The Resale Marketplace

By Michael J. Gelfand, Esq. / Published April 2022

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urfside’s Tidal Wave Swamps Resales: Following the Money as Lending Restrictions Lead Reforms

     Who would have seen it coming so soon and seemingly out of nowhere! A wave of change may upend resales of condominium and cooperative units and likely will also impact many homeowners association communities.

     What is this wave? It is a significant change in mortgage loan underwriting. These are the thresholds a borrower must show before a loan is approved. Lenders are requiring associations to show better funded reserves, fully paid maintenance programs, and structures that are certified to be safe and in good condition.

     The impact will be substantial in terms of budgeting and planning. Why? Lenders drive a considerable part of the resale marketplace. Increasingly, lenders want to make certain that the property which they are providing a mortgage for is structurally sound and that the association has the funds to complete proper maintenance. Lenders expressly acknowledge that the effort is a result of the Surfside Champlain Towers South Condominium collapse.

     Think about the practical impact. If a buyer cannot obtain a loan for a unit in a building, then the buyer may go elsewhere, driving prices down even in this runaway market. If a building has a reputation of not having proper reserves and not being properly maintained, then brokers may steer prospective buyers away, depressing prices further.

     The collateral effect will be demands by owners to correct the situation. This then brings the situation full circle as owners start to calculate the cost of deferring maintenance and waiving reserves. While the focus is on condominium and cooperative projects, expect homeowners associations that maintain homes’ structures, roofs, and walls to be swept into the wave.

     How will this strike hit? Mortgage lenders are starting to require detailed information regarding a community. Associations will be asked to complete a “questionnaire” documenting a community’s maintenance and reserve status as well as other criteria important to lenders. The thought is that if owners continue to stymie proper funding of reserves and timely maintenance, then there will be swift economic impacts.

     Prepare for a deluge of information requests from lenders that may initially overwhelm management and volunteer administrators. In the long term this process may create long-term liabilities and perhaps claims against associations.

     The Federal Home Loan Mortgage Corporation, also known as Freddie Mac, issued a Bulletin with the captivating title “Temporary Condominium and Cooperative Project Requirements and Topic 5600 Reorganization.” The requirements apply to all condominiums with five units or more even if the condominium is otherwise exempt from review.

     Before describing the highlights, a few cautions. The regulatory wording indicates that this is not restricted to Florida but is national. Of course, Freddie Mac does not buy all mortgages, but it has an impact far beyond its immense purview.

     A few of the highlights may compel Florida condominium associations to effectively plan long-term maintenance needs because waiting until it is needed may cut off Freddie Mac’s mortgage financing!

• Units in condominiums with critical repair needs are not Freddie Mac eligible.
  • Even if the administration is diligent and the work has started.
  • Even if the work is fully funded!
• Engineering reports will likely be required as proof of completion.
• Special assessments are to be evaluated to determine if they are for critical repairs.
• A questionnaire is created.
  • Five pages to be completed by the association or management.
  • Requires interpretation of governing documents.
  • Requires disclosure of all litigation.
  • Requires evaluation of the following:
    • Unit uses;
    • Multi-unit owners; and,
    • Insurance.
    • Though stated as “temporary,” there is no end date. The devil is always in the details, so here are the definitions for information sought in the questionnaires, which are relatively broad.
• Critical Repairs.Repairs and replacements that significantly impact the safety, soundness, structural integrity, or habitability of the project’s building(s) and/or that impact unit values, financial viability, or marketability of the project. These repairs and replacements include the following:
  • All life-safety hazards;
  • Violations of any federal, state or local law, ordinance, or code relating to zoning, subdivision and use, building, housing accessibility, health matters, or fire safety;
  • Material deficiencies; and,
  • Significant deferred maintenance.
• Material Deficiencies. Unresolved problems that cannot reasonably be addressed by normal operation or routine maintenance and which include the following:
  • Deficiencies which, if left uncorrected, have the potential to result in or contribute to critical element or system failure within one year;
  • Deficiencies that will likely result in a significant escalation of remedial cost related to any material building components that are approaching, have reached, or have exceeded their typical expected useful life or whose remaining useful life should not be relied upon in view of actual or effective age, abuse, excessive wear and tear, poor maintenance, and exposure to the elements; and,
  • Any mold, water intrusions, or potentially damaging leaks to the project’s building(s).
• Significant Deferred Maintenance. The postponement of normal maintenance, which cannot reasonably be resolved by normal operations or routine maintenance, and which may result in any of the following:
  • Advanced physical deterioration;<
  • Lack of full operation or efficiency;
  • Increased operating costs; and,
  • Decline in property value.

     These definitions may cause pain!

     There is more. Interestingly, the Bulletin highlights “reminders” of the need for reserves. Reserve studies are required to justify short funding.

     Anticipate disputes over whether something is a routine repair or a critical repair, and requirements to complete the form and who pays for the completion.

      Beware of just filling out the form with guesses and providing answers when you do not have good or complete information. You know who will be blamed when there is a problem! Note that the follow-up information indicates that in some circumstances lenders will accept information from other than associations, such as from an appraiser.

     If you have not seen the forms or the bulletins, here are the links to Regulation material: https://guide.freddiemac.com/app/guide/bulletin/2021- 38?utm_source=eloqua&utm_medium=email&utm_campaign=2021-12-15_POLICY_GuidePolicy.

     To the new questionnaire: https://sf.freddiemac.com/content/_assets/resources/pdf/forms/condo_questionnaire_form_full.pdf.

     Start planning!

2022 Legislative Session

     Florida’s 2022 legislative session started with over 20 bills touching Florida community associations. The post-Surfside bills include mandatory reserves and regular inspection reports and reporting formats.

     The annual mystery—or misery, depending on your perspective—is which bills will make it through the gauntlets of both Florida legislative houses and be signed by the governor. What seems certain to be adopted is the expansion of owner flag display rights to include the flag of the newest military branch, the Space Force.

     What else is being considered?

• Creation of a homeowners association ombudsman and of a Southeast Florida Investigation of Fraud program
• Preemption of regulations on short-term rentals
• Limiting the time within which to bring construction defect claims
• Prohibiting HOA fines from becoming liens
• Keeping a database of community associations
• Requiring directors to attend an education course and provide a certificate of compliance, addressing kickbacks
• Listing financial records to be kept
• Allowing a multitude of flags to be kept

     There are many other areas under consideration, and for most bills it is not certain what will be approved and what will drop to the floor. Those interested can access the bills at Online Sunshine at www.leg.state.fl.us/.

Michael J. Gelfand, Esq.

Senior Partner, Gelfand & Arpe, P.A.

     Michael J. Gelfand, Esq., the senior partner of Gelfand & Arpe, P.A., emphasizes a community association law practice, counseling associations and owners how to set legitimate goals and effectively achieve those goals. Gelfand is a dual Florida Bar board certified lawyer in condominium and planned development law and in real estate law, a certified circuit and county civil court mediator, homeowners association mediator, an arbitrator, and parliamentarian. He is a past chair of the Real Property Division of the Florida Bar’s Real Property, Probate & Trust Law Section, and a Fellow of the American College of Real Estate Lawyers. Contact him at ga@gelfandarpe.com or (561) 655-6224.