FHA Condo Approvals – I Wouldn’t Recommend That…Either

FHA Condo Approvals – I Wouldn’t Recommend That…Either

My blog posts about legal phasing and another about investor concentration resulted in a phone inquiry for a situation which I had not previously encountered.  But, then again, I don’t live in Florida…

A member of an investment group called me with reference to a 200-unit condominium project in Florida.  The buildings were built in the 1970’s and converted to condominiums in 2005.  During the marketing phase, the market tanked, as we all know, and the developer went bankrupt.

Fast-forward 5 years and this investment group purchased some 145 units in the project and has spent the past 2 years completing or renovating the units and then rented a bunch of them.

Now they wanted to gain HUD’s approval to facilitate selling them.

I told my caller that the project is not approvable.

He asked about legal phasing and I told him that it was not possible because HUD doesn’t allow legal phasing for conversions.

Then he suggested creating several LLC’s and then transferring units from his LLC to his other LLC’s such that none of the individual LLC’s would own 10% or more of the units.

I told him that there is nothing stopping him from doing that.  However, one of the forms that must be completed is a Project Certification form.  The signor of this form is certifying under penalty of law that the condominium project meets HUD’s guidelines.

Does it technically meet HUD’s guidelines?  I guess that technically it does.

But let’s suppose that this developer also goes bankrupt, which could happen, and HUD suffers financial losses.  It will launch an investigation to see what happened and if there was fraud involved.

How is HUD going to look at the same person or investment group having 21 separate LLC’s that own 145 units?  Oh, and by the way, the LLC’s were created just prior to the application to HUD for approval.

That doesn’t smell right to me.  I wouldn’t think that it would pass HUD’s sniff test either.

In my opinion, HUD created these guidelines for a purpose: to mitigate its risk.  FHA financing programs already offer a significant risk for financial losses, as does relatively lax guidelines for condominium project approval.  Whether we like it or not, if HUD assumes too much risk it could possibly face bankruptcy.

The housing market would certainly be worse off without FHA-insured loans.