When discussing HOA’s and mortgage financing in the Temecula Valley, there are certain issues that can impact consumers, delay financing, or—in some cases—completely kill a real estate transaction.
The good news is that the Temecula Valley and surrounding areas are generally not as heavily impacted by condominium financing as areas closer to Orange County, Los Angeles, and San Diego.
For whatever reason, the Temecula Valley has not historically been overburdened with attached condominium developments.
That can be both a good thing and a bad thing.
From a financing perspective, fewer condominiums can mean fewer complex-level HOA issues.
From an affordability perspective, however, fewer condominiums can place additional pressure on entry-level housing. Condominiums can provide a lower-priced entry point into homeownership, so having fewer options can increase the strain on buyers trying to enter the market.
That said, when financing an attached condominium, there are several HOA-related issues that deserve serious attention.
#1: Attached Condos With Litigation Against the Builder or HOA
This is often one of the biggest red flags in condominium financing.
When an HOA or condominium complex is involved in active litigation against:
- The builder
- The developer
- The HOA
- A contractor
- Another major party connected to the project
…the available financing can become extremely limited.
Structural or construction-defect litigation is often the biggest concern.
When the lawsuit involves possible problems with:
- Foundations
- Balconies
- Roofs
- Structural components
- Water intrusion
- Building defects, ie stucco, 2nd floor issues, roofing, plumbing
…many traditional or top-tier financing options may be unavailable until the matter is resolved. If you are good in Phase 7 of the complex, but Phase 2 has a suit – that typically means the whole HOA and complex could be frozen from traditional financing.
What About Injury Litigation?
Not all litigation is automatically identical.
For example, I have seen claims involving injuries in common areas.
In certain situations, the issue may be reviewed differently if the HOA can demonstrate that:
- Adequate insurance is in place
- Insurance coverage addresses the potential claim
- HOA reserves are sufficient
- The claim is not expected to materially impact the financial health of the complex
However, there are no guarantees.
Litigation can be the kiss of death for a real estate transaction.
Pre-Litigation Can Be a Problem Too
Pre-litigation can also create a dilemma.
Over the years, we have seen newer construction complexes receive attorney letters, notices, or other warning communications as the development approaches approximately Year 9.
This can occur as owners, HOAs, and attorneys evaluate potential construction-defect claims before important warranty periods expire. I am speaking solely about California here.
Even if a lawsuit has not officially been filed, these issues can create questions for:
- Buyers
- Lenders and Underwriters
- Appraisers
- Title companies
- Insurance companies
These items may also be disclosed during escrow.
For a buyer, the question should be:
“What do I potentially own a piece of if I purchase into this complex?”
That is worth understanding before removing contingencies.
#2: Low Owner-Occupancy Ratio
Owner occupancy can also impact financing.
If a condominium complex has too many:
- Rental properties
- Investor-owned units
- Non-owner-occupied properties
…the complex may become more difficult to finance. This can be common near college towns. And to drill-down deeper, the completion of the Condo Questionnaire can be impacted by interpretation of the question. Many HOA’s solely send questionnaires out for occupancy questions to the owners or they check on-site addresses vs off-site addresses in the billing systems. This number can be skewed because off-site address could mean a PO Box or the owner splits time between two homes. Those are different, than an actual unit that is rented to an “actual tenant.” In the past, we have had consumers contest this with the HOA.
For example, when owner occupancy drops below important Conventional Financing thresholds, the buyer may lose access to preferred or Tier One Financing Options.
On certain investment-property transactions, a high percentage of investor-owned or rented units can potentially push the property toward non-warrantable condominium financing.
That can mean:
- Higher interest rates
- Larger down payments
- Different underwriting requirements
- Fewer available lenders
#3: Excessive HOA Dues Delinquency
Another major concern is delinquent HOA dues.
A common financing concern occurs when more than 15% of units are seriously delinquent, such as being more than 60 days behind on HOA dues. This rule used to be 30 days, the number of folks that pay HOA Dues between 30-59 days delinquent is pretty prevalent. The 60 days change, actually helped this portion of the questionnaire.
Why does this matter?
Because HOA dues are the financial lifeblood of the complex.
If too many owners are not paying, the HOA may struggle to fund:
- Insurance
- Maintenance
- Repairs
- Utilities
- Reserve contributions
- Future capital improvements
Excessive delinquency can push a project outside of standard financing eligibility and into non-warrantable territory.
#4: Reserve Studies
A reserve study can provide a detailed look at the financial health and future maintenance needs of a condominium complex.
It may identify major future expenses involving:
- Roofs
- Balconies
- Structural components
- Painting
- Plumbing
- Building systems
- Other common-area improvements
Reserve studies can be extremely valuable because they help answer a simple question:
Does the HOA have enough money to maintain the property and the current monthly dues?
A reserve study may be updated periodically, often on a multi-year cycle, but the timing and requirements can vary. They are typically accepted inside of 5 years old.
These studies have become increasingly important when structural concerns are involved.
#5: California SB 721 and SB 326
California structural-inspection laws received significantly more attention after the tragic 2015 balcony collapse in Berkeley, which resulted in multiple deaths and injuries.
SB 721 focuses on inspection requirements for certain exterior elevated elements on applicable multifamily properties.
SB 326 addresses inspection requirements for certain elevated exterior elements within condominium associations.
These can include components such as:
- Balconies
- Decks
- Walkways
- Elevated stairways
If significant problems are discovered, the HOA may need to repair them—and those repairs can lead to major expenses or special assessments. For Fannie Mae, Freddie Mac, FHA, and VA – the repairs and mitigation would need to be completed prior to closing a transaction.
#6: Federal Structural Requirements
Federal attention to condominium safety also increased after the 2021 Champlain Towers South collapse in Surfside, Florida.
That tragedy resulted in significant changes in how lenders and government-backed mortgage programs evaluate certain condominium projects, particularly projects with:
- Deferred maintenance
- Structural concerns
- Safety issues
- Major special assessments
These requirements can be particularly important for older, multi-floor condominium buildings.
The rules and lender requirements continue to evolve.
Sometimes You Have to Dig
One of the biggest challenges is that HOA and management companies know how important their answers can be.
Some are highly experienced with lender questionnaires and may provide very narrow answers based on the exact question being asked.
That means lenders, buyers, and real estate professionals sometimes need to dig deeper.
The future condition of a complex may not always be fully understood by simply asking:
“Is there any current litigation?”
The more important questions may involve potential claims, known defects, inspections, repairs, reserves, special assessments, and structural concerns.
Final Thoughts: Condos Are Not Bad—But Know What You Are Buying
Not all condominiums are bad investments.
Far from it.
This article is simply meant to create an honest conversation about the risks and exposures that can come with purchasing or financing a condominium.
Structural requirements, balcony inspections, reserve funding, and enhanced project-review requirements continue to evolve—particularly for larger and multi-floor condominium projects.
When buying into an HOA, remember:
You are not just buying your unit. You are buying into the financial and physical condition of the entire complex.
Read your HOA documents carefully. Review the financial information. Understand the reserve position. Ask questions about litigation and structural issues.
The goal isn’t to scare you away from condominiums.
The goal is to help you understand your risks before you become financially connected to everyone else in the complex.
