How Does FHA Handle “Cloud” Condominiums?

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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?

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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?

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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?

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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

FHA Won’t Dictate How You Run Your Condominium

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HUD_bldgWe have been working with one of our clients for many months because the Board has been reluctant to provide the necessary information to us.  It recently surfaced that they have concerns that once the condominium is approved by FHA, the Federal Government will have the power to dictate how the condominium is run.

The couple asked us to compose an email that they could present to the Board that might allay the fears of the members.  While this email is too long to post here, you can read the full version HERE.

We believe that part of the misconception is that FHA is a division of HUD.  HUD has other divisions which provides housing subsidies for low- and moderate-income folks.  It also builds, owns and manages housing facilities for these folks as well.  However, FHA is not linked to these other divisions except that they are all branches of HUD.

The Board noted that they “didn’t want the Federal Government’s dirty hands in the affairs of our association”.  It became clear that the Board thought that the FHA approval would mean that the condominium would then be a HUD community which would give it the right to tell the association how it should be managed.

The fact of the matter is that the FHA project approval is merely a “stamp of approval” that the condominium meets the minimum requirements for FHA loans.  Without it, unit owners and potential buyers would not have the ability to finance units with FHA loans.

In our case, we are working with unit owners to obtain an FHA condominium project approval.  This is necessary because they are attempting to obtain a reverse mortgage for their condo unit which will provide them with additional monthly revenue by utilizing the equity in their unit, which is substantial.

Once approved, neither HUD nor FHA will be given any power to control how the condominium is run.  In fact, if the association decides to change its rules, amend its legal documents or make other internal changes, the condominium will lose its FHA approval.

The only time FHA or HUD would have the ability to influence the operations of the condominium is if it receives title to a unit through the process of foreclosure or deed in lieu thereof.  Even if this were to happen, HUD would then be a unit owner and its power would be limited to that of an ordinary unit owner.  It would have the ability to vote on issues of the association subject to the limitations as laid out in the legal documents.  This is no different than if a conventional (or other) lender receives title through the process of law.

Hopefully, the email will clear up any confusion that Board has so that these folks can get their reverse mortgage.

Board Doesn’t Want HUD to Affect Operation of Condominium

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iosphereWe have been working with a lovely couple in Connecticut to get their condominium approved with FHA so that they can obtain a reverse mortgage.  The Board has been reluctant to provide the necessary information to us and it recently surfaced as to why this is.  They have concerns that once the condominium is approved by FHA, the Federal Government will have the power to dictate how the condominium is run.

The couple asked us to compose an email that they could present to the Board that might allay the fears of the members.   The content of this email follows…

Thank you for your contact today.  I can understand the Board’s apprehension regarding getting your condominium approved for FHA loans but I can assure you that this is due to misunderstanding.

The Federal Housing Administration (FHA) is housed within the U.S. Department of Housing and Urban Development (HUD).  HUD has many departments within it including special help for folks with low to moderate income levels.  It provides Section 8 housing for these folks.  However, FHA is not part of this program and borrowers who use FHA loans are not subsidized by the government and have to qualify for the payment of the loan based on their merits.  The standards for FHA loans are nearly the same as for the so-called “conventional” loans of Fannie Mae and Freddie Mac.  FHA is also the sole provider of Reverse Mortgages, which you are now seeking.

FHA is not a lender; rather, it is a mortgage insurer.  When a borrower contributes less than 20% to a purchase of a home, the lender requires some sort of mortgage insurance.  In the conventional world of Fannie Mae and Freddie Mac, the insurance for these loans is provided by third party insurance companies such as MGIC and PMI.  When a borrower uses an FHA loan, FHA insures the loan to the lender in the case of borrower default.  If the lender has to foreclose on the loan and acquires title to the property, the title then transfers to the Secretary of HUD and the FHA insurance fund will pay the lender for any monetary losses that the lender suffered as a result of the foreclosure.

For condominiums, FHA has a requirement that the entire condominium project first obtain approval from HUD to verify that it meets the requirements of the Federal Code of Regulations that established the guidelines for FHA loans and acceptable property types (24 CFR 203).  HUD Mortgagee Letter 09-46b established the requirement for project approval and eliminated the “Spot Loan Approval” process.  Prior to 2/1/2010, FHA would allow loans in condominium projects that were not on the approved list on a “spot loan” basis.  Now all condominiums must be on the FHA Approved Condominiums List if FHA loans are to be allowed to encumber any units in the project.

ArcadyObtaining an FHA Project Approval is what allows unit owners and unit purchasers to finance their units with FHA loans.  It is a “stamp of approval” that the condominium project meets the minimum requirements.  Once approved, neither HUD nor FHA has any ability to control what happens within the community.  If the condominium decides to make rules, amend its legal documents or make other internal changes that violate HUD’s guidelines, the community would lose its approval and no longer qualify for FHA loans.  Neither FHA nor HUD would have any power to block the association’s decisions to do so.

If a unit is encumbered with FHA financing, FHA has no control over the goings on of the condominium unless the borrower defaults and the title of the unit transfers to the Secretary of HUD, as mentioned above.  If this were to happen, HUD would then become a UNIT OWNER and potentially have voting rights within the condominium but subject to the limitations a laid out in the Declaration and By-laws.  HUD would have no powers beyond that of a UNIT OWNER and would have the percentage of ownership interest in the common elements as dictated by the legal governing documents.

Many believe that FHA loans are for low- to moderate-income buyers (as mentioned above) which is a myth.  FHA borrowers must meet underwriting criteria that are nearly as strict as conventional loans.  The benefit of using an FHA is the ability for a low downpayment of 3.5%.  This would not affect the condominium because of the property values of the units.  I say this because the maximum FHA loan amount in your county is $601,450.  This would mean that for a buyer to purchase a $1,000,000 unit in your condominium, he/she would have to make a $398,550 down payment to use an FHA loan.

The reason we are working diligently to get the condominium approved with FHA is to allow the availability for FHA Reverse Mortgages to those who already reside in the community.  An FHA Reverse Mortgage will allow the unit owner to utilize the equity in his/her unit and will not require the owner to make monthly payments.  A great facet of Reverse Mortgages is that if the unit faces a negative equity position, FHA, not the owner’s heirs or the condominium, will make up the deficiency with the lender.

I hope that this provides some insight as to FHA, HUD and the project approval that we are seeking for your condominium.

Please let me know if you have any further questions.

Hopefully this will clear things up for the Board!

 

Top Photo Credit: (c) freedigitalphotos.net / iosphere

Lower Photo Credit: (c) Can Stock Photo / arcady

Property Manager Won’t Help With FHA Condo Approval

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gstockstudio…because they offer the same consulting service.

We were contacted by one of our property manager referral partners about obtaining an FHA condominium project approval for the condominium in which he lives.  Over the past 5 years, we have facilitated dozens of approvals for him and the company for which he works.

Of course we told Thomas that we would be happy to handle the approval for his condominium.  As standard procedure, we forwarded a copy of our prequalification questionnaire to him to complete or have completed.  The questionnaire rules out or brings to light the vast majority of reasons why condominiums are rejected by FHA.

Two weeks later, we followed up with him regarding the questionnaire and he told us that we need to contact the property manager for the condominium.  No problem.  We don’t know the manager and she doesn’t work for Thomas’ company so this could potentially be a new source of business.

When we did, we were informed that her management company offers to facilitate FHA approvals as well and the Board has not decided to move forward with the approval.  She said that she would not complete the questionnaire and that we would need to speak with Thomas about it.

Certainly, our goal is not to compete with their management company or to come between them.  We often help managers who try to get condominiums approved with FHA and get stuck during the process.  We told Thomas to please let us know if there is anything that we can do to help.

Fast forward a month and yesterday we check in with Thomas about the status.  Thomas writes that the management company is refusing to provide any assistance in the FHA approval process because they will not be the provider of this service.  The manager wrote to Thomas “It would be up to the board to get the pre-qualification paperwork to this new vendor as this service is above and beyond our regular management contract.”

We ran across a similar scenario last year with a 130-unit condominium in Maryland.  The manager provides the same service that we do but the Board wanted to use us because it is our specialty.  The manager said that he would not cooperate.  The end result was the condominium found a new manager.

Is this manager fulfilling her duties as a property manager if she is not doing what’s in the best interest of the association?  We are very curious to hear from Thomas how he feels about this manager’s stance, seeing as how Thomas is a manager himself.

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

New Level of Scrutiny in FHA Condo Project Approvals

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wanamaker2In February, we were saddened to learn of the retirement of the Chief in FHA’s Philadelphia Homeownership Center (PHOC).  We had a great working relationship with her and had met her in 2014 at the Round Table sessions in Washington DC.  A few weeks ago, she was replaced and since then, we have seen some changes in procedure and the level of scrutiny.

One of the major procedural change that has taken place is when a condominium project approval file gets rejected.  Previously when a file was rejected, we would submit the conditional documents and the file would go back in queue.  This meant that it would go back to the bottom of the stack of files and could take another 2-3 weeks to be reviewed…even if it was only one or two small documents.

Now, we are given 5 calendar days to submit the missing documents/information.  If we adhere to that timeframe, the file will stay in the process rotation and will be reviewed as if it were at the top of the pile.  The only problem with this is that we are almost always going to lose two days (the weekend) because it’s 5 calendar days, not 5 business days.  All of our rejections over the past month have come on a Thursday or Friday.

A reviewer in Philadelphia mentioned to us on the phone last week that the new Chief is particularly sensitive to the financials of the condominiums.  They are more highly scrutinizing condominiums which currently have a year-to-date loss or those who posted losses in the previous fiscal year.  Requests for letters of explanation regarding the losses, up to 3 previous years’ income and expense statements and year-to-date income statements have been requested of us to explain even small losses.

We have also been told that now all files have to pass QC, which can delay the processing time of the files.  The reviewer mentioned to us that the QC team is currently about a week out to review files.  This means that after the reviewer approves the file, it will take at least another week for QC to review it.

Eight of our ten submissions prior to the change were approved on their first pass.  Since then, 6 out of 8 have been rejected; 5 of them were due to financials.

The bottom line is to be patient when submitting FHA condominium project approvals to Philadelphia.  HUD sometimes makes internal changes that it doesn’t notify the public about.  We only learn of them when files get rejected for reasons which we have never seen.  This can delay processing times at first but once we adapt to the changes, they become standard procedure.

…until the next round of changes.

“Your Association and the FHA – What’s in it for me?” with Eric Boucher

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“Your Association and the FHA – What’s in it for me?” with Eric Boucher

Robert NordlundJoin Reserve Specialist Robert Nordlund of Association Reserves and Eric Boucher of ReadySetLoan in this straightforward discussion clearly outlining the benefits of becoming FHA approved and what it takes for your association to become FHA approved. No more wondering! Join us for this free webinar so you can make a wise decision about pursuing FHA approval for your association. During the 45 minute session, you will learn: 

  • What are the benefits?
  • Is our Association suited for FHA approval?
  • What does approval cost (in terms of time & $)
  • Can we meet the requirements?
You can find a recorded version of the Webinar HERE.
You can find a Outline of the Webinar with Q&A HERE.

Trying to be Slick with Legal Language

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elxeneize_2The packages for FHA condominium project approvals include the management agreement between the association and the property manager.  Most of them are about 8-12 pages, cut-and-dry, very simple and very easy to read and interpret.  But there are some that are just so tedious to read primarily because they are trying to be slick with the legal language.

Case in point: we reviewed the language of a 33-page management agreement from 2012 and the paragraph about the term of the contract went like this…

“The Board appoints Agent exclusively to manage the Property for a period of ONE (1) year(s), beginning JANUARY 1, 2012, and The Board shall have TWO (2), ONE (1) year options to renew such agreement. Each renewal term shall include a TWO PERCENT (2%) increase in management fees and Cortland provided onsite personnel fees described herein. If Board does not exercise such option within 90-60 days prior to expiration, and does not terminate this agreement according to the terms hereof, this agreement shall automatically renew for additional ONE (1) year terms, with an automatic minimum TWO PERCENT (2%) increase in management fees and Cortland provided onsite personnel fees described herein.”  [Emphasis added so that you don’t have to read the whole thing]

Is there an attorney in the house??

I’m sure your first thought was “isn’t Eric’s job fun??!”  Actually, I really enjoy my work and to answer your follow-up question: yes, I know I’m not normal.

For anyone who cared to try to digest that paragraph [and those who did are probably as abnormal as I am], might think like me that initially it doesn’t make sense.

The first sentence says that the Board has two options to renew the management agreement in one-year increments.

HOWEVER

If the Board doesn’t “opt in”nor terminate the agreement, it will automatically renew for one-year terms.

The question that HUD will have: “is this agreement still in effect?”

What would your answer be?

My answer is that it is still in effect.  This is not because the association is still paying the management company to manage them; we see expired agreements all of the time and the HOA still pays the manager.

My opinion is that it is still in effect because the second piece appears to overwrite the two one-year option stipulation by saying that if the association is silent, then the contract continues in one-year increments until it is terminated.

That’s just my opinion.  Let’s see what FHA has to say.

Stay tuned…

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