Hoisted by our own petards...

Michigan is one of only a hand-full of states that adopted a condo-hybrid zoning category called a site-condos, as a way to speed up the process for developers to bring new projects to market. The old, traditional zoning category called a platted subdivision served the needs of developers for many decades, but the necessary approvals and the whole process, which involved extensive public hearings, had become cumbersome by the 80’s, and so the concept of the site condo development was born.

Here’s a quick explanation of the concept:

When you own a true condo you are not responsible for outside maintenance and you don't own the outside of the building. It is part of the common property owned by the association. The condo association takes care of the exterior of the buildings and the landscaping maintenance. A true condo community has common property that can not be divided and that can be used by all condo owners. It is property that all owners pay to maintain. Your condo may be detached, so there are no common walls, but you still don’t have responsibility for the outside.

As a homeowner in a site condo you own the house and your lot. You are responsible for the exterior of your home. Nobody else has an interest in your home. You have to take care of the landscaping, the painting, the decks. But remember as an owner of a Michigan site condo you do have to obey the condo association rules. You do have to belong to the condo association and pay association dues. The association is responsible for the common areas that will include the roads at a minimum, as well as any other common areas, like parks, play areas, and entrance islands.

There were other good reasons why developers adopted the site condo category:
- Homes can be built closer together (So builders can make more money because they can build more homes on the same amount of land. Which is also a benefit to home owners because the homes are less expensive)
- The roads can be private and built less expensively than city regulations. (Asphalt versus cement) Width of the road may be less sometimes. The association is responsible for snow plowing and maintenance of the roads.
- Common elements like pools, parks, and club houses can be built and supported by the association rules.
- Many time homes and the development can be built quicker because of the easier rules for condo complexes – plated subdivisions can take 8-12 months for the approval cycle in Michigan; whereas, site condo project plans can be approved in 2-3 months.

So, Michigan developers jumped on the site condo bandwagon wholeheartedly and almost every new single-family homes development over the last 2-3 decades has been a site condo.

Then in 2009, the FHA promulgated new rules concerning mortgage requirements for condos and lumped in all condo types, including site condos. The rules, which were apparently written by people who never had heard of site condos and didn’t understand the impact of what they were doing on states like Michigan, have requirements that may make sense for traditional condo complexes, but which are onerous for site condo owners and buyers.

The FHA rules require that a would-be buyer, who wishes to use an FHA-back mortgage, submit a Condo Questionnaire, which is normally filled out and signed by the Home Owners Association (HOA) Treasurer. That Questionnaire, which was again created fore traditional condo complexes, has questions on it about the percentage of units that are leased out, the percentage of units that are in foreclosure, the percentage of the total complex that is owned by a single owner (can’t be more than 20% to qualify for an FHA mortgage), whether or not the developer ever turned the complex management over to the HOA and other questions that seem to make more sense for a traditional condo complex.

Here’s the rub. If any of the condo questionnaire questions come back with even a single “No” as an answer, then an FHA-backed mortgage is likely out and the buyer will need a 20% down payment to go conventional. How easy is it for that to happen? Well here are some of the questions:

6. At least 90 percent of the total units in the project have been sold.
7. At least 51 percent of the total units in project are owner-occupied.
9. No single entity owns more than 10 percent of total units in project.
12. General maintenance level of common elements is acceptable and there is no deferred maintenance, based on the comments by the Appraiser and/or the pictures.
13. The owners association has a reserve plan and a reserve fund, separate from the operating account, that is adequate to prevent deferred maintenance.
14. (a) For projects consisting of over 30 units, no more than 10 percent of total units are encumbered by FHA insured mortgages.
(b) For projects consisting of 30 units or less, no more than 20 percent of total units are encumbered by FHA insured mortgages.

Now, think about that little in-build, site condo development in which you just listed a house. It only has 10 houses and four already have FHA loans. Oops! A buyer wouldn’t be able to get an FHA loan to buy your listing. Your seller is hosed. Or perhaps you have picked up 2-3 bank-owned houses in a failed site condo development, one where the developer gave up or went out of business. The development was only20-30% finished and the HOA was never formed. What now? You’re hosed again. And how about those people who bought in that development before it went bust? They are in limbo. Not only are they living in what likely looks like a wasteland, but also no one can buy their homes unless they can get a conventional loan and put 20% down.

So, here we are in Michigan, hoisted by our own petard (an old nautical phrase) and our love of site condos as development vehicles. Most of these requirements weren’t all that onerous when things were good, but with the current market, fewer and fewer of our site condo complexes can pass muster with the FHA Questionnaire. And those failed developments – fagetaboutit!

Is your state one of the others with site condo developments? How is this impacting your business? Has your state done anything to try to help out home sellers and buyers? What are you doing to prepare sellers and buyers for this problem?