New FHA Condo rules kick in...

The new condo rules from the Federal Housing Administration (FHA) went into effect last week and they are already drawing fire. From an article by Ken Harney on the Realty Times Web site comes this report on some of the key features of the new rules -

Among the key make-or-break rules that condo marketers, buyers, lender and realty agents now need to know about are the following:

* FHA won't insure mortgages in buildings or complexes where less than 30 percent of the units haven't already been sold.

* At least 50 percent of the units in a project must be owner-occupied or sold to purchasers who intend to occupy them.
* No individual owner or investor can hold title to more than 10 percent of the units in the entire project.
* No more than 25 percent of the square footage of a condo project can be non-residential -- in other words, used for commercial purposes.
* No more than 50 percent of the units can have FHA insured financing on them. FHA doesn't want to “concentrate its risk” in any single project.
* No more than 15 percent of the units in a project can be 30 days or more delinquent on their monthly payments to the condo association.

Basically if a condo complex doesn’t meet these rules then it isn’t eligible for FHA financing and FHA-backed loans make up the bulk of the financing normally used these days. I believe that these rules are to apply only to true condo complexes and not the site condo developments that make up the bulk of Michigan’s new build developments. It would be an even bigger problem if these rules are applied to site-condo developments.

As it is, these rules probably will cause havoc in Michigan in regular condo complexes. With the economy in the dumpster there has been a rash of investor buys of condo unit. The investors normally rent out the units. There were also lots of live-work complexes built, which would seem to violate the 25% rule for commercial use of the complex space. There are also numerous stalled out condo complexes which may now prove to be very difficult to sell, because 30% or more of the complex may not have yet been sold. In my little town there is also a small, 5-unit luxury condo complex that almost certainly could violate 2-3 of these rules. In fact, in that complex, which has yet to sell a unit, the first buyer will take the complex over the 10% ownership by a single owner rule. How dumb is that?

At a time when FHA financing is the primary choice for properties under $300,000 (a range that includes most condo complexes) setting the 50% rule effectively discriminates against those who try to buy into the complex after the first half of the units are sold. That doesn’t seem fair, does it? Of course that might not happen anyway, since the FHA won’t insure the first 30% of the units to be sold. Maybe that is the Catch-22 in this crazy set of rules.