What is the Difference Between Legal Phasing and Marketing Phasing?
I received an inquiry from a mortgage broker in Arkansas asking what the difference is between legal phasing and marketing phasing as it pertain to Fannie Mae condominium project approvals.
I thought this to be an appropriate blog article here because it pertains to Fannie, FHA and VA condominium approvals. All three of them have the same viewpoint in this matter.
Legal Phasing must be specified in the legal documents that are recorded on the land records. It is not imperative to spell out how many units will be completed in each phase.
What is important is that the original declaration names the original units that are declared in the initial phase and that the developer is retaining the rights to build/add in more units up to a maximum of “x” units.
The initial number of units declared would then be phase 1. Once another grouping of units is completed, the units would be added to the Declaration by means of an Amendment and recorded on the land records. The phases do not need to be named Phase 1, Phase 2, Phase 3, etc. It is also not necessary that all of the phases contain the same number of units.
Marketing/Construction Phasing is not something specified in the legal documents. Typically the legal documents would declare all of the units to be built and the developer will build a group and begin to market them. In the eyes of Fannie, FHA and the VA, this is a single-phase project because all of the units are declared at the same time.
In some cases, the legal documents might break the project down into 2 legal phases but the developer will build part of phase 1 and begin to market them.
Why is this discrepancy so important?
It is important especially when dealing with the presale requirements of Fannie, FHA and the VA. Fannie and the VA have a 70% presale requirement and for FHA it is 30%. This is the percentage of units that must be sold prior to these agencies allowing financing in the project.
All three calculate this percentage taking into account legal phasing, NOT marketing/construction phasing.
Let’s do an example
A condominium project declares 10 units with the initial declaration with there to be a maximum of 100 units. We will assume that 100 units are ultimately built (not that it matters in the case of legal phasing).
After the 10 units are declared, 3 have to be sold before FHA financing can be used. 7 must be sold before Fannie or the VA will allow financing in the project.
After all 10 units are sold, the developer adds another 10 units on the land records by amending the declaration to include these units in this second phase. Since 10 of the 20 declared units are sold, lo and behold! The presale requirement for FHA has already been met! Not only this, but only an additional 4 units would need to be sold before Fannie and VA will allow financing in the project.
If there is no legal phasing and all of the units are declared in the declaration, and the developer builds 10 units NONE of these units would qualify for financing with any of the agencies.
Why? Because this is a single-phased project of 100 units and the developer would have to sell 30 units before FHA financing can be used and 70 units before Fannie and the VA will allow financing in the project.
We can all agree it would be very difficult for the developer to find buyers who are cash buyers or can find financing without using Fannie, FHA or the VA.
The Condominium Project Approval Team at ReadySetLoan is dedicated to helping condominium projects across the nation to obtain their approvals with FHA and the VA or become recertified with FHA. We have assisted nearly 200 condominiums and we can help your association.
ReadySetLoan is an active member of the Connecticut and New England chapters of the Community Associations Institute (CAI) and is a frequent contributor to Common Interest Magazine as an expert in FHA/VA condominium project approvals.
Please contact us with any questions regarding FHA or VA condominium project approvals. You can email me at firstname.lastname@example.org or call me at 404-433-4565. I will be happy to answer any of your questions.
FHA/VA Condo Approval Specialist
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Check out our article in Common Interest magazine on page 19!