is other important reasons why associations should consider completing a reserve study and establishing a reserve fund.
  1. Reserve funds meet legal, fiduciary, and professional responsibilities of an association and its board members.
  2. Replacement funds may be required by a secondary mortgage market in which the association participates (e.g., Fannie Mae, Freddie Mac, FHA, VA), state statutes, regulations, court decisions and/or the community’s governing documents.
  3. Reserve funds provide for major repairs and replacements that will be necessary at some point in time. Although a pool may need to be resurfaced every 10 years, every owner who lives in the community and uses the facilities should contribute to the replacement cost.
  4. RESERVE FUNDS ELIMINATE OR REDUCE THE NEED FOR SPECIAL ASSESSMENTS. For most association members, this is the most important reason.
  5. Reserve funds enhance resale values. Lenders and real estate agents are aware of the ramifications for new buyers if the reserves are inadequate. Many states require associations to disclose the amounts in their reserve funds to prospective purchasers.
  6. The American Institute of Certified Public Accountants (AICPA) requires the community association to disclose its reserve funds in its financial statements.
CONSIDER THIS SCENARIO: The Smiths move into a community which is 10 years old.  The community has all types of attractive amenities, including a community swimming pool.  Unfortunately, the association does not have a reserve fund established for the community.  One month after the Smiths move into the community, the association is told by the local health department that their pool needs to be resurfaced in order to obtain their license for the season.  The price tag for the resurfacing totals $25,000.  There are 100 homes in the community.  Because the association does not have a reserve fund established, each owner must be assessed $250 to cover the expense of the pool resurfacing.  Do you think this is fair to the Smiths who have not even used the pool yet?  What if the association is unable to collect the special assessment to cover the cost of the pool resurfacing? It is important to keep in mind that reserve funds should not be considered an extra expense—they are simply a fiscally responsible and fair way to set aside monies to be used to fund the replacement of major association components so that the money is available when needed and alleviates the need for special assessments.