balance sheet deficit - downsides

Condo balance sheet shows negative equity, related to a capital improvement loan.

For reference,
assets (108k) - liabilities (-188k) = equity (-75k)
where annual operating budget is 220k
of which replenishment of reserves is budgeted at 19k

Obviously, everyone wants positive equity. However, in the interim, what are the downsides? Does this make selling a unit more difficult because the buyer might not be able to obtain a mortgage (when seeking fma, va loans)?

The other financial statements are fine, just a balance sheet problem.

Thanks

Thanks Sheliah,

Just to clarify, assets = liabilities + equity, where in my case, 108k = 187k -75k. So the equity is negative. I have had cpas look at this and basically they say it's not a good thing.

My question really is, if i try to sell my unit, will the buyer have difficulties in obtaining a mortgage? I know that banks/mortgage companies scrutinize the hoa financials as part of the approval process.

i can live with the negative equity, as it appears that eventually it will be satisfied thru additional contributions. I am wondering if this has other implications though.

Thanks.

How much was the Capital Improvement loan for?

We aren't bankers or mortgage experts (at least I'm not), so there's no way to answer that question. I'm sure the potential buyer has his or her own finances to consider and that may carry more weight because the HOA won't be paying the mortgage, the buyer will.

I think your real question is how hard the banks look at a HOA's finances and have their been instances why the finances were so jacked up no reasonable banker would back a mortgage company in that community. That's not a bad question - things like underfunded reserves and too many delinquencies can lead to special assessments homeowners can't afford. That might result in people not paying their mortgages and then the bank has to spend money on foreclosure.

This may be more of an issue if the buyer is getting a FHA backed loan, so perhaps you need to talk to your bank to see how they'd look at this. Of course, that's just one opinion, so I suggest that you may want to take these questions to the board. If there are negative numbers, what's being done to bring those numbers to the positive?

-- As I think you know, impressions, based in some experience, are all that can be shared here.

-- A COA that had to take a loan is a COA that almost assuredly was mis-managed in the past.

-- The specific lapse of prior boards most likely is a failure to heed the guidance of professional reserve studies on a regular basis.

-- Mis-management is endemic to HOAs/COAs, due to boards being made up of unpaid volunteers who nearly always lack the demanding skill set to oversee a COA via informed board votes. Said skill set requires extensive knowledge of the law of covenants; the engineering of infrastructure; and competency in financial math.

-- The word on the street is that lenders are starting to pay more attention to a COA's financial statements. This is likely due to the Surfside disaster. (I have not seen treatment in the media of what the building collapse did to lenders. I suppose insurance is supposed to cover the value of the units and so pay off lenders?)

-- Those who buy housing to become a landlord (and not to live in) need to understand that bubbles like the one we are in now do not last. Real estate is not an ATM.

-- Granted most self-proclaimed financial savants have to learn the hard way that there's no such thing as a free lunch.

-- I would never buy into a COA whose percent funded figure for the reserves is under 90%. Which would eliminate many COAs indeed from my consideration.

-- I would bet the percent funded figure for the OP's COA is poor indeed.

A potential buyer is NOT a HOA member. They have no right to HOA information unless it's public. Which is CC&R's and Articles of Incorporation documentation. Now that isn't to say that one can not ask and not receive. Just understand a potential buyer is NOT the member. You are. It would be up to you to decide if you want/need to disclose any of this. The HOA doesn't own your home. You do.

You want to ask the seller to provide a copy of the most recent reserve study. In my opinion, the COA is obliged to provide this to any owner, pursuant to the Mass Condominium statute. See
https://www.ncsl.org/documents/environ/MAcondo.pdf

If per chance the condo association gives the seller a hard time about obtaining a copy of the most recent reserve study, then this is another huge red flag.

If the most recent reserve study is more than five years old, you know this COA's board has idiots for directors.

If you get a copy of the reserve study, read the first several pages, and plan on reproducing some of what's written here. If the reserve study clearly recommends large increases in the regular assessment, and the COA shows no signs of implementing these increases, I advise walking away.

With Augustin, make your offer "contingent upon" your inspection and approval of the most recent reserve study within 10 business days. You want to review a study that had been done by a certified reserve analyst or specialist. within the last 3 years. There will be a summary at the front it will tell you at what % the reserves are funded. A nationally-respected reserve company's founder states that the risk of a special assessment is moderate if 30-70% funded. If you cannot read it, and I wouldn't necessarily think your. r realtor or real-estate attorney can, you may wan to spend some$ and have an actual reserve company review it.

Since the Assn. had to take out a loan to fund the street paving, which should have been paid for out of reserves, the reserves were most certainly underfunded UNLESS the paving was somehow defective and failed prematurely & unexpectedly.

It's true that lenders definitely have tightened their review of condos that need financing and it's also true it's due to worries following the Surf side tragedy. Lenders are sending condo boards or management companies very detailed and probing questionnaires about reserves and structural topics. An HOA law firm in CA recently held a webinar on the topic that was attended by 300 or 600 HOA leaders.

So, you're correct to worry about resale.

What the heck size is this condo project? All one building? How many stories?

Wow, alot to digest here! Thanks for the input.

The community was built in 1988 and is somewhat sprawling - there are 11 separate buildings with 4 townhomes each, Their annual budget is 190k. The only financials (ytd 2022 financial statements) I've received are thru the realtor, and i am attempting to get the rest of the data from the management company, I've gotten permission from the board to talk wit the management company, but I am waiting to have a conversation with them

I've heard from different people that the negative equity does not automatically disqualify a buyer from getting a mortgage, and that was what i was really trying to find out.

The road that was repaved (first time since condo was established) and sidewalks repaired for 440k, of which a special assessment of 360k charged. There's no other amenities, so the only "other" large expense would be the roofs, side shingles, and each unit has a deck. I figure it would cost to replace 20k a roof, 20k for shingles, say 15k for the deck, for a total of 600k. Figure everything is half life (50 % depreciation, a guess), we get to 300k, and with a reserve of 60%, I would want a reserve of 181k. Their actual reserve amount is 75k, so it seems light, but this is a guesstimate.

The HOA is paying its bill and looks to be adding 20k/year to replenish its balance sheet.

Condo market is so hot here (all condos are selling within 3 days, multiple offers, 5-10% over asking), I gave up the farm to win the bid - cash, no inspection, close in a month - the purchase sale agreement is by end of this month. The other owners I've met seem genuinely friendly and most are long term residents.

Basically at least I now know better what I am stepping into . And again, just want to thank you for your feedback.

Also ask the how the assessment it being collected. Is it a one time payment or paid over time?

When were the roofs last replaced? That may be needed soon and unless the money is in the reserves, could be another assessment.