Are Nudist Community Condominiums Allowed by FHA?

vladoCondominiums come in all sorts of shapes and sizes and this one is no different.  Well, it is a little bit different…

There is a condominium project that wishes to obtain FHA project approval for its unit owners and to allow FHA purchase loans.  The sales prices of the units are in FHA’s “sweet spot” so the association is really pushing to get it done.

The project’s composition is acceptable to FHA consisting primarily of residential units with a few commercial components, one of them being a bar/night club.  The project’s financials are up to FHA’s standards and the owner-occupancy rate hovers around 100%.  Unit owners are nearly perfect in the payment of their common charges.  The units are in very high demand and there is a waiting list to move into the community.

All of the major aspects of the condominium meet FHA’s guidelines.  However, the condominium is a nudist community.  This, on its own, does not present a threat to the condominium’s eligibility for FHA approval.    The issue is that all unit owners are required by the legal governing documents to acquire and maintain membership to either a regional or national nudist organization.

This violates the National Housing Act in that it is requiring that the unit owners become members of an outside organization or club.  Because of this, the condominium, and, therefore, the units are not eligible for FHA-insured loans.  This is akin to a condominium requiring the unit owners to join an affiliated golf club or the Master Association’s boating club.

The community is very disappointed in their ineligibility and have verbalized that they are being discriminated against.  First of all, nudists are not a protected class so the accusation is unfounded in that regard.  But second, and most importantly, it is the requirement for membership which renders the condominium ineligible.  If they were to amend the legal documents to remove this requirement, they would be eligible.

Image courtesy of Vlado/freedigitalphotos.net

Automatic Power of Attorney is not Acceptable for FHA Condo Approval

gstockstudio_2During the round table session that HUD held in Washington DC recently, it clarified its position on automatic Power of Attorney written into a condominium’s legal governing documents.  If the legal documents grant irrevocable POA to the association simply by the unit owner accepting the deed, the condominium is ineligible for FHA condominium project approval.

We don’t see this language very often but do bump into it now and again, twice yesterday in fact.  The language reads like this:

Each Unit Owner shall and does by the acceptance of his deed grant to the Association of Unit Owners an irrevocable power of attorney, coupled with an interest, to acquire title to or lease any Unit whose owner desires to surrender, sell or lease the same…” [I won’t bore you with the rest of the legal mumbo jumbo.]

In both of these cases, the condominiums were approved by HUD in 2013.  Fortunately, one of them recently recorded its Amended and Restated Declaration and Bylaws and removed the power of attorney section in its entirety.  They will be eligible for approval.  The second is in the process of doing so and will not be eligible for FHA approval until the document is adopted and recorded.  [I offered to review them for compliance with HUD’s guidelines.]

Because it was announced that HUD will begin enforcing the Appendix A Project Certification form, it would behoove any submitter of a recertification package to re-read the legal documents of a condominium to ensure offending language like this does not exist.  As a reminder, the submitter is responsible for the accuracy of the approval package, whether or not he/she signed Appendix A.  Had I submitted these for project approval without re-reviewing them, I would have been subject to fines.

Just because the condominium was approved 2 years ago does not guarantee that it will be recertified.  Not only has HUD modified many of its guidelines for project approval, HUD staff members have become far more adept at reviewing the packages.  This is a perfect example of the need to review the entire condominium prior to submission for recertification.

Top Photo Credit: (c) Can Stock Photo / gstockstudio

Do You Sign Appendix A When You Submit a Condo for FHA Approval?

wanamaker2Recently, Eric attended a two-day session about FHA condominium project approvals with HUD in DC.  Incomplete submissions and the Appendix A Project Certification were among the most important topics discussed.

First off, HUD will only review packages submitted by the following entities: Lender, Builder/Developer, HOA, Management Company, Attorney or Consultant.  They have been receiving packages from real estate agents, mortgage loan officers, unit owners and others.  Moving forward, any packages submitted by any entity who do not belong to the first group will be returned without review.

Secondly, incomplete packages submitted to HUD will be returned to sender prior to review.  It was not mentioned during the session as to whether or not HUD would include which document(s) are deficient.  HUD did say that those submitting approval packages should know what documents are to be included in the submissions.  Which leads to the next, and most important point…

Appendix A: Project Certification… so much to say here…

Appendix A is a signed document whereby the submitter certifies to HUD that: (1) the information and statements are true and correct; (2) the project meets all FHA condo approval guidelines; and (3) there are no known circumstances or conditions that might have an adverse affect on the condominium.  Appendix A was created in 2011 and modified in 2012.

Appendix A must be signed by the submitter.  There are many who submit FHA condo approval packages to HUD that are signed by someone other than the submitter.  Regardless of who signs Appendix A, the submitter is still responsible for the information contained in the submission package and will be treated as if he/she signed Appendix A.

Appendix A will be enforced.  Item #2 on Appendix A states that the condominium meets HUD’s requirements for project approval.  Moving forward, it will be enforced in that:

  1. If the project is not eligible for HUD approval, the submitter may be penalized.  $3500 per infraction was mentioned.
  2. Repeat offenders will be placed on HUD’s LDP list which means that they will not be able to work with HUD in any capacity.
  3. Repeat offenders may be prosecuted.  The maximum penalty for a false certification is up to 30 years imprisonment, $1,000,000 fine or both.

There will be no more “spaghetti tests” where submitters assemble a questionable package and send it to HUD.  If you submit a package to HUD that is not approvable, you could be subject to a $3500 fine.  If you submit many questionable packages, you could face further penalties according to Title 18 U.S.C. 1014 and land on the LDP list.

We have seen many condominiums that were previously approved by HUD that should not have been; everyone makes mistakes or guidelines may have changed since the previous approval.  Submission of these condominiums for recertification may result in penalties as mentioned above.  If you sign Appendix A, you are responsible for the package that is submitted to HUD.

Does HUD Allow Private Transfer Fees?  Yes and No

hennykaOver the past two days, Eric attended a session about FHA condominium project approvals at HUD Headquarters in Washington DC.  There were many topics discussed during the session, some of which are highly classified.  Well, not really because they will appear in future articles…so you’ll have to wait.

One of the major topics of discussion 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.

Top Photo Credit: (c) Can Stock Photo / hennyka

The VA is Definitely Tougher on Condo Leasing Restrictions

small__2832610326In the past month, three of our condominium submissions have been approved by FHA and rejected by the VA – all for leasing restriction language.  Through at least the end of the year, when hired for FHA Condominium Project Approval, we are submitting for VA project approval if requested at no additional charge.  The VA submission package is similar to the FHA submission so we offer to do both.

[For those who don’t know, the VA requires condominium project approval prior to allowing VA financing to encumber any of the units in the project.]

The VA is tougher on leasing restrictions than is FHA, if you can believe that.  The rationale behind it makes sense though: the VA doesn’t want leasing restrictions to impede a Veteran’s** ability to lease his/her unit in the case of deployment.  Therefore, maximum leasing restrictions are reviewed more closely.

Maximum number of leases cannot be established because once this number or percentage is met, no other units may be leased.  It’s not difficult to see that this could impede a Veteran from leasing his/her unit.

Must use a Board-approved lease form or the Board must approve the form on which the lease is written.  This is not allowed because the Board could require a form that is not in compliance with other VA requirements or the Board could reject the form the Veteran has used.

Third-party approval of tenants is also not allowed by FHA.  If the association/Board has the authority to approve or reject potential tenants, most of the time the condominium is not approvable by either the VA or FHA.

Third-party approval of modifications to leases poses a potential restriction for the Veteran.  What if the Veteran wishes to extend or shorten the lease according to changes in his/her deployment period and the Board doesn’t allow it?

Maximum lease period can be an issue for a Veteran if the deployment extends beyond the maximum established lease period.  Fortunately, though, we don’t see this very often.

Often, developers and Boards place the above provisions in place in an attempt to protect the community.  However, in doing so, Veterans are prevented from using their VA benefits to purchase units in the community.

One way to potentially circumvent the above and still obtain a project approval is to include an exception for units that are encumbered with VA financing.  From what we have been told by the VA, this should be allowable in most cases.

**NOTE: the term “Veteran” is being used to conserve space and is meant to represent Veterans, active service members and anyone who qualifies for VA home loan financing.

Our Condominium Has 50% FHA Concentration – Now What?

Oliver26Our first response would be to make sure that you don’t lose your FHA Condominium Project Approval!  Obviously, FHA buyers are attracted to your community so it would be beneficial to the association to maintain this approval (Law of Supply and Demand).

Really, though, the question stems from the FHA guideline that the maximum concentration of FHA loans in a condominium is 50%.  FHA uses case numbers to track all FHA loans and no FHA loan may exist without one.  Once the 50% level is reached, case numbers may no longer be automatically assigned using FHA’s online system FHA Connection.

However, FHA does allow greater than 50% concentration in condominiums that meet its guidelines to be granted an exception.  In these cases, lenders must contact the jurisdictional Homeownership Center (HOC) and request a case number manually.  If the condominium meets the exception criteria, FHA will allow up to 100% FHA loan concentration in the condominium.

All of these criteria must be met in order for FHA to allow the exception:

  • The project must have at least 4 units
  • The project must be 100% complete and has been completed for more than 1 year
  • 100% of the units have transferred from the developer and no one entity owns more than 10% of the units**
  • The project’s budget provides for the funding of a reserve account greater than or equal to 10% of the annual budget
  • Voting control has transferred to the unit owners
  • The owner-occupancy ratio is at least 50%

**Exceptions to the 10% criterion: (1) if the project is 10 units or less, no one person/entity may own more than one unit; (2) Federal, state and qualified non-profit programs may own more than 10% of the units provided that the program is designed to assist low- and moderate- income buyers and renters; and (3) units owned and inhabited by an investor are considered owner-occupied.

The concentration exception terminates with the expiration of the condominium’s FHA project approval.  Once the project is recertified, the concentration exception may be sought again.  Unless HUD changes this with the issuance of another Mortgagee Letter, it can be assumed that exceptions will continue to be granted once the project is approved and continues to meet the above-mentioned criteria.

Top Photo Credit: (c) Can Stock Photo / Oliver26

How Does FHA Handle “Cloud” Condominiums?

condo2It appears that the “cloud” concept has spread wider than in the area of computing.  A newer type of condominium community, called a cloud condominium, has been popping up and is already approved in certain large cities such as Denver, Orlando and San Diego.

A cloud condominium is a community under a declaration of condominium but there isn’t a Home Owner’s Association (HOA) because there are no common elements in the project.  The community is governed by CC&Rs (covenants, conditions and restrictions) but does not maintain an HOA to enforce them.

The unit boundaries contain the interior and exterior of the unit and the adjacent land (front, back and side yards as applicable).  The boundaries also contain the air space above the unit to about 50 feet and the footprint of the unit.  The units can be attached (like townhomes) or free standing like “site condos”.  The units are generally smaller than a standard single-family home which is seen as decreasing the maintenance for the unit owner.

The primary purpose of these communities is to circumvent local zoning restrictions on lot size (as is the case typically with condominiums and planned communities) but without having the political structure of the HOA.

The major downside to not having an HOA is that there is no governing body within the community to enforce the CC&Rs. This means that if a unit owner is in violation of the rules or by-laws, a unit owner (or a group of unit owners) would have to take the matter to civil court to resolve it.

Because these projects do not have an HOA to enforce the CC&Rs, FHA has decided not to approve these condominium projects and, so far, it has made the decision to not lend in these projects either.  If the project consists of attached units, it is not approvable.  If the project qualifies as a “site condo”, it would not need project approval, but FHA has decided not to provide financing for these units.

Because this concept is still relatively new, we would expect that FHA would revisit this decision if the need becomes large enough or if there is more pressure from national organizations.

What is a “Co-Housing” Community?

jay_morphoLAOriginating in Denmark, co-housing communities range in size from a handful of units to more than 5 dozen; although typically they contain 20-40 units.  They have a centralized design where the units are either attached or free-standing or both and surround a courtyard and/or common house.  The design is to promote the old-fashioned neighborhood feeling where everyone knows each other and works together.

The common house is the center of the community and usually has a large dining room, kitchen, children’s play area, laundry room, recreational facilities and sometimes even a guest room.  At least a couple of times per week, the community members serve group meals and take turns preparing the meals.  Some communities provide child care services for working parents.

The community members work together to tend to the common elements.  While they operate under set By-laws, generally the decisions are made by consensus and the rules are used as back-up for dispute resolution.  Many of these communities have a waiting list of people who wish to move into them.  Here is a write-up about one in Berkeley, CA.

You may be thinking: “How does FHA handle these communal-type communities?”

Many co-housing projects are legally-declared condominium projects and some have attempted to get approved with FHA.  Some of them have been approved while others are not eligible.  Here are some of the deciding factors:

matt_hintsa1. Communal Kitchens.  There are varying degrees as to the level of “community” between the co-housing projects.  Some attempt to promote a sort of 60’s style commune where everyone works together as one big family.  This can result in co-housing projects only having one communal kitchen and everyone cooks in the kitchen.

The issue that we encounter here is that the individual units do not meet the minimum appraisal standards for FHA which requires the units to have a working kitchen.  Having a communal kitchen is OK provided that the individual units meet FHA’s minimum standards.

2. Screening buyers or renters.  Because the community is so tight-knit, co-housing projects sometimes wish to interview and approve potential buyers or renters.  If these newcomers are going to be in a closely-held community with children, this is not an unreasonable request.

According to 24CFR203.41, third party approval of buyers or renters is not allowed; this violates “free assumability”.  Therefore, the CC&Rs cannot provide for a requirement that the Board or HOA have the power to approve or reject buyers and renters.

The only exception to this rule is that the HOA/Board can use the registered sex offender list to reject a potential buyer or renter.

3. Affordable Housing.  This is a tricky topic on its own regarding FHA condo approvals.  Affordable Housing is allowed by FHA provided that the language in the CC&Rs meets FHA’s standards.  One of the main conditions that it looks for is that the Affordable Housing requirement terminates upon transfer of title of the unit to FHA either via foreclosure or deed-in-lieu.  If the Affordable Housing language meets FHA’s requirements, this is not an impediment to project approval.

In conclusion, if the co-housing project has the look and feel of a typical condominium (typically-sized units, own kitchens, appropriate CC&Rs, etc), then the project has a good chance of getting approved.  If the project appears to be more of a commune-style community, it may have more difficulty in obtaining a project approval.

Condo photo credit: Jay@MorphoLA via photopin cc

Cooking photo credit: matt.hintsa via photopin cc

What Types of Condominium Projects are Approvable by FHA?

stuartmiles (6)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.
  • 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.arvind balaraman
  • 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.

 

Top Photo Credit: Freedigitalphotos.net / stuartmiles

Houseboat Photo Credit: Freedigitalphotos.net / arvind balaraman

Can We Use Reserve Funds for Landscaping During Drought?

tiveryluckyWe receive a lot of questions from associations on how they are able to use their reserve funds and still be eligible for FHA condominium project approval.  Up in our neck of the woods in New England, these questions are primarily geared towards excessive costs due to storms, especially during the winter.  This past winter was particularly annoying with bitter cold and high snowfall totals.  Many, if not all, associations ran over-budget due to the storms.  You can read more about that topic HERE.

Currently, California is suffering a severe drought and questions are flowing in regarding use of the reserve funds to cover the costs of maintaining an aesthetic environment and to replace burned out lawns.

Association Reserves, one of the largest reserve study providers in the country, published a very comprehensive article that details the circumstances by which reserve funds can be used during times of extreme drought.  The article is thorough we chose to merely provide the link rather than to attempt to summarize it here.

From an FHA condominium project approval standpoint, a severe drought is an exceptional circumstance that is beyond the control of the association.  If budget overruns do occur, they must be explained and there is a great chance that FHA will ask for previous years financials to demonstrate that the association does not consistently operate at a loss.

We have assisted many association to get certified with FHA that have posted such losses due to rare circumstances such as this.  FHA understands that associations work to budget for common, predictable expenses so such overruns can occur from time-to-time…so long as they don’t occur every year.

Top Photo Credit: tiverylucky/freedigitalphotos.net