On June 24, 2021, the Champlain South Tower condominium complex in Surfside Florida partially collapsed without any preliminary rumbles. Although there were no new red flags that day, the complex had a history of delayed maintenance repairs. A decision that the surviving residents will always regret.
More problems appear as buildings age. Broward and Miami-Dade counties address this by requiring a 40-year and 50-year recertification of the structural, mechanical and electrical systems in a building. Unfortunately, the contractors currently deliver the report to the property management company and not the city. After the Surfside, collapse investigators found communities that never submitted the findings to the city because the assessed repair costs were so high.
In response to the devastating tragedy in Surfside and the likelihood that delayed maintenance is common throughout the condo and co-op world, it is expected that the Florida legislature will issue new rules regarding mandatory disclosures of reserve funds and inspection results throughout the state. Meanwhile, Fannie and Freddie are determined to reduce their lending risk.
Fannie Mae announced its new guidelines in October 2021, effective in January 2022. In summary, lenders will need to document the financial and structural soundness of any residential building with more than five attached units. It is clear that they will not purchase any loans in the secondary mortgage market from condos or co-ops located in complexes with deferred maintenance issues. The burden of proof lies with the lender, and I expect that this will significantly lengthen the time it takes to obtain a mortgage loan approval.
Recommended best practices for lenders include the following:
· Lenders should review the past six months of HOA meeting minutes and further investigate any mention of repairs, improvements, low reserves, negative cash flows, etc.
· Lenders should obtain a copy of any inspection or engineering report completed within the past five years.
· Lenders must ensure that appraisers document any special assessments and outstanding repairs that threaten the security and safety of the complex. (This will most like increase an appraiser’s turn-around time.)
Red flags may prevent unit owners from refinancing their mortgage loans or obtaining an equity line of credit. It may also force them to sell their unit for cash which may lower the offer price.