Did you know your homeowners’ association (HOA) can make it extremely difficult to sell your condo?

As a condo owner, you have to follow the rules of the HOA. You don’t have control over the common areas, you have to pay your monthly dues and assessments, and you have to play by the rules of the condo association. You understood, when you bought the condo, that you’d be subject to certain restrictions.

But you, like most sellers and their real estate agents, probably aren’t aware about the potential red flags an HOA can cause until the condo has a buyer with a contract to purchase and that buyer can’t get a loan because of the HOA issues.

The red flags typically show up in the Condo Cert (also known as a Condo Questionnaire) document. The Condo Cert, required by the buyer’s lender, assists banks in assessing the health and financial status of the HOA. They want to be sure there is minimal risk in lending on a condo in the HOA.

The Condo Cert is standard practice when underwriting a home loan. The HOA’s management company, or an HOA representative if the condo complex is self-managed, normally completes the Condo Cert once the property is in escrow.

This is where the deal can fall apart. Many times, a seller has no idea about the HOA details. Most real estate agents, buyers or sellers don’t think about it in advance. But as lending standards have tightened, what appear to be small things can really mess up a deal. That’s why, if you’re a seller, it’s important to do some work ahead of time.

Here are three red flags that can pop up in the Condo Cert — and can screw up the sale of your condo.

1. The Ratio of Homeowners to Tenants is Out of Whack

All banks believe a condo complex or building occupied primarily by homeowners is less risky than one with a lot of rental units. The theory is that homeowners who live in their property are more likely to take good care of it and take an active interest in maintaining common areas than someone who’s simply renting the condo.

As a result, most lenders may not give a buyer a loan if the complex has too high a ratio of tenants to owners. Too often, the seller and the buyer have no idea how many renters are in the complex until the Condo Cert is completed and distributed. The problem has only been exacerbated in recent years because many homeowners who needed to sell for financial reasons couldn’t get the equity they needed and were forced to rent.

2. One Person Owns Multiple Units

Another potential problem that shows up in the Condo Cert is when one person owns multiple units in the complex. Lenders don’t like this scenario because if that owner defaults on his or her HOA dues or files bankruptcy, the financial effect on the HOA’s finances can be drastic.

When the real estate market heated up in the early-mid 2000s, investors and developers built lots of new condo buildings. Then, as the market slowed and prices fell, they were forced to rent many of their properties. When there’s a large percentage of renters in a complex and many of those units are owned by the same person, potential buyers of units in that complex will likely find it doubly difficult to get loans.

3. There’s Not Enough Money in the Kitty

The HOA’s financial health, described in the Condo Cert, can be another stumbling block. Does the association have enough money in a reserve account to pay for repairs to the roof or other common areas? Is the HOA properly insured? (Some lenders require a minimum of liability insurance in order for them to lend on a condo.)

None of these potential problems alone will necessarily thwart a deal. A successful real estate transaction depends on many factors.. A lender may be more flexible if, for example, the buyer has an excellent credit score and a large down payment. On the other hand, for the first-time buyer with the minimum down payment and a low salary or minimal credit history, a bad HOA situation could be a deal-killer.

Advice to Buyers

Be aware you might hit a snag during the loan process. With the seller’s approval, be prepared to ask the seller to extend the time frame to get your loan approved. In some cases, you may even need to find a different lender, such as a local bank or credit union that would be more flexible than a big bank.

Advice to Sellers

You should know as much as possible about the HOA. Ask your HOA president or management company how many renters are in the complex, or if one owner owns more than one unit. Work with your real estate agent to isolate and flag these issues before you go on the market. Otherwise, your days on market will increase. And if you go into contract and then are forced later to put the condo back on the market, your listing looks suspect.

If you think there could be an HOA issue, identify a lender before you go on the market. Work with that mortgage broker or banker to understand what it would take for someone to get a loan to buy your condo. Consider letting those requirements be known up front, either to agents privately or to buyers at an open house who express serious interest. The goal is to save yourself, your agent, the listing agent — and everyone else involved — a lot of time and headache.

Brendon DeSimone is a Realtor and real estate expert based in San Francisco and New York. He is a contributor to Zillow Blog, has collaborated on multiple real estate books and is often quoted by major media outlets.

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

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