What is the 10% Rule
There are two areas where condominium buyers may hear about the 10 percent rule:
FHA Approval – FHA stipulates that any one single owner cannot own more than 10% of the units. This is for FHA approval which frankly I don’t hear much about these days
FHA / Fannie Mae / Freddie Mac – Require that the amount set aside annually for reserves shall not be less than 10% of the budget for that year…” This language is commonly misunderstood to mean that condominium associations only have to fund reserves at 10% of their budget for any given year. This could not be more wrong and reading it in this manner opens associations up to one of the greatest areas of owner dissatisfaction.
What the Washington Common Interest Act (WCIOA) actually states is that the board must adopt a budget that will fund the reserve account in an adequate manner to repair and replace the common elements in the normal course of business without the need for a special assessment. Often the amount needed to be fully funding the reserve account greatly exceeds the 10% requirement.
The 10% requirement was initially written in order to require condominium developers to properly fund reserve accounts prior to turning the condominium over to owners. Unfortunately, the outcome of the law seems to have only created confusion. FHA / Fannie Mae / Freddie Mac may make an exception to this 10% rule if the community has a reserve study completed by a reserve professional which shows less than 10% is adequate for the long term budgeting requirements related to reserve expenditures for a particular community. In the 14 years we have been providing reserve studies we have yet to see a condominium association that meets this requirement.
