Does HUD Allow Private Transfer Fees? Yes and No

One of the major topics of discussion at a round table discussion with HUD was Private Transfer Fees, aka 3rd party transfer fees, community enhancement fees or any other fancy name that you might have heard. Basically, these fees are deed restrictions which require the seller of a condominium unit to pay a fee to an entity other than the buyer upon conveyance. A third party could include a management company, the association or an affiliated or unaffiliated entity.
HUD said that it is encountering an increasing number of condominiums whose legal governing documents require that unit owners pay some sort of 3rd party fee upon the sale of the unit. These fees are subject to 24CFR203.41. This section of the Code states that legal restrictions on conveyance may not limit the sales proceeds retained by the seller. [This doesn’t only apply to condominiums.]
Basically, a condominium’s CC&Rs may not limit the amount a seller may gain from the sale of his/her unit EXCEPT for the exceptions laid out in the section of the code named above.
Because governmental language can be vague at times (ah-hem), the session sought to clarify it as it pertains to condominiums:
 Third party fees that are administrative in nature are acceptable. This would include reasonable fees charged by an HOA or management company for the processing of resale packages or for updating the list of unit owners, among other administrative-type duties.
 Capital contributions are acceptable. Again, within reason, a requirement for the seller to contribute to the reserve account is acceptable because it is a benefit to the association.
 Fees paid to affiliated or unaffiliated third parties are NOT acceptable. These would include required transfer fees paid to entities such as non-profit organizations that are not for the betterment of the condominium. This could be a topic in and of itself.
 Fees may NOT be a percentage of the sales price even if the fees belong to the first two categories above.
 Buyers may NOT pay the fees that are not acceptable. Even though the section of the Code pertains to the proceeds of the sale to sellers, HUD has determined that buyers may not pay the fees on behalf of the sellers.
If a developer or association wishes to collect the unacceptable fees and still be eligible for an FHA project approval (and, therefore, FHA-insured loans), creating an exemption in the CC&Rs for units encumbered with FHA financing is allowed. However, HUD does want specific language to be included in order for the project to be eligible.

What Types of Condominium Projects are Approvable by FHA?

This is one of the most commonly-asked question that we receive.  The better question to answer is Which types of condominiums are NOT approvable by FHA?   Then we can deduce that all other types of condominiums are eligible for FHA condominium project approval.
These projects are ineligible for FHA condominium project approval:

♣ Projects where more than 25% of the total floor area is non-residential.  That is the basic guideline although there may be exceptions granted that will allow up to 50% in certain circumstances.
♣ Timeshares and Condohotels (Condotels).  Segmented unit ownership or condominiums that also operate as a hotel.  Condominiums cannot offer hotel-type services such as a front desk, room service or maid/cleaning service or offer leases or rentals for less than 30 days (aka “transient leasing”).
♣ Multi-dwelling unit condominiums are fairly rare but this means that the condo units are multi-family dwellings and the project consists of a grouping of these whether they are attached or detached.  These are not allowed.
♣ Mandatory rental pooling of the units is not allowed.
♣ Condominiums converted from hotels or motels.
♣ “Cloud Condominiums and Co-Housing communities: “Cloud” condominiums are not eligible for FHA approval.  Co-housing communities may be eligible if they meet FHA guidelines for approval.
♣ Mandatory membership to a country club or the like.  Condominiums can be required to be a part of a Master Association but it cannot require unit owners to be members of any type of club, such as a golf or racket club.
♣ Houseboat condominiums is not something that we have seen but there must be enough of them out there – somewhere – for FHA to mention them on this list.
♣ Projects in designated coastal barriers according to FEMA such as sections of the Atlantic Coast, Great Lakes and Gulf of Mexico.
♣ Occupancy restrictions which is an entire topic by itself.  Basically, a third party, such as an HOA, cannot prevent or restrict the leasing or sale of a unit except under certain circumstances nor can the HOA screen a potential buyer or lessee (except the Registered Sex Offenders list).  A right of first refusal is acceptable provided that it is written in the proper manner.
♣ Projects that outright restrict leasing.  A project has to allow leasing of at least one unit.  Exceptions include age-restricted communities and projects that consist entirely of Affordable Housing units or the like.
♣ Conveyance/deed restrictions that require 3rd party transfer fees which are not administrative in nature or benefit the association directly.  For example, a transfer fee of $300 paid to the HOA for providing resale packages is acceptable as is one which contributes to the association’s reserve account.  Unacceptable transfer fees include those tied to a percentage of the sales price or those paid to a “nonprofit organization” for any reason.
The above list represents the major categories of condominiums that are not eligible for FHA project approval.  Most of them are also not eligible for Fannie Mae (conventional) financing options as well.  Age-restricted and Affordable Housing communities may be eligible for FHA project approval if they meet other FHA criteria for approval.