Financial decision regarding condo updates

[JP.mpls]

My partner's condo is going through some major updates (new roof, and new common HVAC system).
Her unit is being assessed a bill of $38K. Ouch.
She doesn't have a choice in the matter, but she has a choice on how to pay for this. I'm interested in opinions on which payment option she should choose. It is a little bit tricky in my opinion, that is why I'm asking for feedback from this trusted forum.
She also has plans to put this condo up for sale within the next 12 months.

A few comments about this condo:
- It is fairly modern, close to a major downtown, easy access to public transportation, reasonably priced, with low amenities, and with low monthly HOA fees.

The condo HOA plan:
They are taking out a loan for $3M to cover the cost for these improvements, and each unit will be assessed an additional payment until the loan is payed.
The payments are tied to the condo unit, not the person.
If someone forecloses, the condo HOA gets burned for the remaining costs. There is concern that many owners will just foreclose if they have less than this much money invested in their condo.

Payment Plan A:
- Accept an additional $282/month payment. This is a $37.6K loan at 4.85%. That increases the total cost to $67.6K.
- I'm shocked to read this, but they won't let her pay it off early. Something about the loan basically being a fixed loan between the HOA and the finance place.

Payment Plan B:
- She could pay them the $37.6K up front, and skip having this loan tied to her condo. Note: She can afford to do that.

My thoughts:

Reasons to pay it off immediately:
- One of the big selling points of this condo it that it is a fairly nice modern condo that is reasonably priced, and has lower HOA fees.
If she ties an additional $282/month fee onto the condo, it will have a high HOA for this area, and it will be much harder or impossible to sell.

Reasons to go along with the monthly loan payments.
- I suspect most condo owners will take the loan, and it will be reflected in their sale prices. I think they will start selling for $50K less, or not selling at all.
She will want more for her place, because it doesn't have the burden of this loan. So she will be asking more like the going rate, and this will make her unit look expensive, and harder to sell. This makes me think she should just accept the loan, and accept that she is going to get way less for her condo.

Your thoughts on this?

Thanks, JP

 

[Bamaman]

She should pay the $38K and let the fact that no future assessments be a selling point on the condo. You can see what a 4.85% interest will do on the total of payments on the loan.

Second thing I would do is fire the entire HOA board. Obviously their low HOA fees were attractive earlier, but they were completely insufficient to keep up with future repairs. HOA fees should be just enough to maintain the status quo of joint properties.

It's a shame that this is all happening after the fact. Not much they can do at this point. If it was at the start, I'd be questioning a roof and HVAC costing such a ridiculous amount per unit.

I'm part owner of a HOA, and we had to completely rewrite our bylaws to conform to state regulation changes the last 20 years. And the HOA has $1,000,000+ in CD's sitting in the bank to do whatever is required. There are specialized attorneys that deal with HOA's and doing what it takes to keep them financially healthy.

 

[Mykle57]

You mentioned some owners may opt for foreclosure rather than pay the assessment. .. wouldn't that lower your prospective sale price?

 

[Scrapr]

You mentioned some owners may opt for foreclosure rather than pay the assessment. .. wouldn't that lower your prospective sale price?

and generate more special assessments for the remaining owners?

One thing I investigated on buying into my HOA neighborhood was the Reserve studies. Neighborhood was started about 15 years ago but an actual Reserve study was not done until about 3 or 4 years ago. Now there is a plan & I feel comfortable with it

 

[Sunset]

I think OP's friend should take the loan, because they are going to sell in a year.

Paying off the price immediately, means an immediate reduction in money compared to selling today of: $37.6K
Compare had the person sold 1 month ago to selling after paying the $37.6K up front.

It's not as if the person can sell the condo for $37.6K extra after paying the debt.

So if selling the condo a year from now, means needing to drop the price by $30K due to the high condo fee, it's not really any extra loss.

This certainly shows the danger of owning in a Condo with insufficient reserves and a lack of a reserve study or replacement plan.

 

[Gotadimple]

Just to add to Sunset's comment: a savvy real estate agent with a buyer who really wants the unit will write a condition into the Purchase Agreement that the seller pays off the Special Assessment at closing. That can maintain the selling price, though the seller won't see all the net proceeds.

l think the logic here is a bit backwards about the explanation of the "loan." The HOA is the entity responsible for paying the $3 million loan and the association members are the source of the payment, as you have described the situation. That means the Board has signed a finance agreement with a bank.

There are two payments plans offered (actually there are 3, but keep reading). Who does the unit owner make the check out to: The bank or the HOA. I'm guessing the HOA who will aggregate the payments to meet their monthly payment to the bank.

Should a unit owner fail to pay on schedule, the Board is the entity that can start a foreclosure procedure because no unit-owner has a relationship with the bank.

I question rationale about no early payments (other than the two options offered). What is the board doing with the one time payments? Immediately turning it over to the bank or holding it for 'their' periodic payment? What will they do with the $ if a remainder payment comes to them from the sale of a unit?

As a treasurer of a condominium HOA - And more to the point: What is the board doing to make sure there is a method to collect reserves to cover these kinds of expenses in the future (to echo Bamaman).

- Rita

 

[aja8888]

Maybe she ought to sell the place now and take a $37K hit? Is that a viable option?

 

[RetireeRobert]

Maybe she ought to sell the place now and take a $37K hit? Is that a viable option?

Yes, with an HOA Board doing things like this one has done, I would want to be out from under their thumb pronto. Sell the unit poste haste, take the reduced market value hit the HOA has engineered onto all the owners, and get out of Dodge.

 

[ncbill]

Second thing I would do is fire the entire HOA board. Obviously their low HOA fees were attractive earlier, but they were completely insufficient to keep up with future repairs. HOA fees should be just enough to maintain the status quo of joint properties.

The board ultimately does what the residents want.

When I first moved into my townhome over 20 years ago & got onto the board nearly all here were elderly couples who had downsized from a larger home & wanted to keep the monthly HOA fee as low as possible.

One (a retired CPA!) even insisted the HOA should liquidate its reserve fund & re-distribute it to homeowners, relying on special assessments instead.

 

[JP.mpls]

Thanks for the comments, and yes, what a mess.

A little more information:
- The HOA reserves: At one point they had decent reserves. They ended up replacing something called a "green roof" multiple times (grass on the roof for increased energy efficiency was the idea), and they dealt with two law suites. Someone falling on the sidewalk was one of them.
- The roof wasn't due for replacement, but it was determined that the original builder's roofer installed it improperly (leaks I'm assuming). The roofer and builder are out of business, the condo is stuck replacing the roof. No other option there.
- The units have individual HVAC units called Skypaks. They are failing. The manufacturer went out of business (nice), and we are told nobody makes a replacement.
I read that a company in Canada called Intuit is now making a replacement called R-Skypak, but it looks like it is unavailable in the states. The HOA pursued this, and ran into a deadend.
The alternatives are to add individual mini splits on the roof, with forced air in the units, or add a community heat pump system on the roof.
The R-Skypak would be more like $10K, the other two alternatives are both $28K. Ugh.

So just a bunch of unexpected large expenses pilled up in a short time period.

Regarding selling right now:
Without getting political, the city has been basically shutdown through covid, so the attraction of a near to downtown city condo is very low. She decided to rent it to her nephew for a year, and is hoping the city gets closer to pre-Covid conditions 10 months from now. Possibly a silly idea, but that decision has been made.

There is a possibility that the HOA board will choose a plan that only includes the roof replacement, and agrees to let people install mini split AC, and heat only forced air systems into their units as needed. Some people have been going without AC or heat for awhile. Possibly using space heaters, and portable AC units.

If they choose this plan, the amount due would only be $10K. I'm hoping for this, but it is leaning towards the heat pump system. Her HVAC is limping along, but she assumes it will have to be addressed.

If they pick the roof replacement only plan, I suggested we go up to Canada, buy one of the replacement units, and bringing it down here. It would be worth it.

Sunset's recommendation seems right, to take the loan, but I'm very concerned that the place will never sell with a $600/month HOA fee. I'm also very concerned that lots of first time buyers will start foreclosing, and it will get even worse. The thought of paying $60k with loan interest for a roof and HVAC system makes me crawl.

Maybe we will be moving into a one bedroom condo that can't sell. She has about 50% equity built up at this point. Ugh again.

PS: My partner is good with her money, and has a very LBYM mentality. She doesn't need my financial support, but she is feeling sick/upset about this silly condo situation.

Take care, JP

 

[ivinsfan]

What will the 38K capital expense do to her equity? And are your being realistic about the value of the condo? Equity is one thing, how does she stand on actual out of pocket purchase price on the place?



As a rural resident of your state, I'd run, not walk away from the condo now. Since she has rented to a family member, I assume she has some wiggle room here. Two options sell for whatever anybody will give her or default on her loan for the condo. Obviously the first choice is better, but she was in the wrong condo, in the wrong place, at the wrong time.


If you or she is in doubt go to Zillow and check the downtown area condo sales, or lack of sales and the list price dropping that is going on. I assume a lot of these condos don't have a 38K bill hanging over them either.

 

[brucethebroker]

As already mentioned, she will most likely not get away with NOT paying the entire assessment-payment plan or no. Most buyers are pretty savvy.

Unless she is making MORE than 4.85% on her nest egg, pay the thing off. It does no good to make the high payments with your cash earning less than 1% in the bank/S&L, etc.

 

[RetireeRobert]

As already mentioned, she will most likely not get away with NOT paying the entire assessment-payment plan or no. Most buyers are pretty savvy.

Unless she is making MORE than 4.85% on her nest egg, pay the thing off. It does no good to make the high payments with your cash earning less than 1% in the bank/S&L, etc.

^ ^ ^

This.

Taking the loan makes no good sense.

Whether she realizes it or not, the HOA has "already" engineered a $37k reduction hit (or possibly only $10k if HOA renegs idea to replace AC units now) on on her realizable equity from sale of condo. Realize the hit, and get out of Dodge now, before genius HOA group comes up with some other brilliant ideas.

 

[pb4uski]

.... Second thing I would do is fire the entire HOA board. Obviously their low HOA fees were attractive earlier, but they were completely insufficient to keep up with future repairs. HOA fees should be just enough to maintain the status quo of joint properties. ...

The board ultimately does what the residents want.

When I first moved into my townhome over 20 years ago & got onto the board nearly all here were elderly couples who had downsized from a larger home & wanted to keep the monthly HOA fee as low as possible.

One (a retired CPA!) even insisted the HOA should liquidate its reserve fund & re-distribute it to homeowners, relying on special assessments instead.

+1 Board should be fired.

While to some degree the board ultimately does what the residents want at the same time the board also should protect residents from their own ignorance.

Our association will be replacing roofs shortly and our villa units are significantly underreserved because of the shortsightedness of some residents and the board allowing less than full reserving for so long. Florida law requires full reserving unless owners vote for less than full reserving and our board has allowed such votes on a regular basis... and with these new roofs a special assessment is near.

One owner recently stated at a board meeting that once the roofs are replaced that he is dead set against paying for roof reserves as he'll be dead when the roof need to be replaced again.

As another retired CPA, I'll say the retired CPA mentioned above that advocated no reserves and only special assessments is a moron. It results in generational inequities and today's buyers are smart about looking at reserving... in fact about a year ago we had an owner whose deal to sell was killed by the buyer's discomfort with the reserves.

I recently joined our board and once we get past these new roofs I will advocate full reserving and not even giving owners the opportunity to vote on less than full reserving.... if they want to vote me out then so be it.

 

[pb4uski]

... Whether she realizes it or not, the HOA has "already" engineered a $37k reduction hit (or possibly only $10k if HOA renegs idea to replace AC units now) on on her realizable equity from sale of condo. Realize the hit, and get out of Dodge now, before genius HOA group comes up with some other brilliant ideas.

+1 ... reminds me of that old Fram oil filter commercial... pay me now or pay me later.

 

[38Chevy454]

Seems like a stuck between a rock and a hard place situation. I think selling now and getting out would be best, but if you decide to stick it out for a year then taking the loan seems the way to go. Unless you have excess cash sitting around that is getting nearly zero return, then it's a question of best use of those funds. The whole condo complex is affected by this, and subsequently all of the units are now reduced value. I don't see a pre-paid off loan as increasing the value by the amount of the payoff. There may be a bunch of sales that start soon because of this, with the reduced value baked in already. So get ahead of the curve and sell now seems the best plan if you can. Accept the hit to value and let it go. Or take the loan and the increased payments to keep cash in your pocket.

 

[pb4uski]

Here's an idea... she takes out a mortgage (or cash out refi if she currently has a mortgage) to pay the $38k special assessment. The rate will likely be less than the 4.85% if she finances it through the association but if she gets a loan on her own then she get the flexibility to pay it off early if she wants to.

 

[Gotadimple]

OK, so the original story has changed:
The Board doesn't have a deal on a loan because the assessment will either be $37.5k or some other amount depending on a board decision. There is not payment plan, and the board hasn't decided anything so pre-paying is an option if someone wants to WHENEVER all the details are clear.

The Special Assessment hasn't been declared, they are just warning you?? "...There is a possibility that the HOA board will choose a plan that only includes the roof replacement, and agrees to let people install mini split AC, ..."

For now: do nothing. She has the unit leased. No unit-owner will voluntarily agree to give a board $37,500 when the Special Assessment is going to be some other number. Get a courtesy valuation from a licensed Realtor and discuss the issues she has currently. That tells you current market value, and you may get some good counsel about selling now vs. later. When she gets ready to sell, that realtor may be one she gives the listing to - or not.

As an owner if there are issues with the building she may have to declare that up front (based on her state's real estate laws and a realtor can tell you this). And the HOA will need to share if they have declared a Special Assessment, how much it is, and the payment schedule, etc when responding to a Purchase & Sale Agreement (in some states a Resale Certificate is required before escrow closes). The HOA may also have to share plans for future improvements and costs and timing for a loan underwriter's questionnaire.

All of this can impact a sale that is why (1) the board needs to be careful about how much the assessment is and when it should be paid, and (2) the owner needs to identify any building defects as respects their unit.

How she chooses to pay the assessment is up to her. I wouldn't pay it until the absolute last moment and indicate to a potential buyer that the assessment will be cleared when escrow closes. This way the question of the amount of the assessment does not cloud the sale negotiations.

Rita

 

[RetireeRobert]

There may be a bunch of sales that start soon because of this, with the reduced value baked in already. So get ahead of the curve and sell now seems the best plan if you can..

+1 Good point about the "bunch of sales" that may be generated by the situation.

 

[RetireeRobert]

Here's an idea... she takes out a mortgage (or cash out refi if she currently has a mortgage) to pay the $38k special assessment. The rate will likely be less than the 4.85% if she finances it through the association but if she gets a loan on her own then she get the flexibility to pay it off early if she wants to.

+1 Two more good points about financing and flexibility.

 

[RetireeRobert]

...There is a possibility that the HOA board will choose a plan that only includes the roof replacement, and agrees to let people install mini split AC, ..."


As an owner if there are issues with the building she may have to declare that up front (based on her state's real estate laws and a realtor can tell you this). And the HOA will need to share if they have declared a Special Assessment, how much it is, and the payment schedule, etc when responding to a Purchase & Sale Agreement (in some states a Resale Certificate is required before escrow closes). The HOA may also have to share plans for future improvements and costs and timing for a loan underwriter's questionnaire.

All of this can impact a sale that is why (1) the board needs to be careful about how much the assessment is and when it should be paid, and (2) the owner needs to identify any building defects as respects their unit.

I wouldn't pay it until the absolute last moment and indicate to a potential buyer that the assessment will be cleared when escrow closes. This way the question of the amount of the assessment does not cloud the sale negotiations.

Rita

All good advice I think.

But if it were me, all these goings on would fraggle me and I would want to sell, take my losses as fast as possible, and get out of Dodge, and start a new less complicated residence somewhere else.

 

[Dash man]

This isn’t an unusual situation. Our Florida condo has always voted down reserves and for years assessments ran from $600-$2,000. I looked at 40 years worth of assessments before we bought. Then a 50-year inspection approached and a bunch of concrete work, a roof, new decking and other things started adding up to big bucks.
The new board put together a plan to get a $600,000 line of credit to proceed with the work and every unit pays an additional $1,000/quarter to pay it off and build up the reserve. It at least stabilized the payments going forward. I’m sure it’ll impact sales prices, but it’s beachfront and the units will sell anyway.

 

[Sunset]

OP - Taking the loan becomes a better deal if your friend is willing to become a landlord, for up to 3 yrs. As it will be deductible against the income.

If the HOA hasn't actually acted yet, your friend could sell the condo next week at the regular price before the special assessment happened. Advance knowledge is powerful.

I had a condo I was renting out, where a few board members quit and sold their place and then we learned of a special assessment being required soon.