No, Your 2-unit Condo Project is Not Approvable with FHA
I debated calling this article "You better hope your unit doesn't burn down!"
Last week, I received a call from a woman in Salt Lake City, UT, who is having difficulty selling her condominium unit because it is not HUD-approved. I receive several such calls per week. And I began to ask her to describe her project.
She described her condominium unit as part of a 2-unit building in a 35-building condominium project with a total of 70 units.
So far so good.
She said that there is no HOA and she doesn’t – and has never – paid association dues.
Wait…what? Aren’t there roads, sidewalks and common areas? Who maintains them?
The county pays for the roads and sidewalks and there are no common areas. She went on to say that one of the buildings was previously approved with HUD.
Whoa, hold on. Only one of the 35 buildings in the project was approved? Is each building its own separate legal entity?
Yes, each of the 35 buildings is its own legal entity. My neighbor maintains his property and I maintain mine.
Ok, so your condominium project is a 2-unit project and an approval would only affect your and your neighbor’s unit. Do your neighbor and you have a written agreement regarding the maintenance of the respective sides of the property?
No, but we can draw one up easy enough. We get along well and we have each maintained our own sides for years.
I asked her to email to me a copy of the declaration so that I could review it. I was very intrigued at how this project was set up. I told her that I would read through the declaration and if it looked OK, we could discuss payment options if she wanted to hire my services to help her get approved with HUD.
I figured if nothing came of it, at least I would have an opportunity for a blog article!
She did and I read through it and found some issues. I contacted HUD to verify the issues and bounce my ideas off of a project reviewer regarding potential methods to remedy the issues.
This is the email response that I sent to her:
The Declaration is for just your 2-unit condominium so we are good there. At present, I do not believe that your condominium project is approvable and I have verified this with a HUD project reviewer in the Denver Homeownership Center.
The reason being is that the unit boundaries of each unit are as follows:
1. Upper boundary is the plane of the lower surface of the ceiling
2. Lower boundary is the plane of the upper surface of the basement floor
3. Vertical boundaries are the interior of the exterior walls and the center line of the party wall
Everything else in the project is deemed Common Area or Limited Common Area. This means that you and your neighbor collectively own the land, anything above the interior of the ceiling and anything outside of the interior of the exterior walls.
Therefore, the structure of the building (aside from the party wall), the attic, roof and all of the land, steps (if there are any) and walkways (even your own) are Common Elements or Limited Common Elements. Those must be covered by a master condominium insurance policy funded by both you and your neighbor.
Why is this important? The insurance that you and your neighbor currently possess that covers the exterior of your own units may come into question during an insurance claim. You don’t individually own the exterior of your unit; the association does. So, in the event of a catastrophic event like a fire, the insurance may not pay the claim because you don’t own the exterior of your unit.
HUD requires that common elements and limited common elements are insured by the association. By buying the unit, you are an association member by default; so is your neighbor.
There are two possible means of fixing this:
1. You and your neighbor amend the declaration of condominium such that each of you own your entire units, including the exterior, and your own half of the land. This may require you to hire an engineer to divide the land. The catch to this is that you must check to make sure that this amendment does not contradict any State law. I would check with a real estate attorney about this.
2. You and your neighbor collectively obtain a master condominium insurance policy to cover the exterior of the units and the property and change your own insurance policies to HO-6 coverage (which is basically “renter’s insurance”) to cover the interior of the units. You may also opt for the master policy to cover the interior of the units as well.
You must also draft an agreement between the two of you, as we mentioned on the phone the other day.
I just spent 10 minutes on the phone with a project reviewer with HUD going through this. She was certain that the project is not approvable. However, if you were to submit a package for project approval, there is a small possibility that the reviewer would miss this detail.
I wish that I had better news for you. Please contact me if you have further questions.
Comments(2)