Condominiums losing value over FHA status

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Sherrie Lemley, president of Mandalay Villa Homeowners Association, successfully applied for new Federal Housing Authority certification.

Condominium associations that have discovered their Federal Housing Authority certifications are expired have scrambled to restore home values by re-applying for the status.

The FHA passed regulations in late 2009 that require associations to renew certifications every two years. They also imposed more stringent requirements on condominium homeowners’ associations to protect the interests of condo owners.

Now that certifications for 70 percent of the associations in Colorado Springs have expired, homeowners are just discovering the issue.

FHA will not lend on individual units if the whole condominium project is not certified, which causes problems for buyers, sellers and lenders, said Terry Jarrett, president of the Rocky Mountain Chapter of the Community Association Institute.

“Let’s say you want to buy a condo and you look at two units,” Jarrett said. “They’re relatively equivalent and you can get an FHA loan on mine but not on the other one.”

He said FHA loans require lower down payments and tend to have more favorable terms for entry-level buyers, which is what condominium buyers typically are.

The units that are not FHA-approved are drawing from a smaller pool of potential buyers, which drives prices down and attracts investors who will turn units into rentals.

“I think some associations just don’t realize the impact it has on property values,” said Sherrie Lemley, broker/owner at Lemley Properties and the HOA president at Mandalay Villa condominiums, which received FHA recertification Feb. 16.

She watched property values plummet at Mandalay Villa after the association’s FHA certification fell through. She had her condo there listed for about $125,000. Though she was prepared to accept less, she said she felt like it was a reasonable asking price in the development.

It wasn’t until someone in the development had a buyer for one of the units that they realized the FHA certification had expired. Since then, someone has sold a unit for less than $90,000 and another condo is on the market now for just $117,000.

It’s common that associations don’t know their certifications have expired until someone tries to sell, said Lenard Rioth, an attorney with Springs-based Anderson, Dude & Lebel who represents more than 100 homeowners’ associations.

Until 2009, projects were approved when they were built and never fell off the list, Rioth said. With most associations being comprised of average homeowners, it’s no surprise they aren’t aware of the new regulations.

Even real estate agents are just beginning to learn that they need to check the U.S. Housing and Urban Development website to see which associations are current, Rioth said.

Of the 110 condominium communities in Colorado Springs, 77 — or 70 percent — have expired FHA certifications. Another nine are due to expire this year and only 18 have recertified.

That 18, however, is a dramatic improvement from October when the CSBJ first reported on this issue. Only seven properties had recertified at that time.

Jim Kelly, president of the HOA at the Peacock Farm condominiums in Manitou Springs said that CSBJ story got his community moving on recertification efforts. He found a new property management company and a third-party expert in FHA certification. They sent their application a week ago.

“Now we’re just waiting to hear back,” he said.

He’s hoping the association’s governing documents are in order, but otherwise believes it meets all of the FHA requirements — no more than 50 percent of the 32 units are rentals. In fact, the association passed a bylaw last year that won’t allow more than 30 percent of the units to be rentals. Also, one owner does not own more than 10 percent of the units, the HOA is managed by the homeowners and not the developer, no more than 15 percent of homeowners are more than 30 days delinquent on their HOA dues and 10 percent of the HOA’s budget goes to reserves.

Another six properties have had their recertification applications rejected.

That doesn’t necessarily mean they won’t be approved, said Rick Minogue with Hammersmith Management. Hammersmith manages Broadmoorings condominiums, which was rejected for recertification on March 5.

Minogue said he couldn’t discuss a specific property, but that applications are often rejected for simple issues that just need little adjustments.

Lemley said Mandalay Villa’s application was rejected the first time because she had to get the names of the investors who owned rental units and the names of the condo owners who had their units on the market. She also had to submit certain forms on official Mandalay Villa letterhead.

Those were things the original forms didn’t ask for, she said. So, she got the names, came up with some letterhead (which didn’t previously exist) and resubmitted the application. It was approved.

When Lemley first discovered that Mandalay Villa’s FHA certification had expired, she had no idea where to go for help. Even with her years of experience in real estate and lending, it was a daunting task. She knew that lenders used to be able to get approval for individual units, though the 2009 regulations eliminated so-called spot approvals. She started with Dave Oliver at People’s Mortgage.

“We sent her to Steve,” Oliver said. “We work with a third party when this comes up and he takes care of it.”

Steve Stenger owns Condo Approval Professionals, LLC outside of Chicago and handles FHA recertifications for condo communities throughout the country. He’s been working on getting lender approval for condos since the early 1990s when he mostly dealt with new construction projects.

Stenger had Lemley fill out a questionnaire to be sure Mandalay could qualify before he agreed to take her project on. Then he guided her through the process, organized and submitted the application.

“A whole cottage industry is cropping up around this issue,” Rioth said. “There are a lot of new companies starting to handle FHA certification paperwork.”

But Lemley still had to be the one to sign the paperwork, which comes with a lot of responsibility. The paperwork states that anyone signing who makes untrue claims is subject to up to $1 million in fines and 30 years in prison.

“It took me a couple weeks to sign it,” she said.

She called the HUD office and asked several times about the requirement and responsibility. She got just about the same answer every time.

“They just want to know you have something to backup what you’re saying and that you have integrity,” she said.

And as for her responsibility to keep HUD informed, she said there are forms she needs to submit if there are any significant changes.

While the application process was intimidating, it was worth it, she said. She expects property values won’t bounce back to where they were before the certification was lost anytime soon. But she figures they’ll probably get close within the next six months or so.

“It wasn’t hard,” she said. “It was just a lot of time.”

She’s been thinking of ways to get the word out that Mandalay is recertified — maybe a banner at one of the entrances.