Does HUD Allow Private Transfer Fees? Yes and No
Over the past two days, Eric attended a session about FHA condominium project approvals at HUD Headquarters in Washington DC. There were many topics discussed during the session, some of which are highly classified. Well, not really because they will appear in future articles...so you’ll have to wait.
One of the major topics of discussion was Private Transfer Fees, aka 3rd party transfer fees, community enhancement fees or any other fancy name that you might have heard. Basically, these fees are deed restrictions which require the seller of a condominium unit to pay a fee to an entity other than the buyer upon conveyance. A third party could include a management company, the association or an affiliated or unaffiliated entity.
HUD said that it is encountering an increasing number of condominiums whose legal governing documents require that unit owners pay some sort of 3rd party fee upon the sale of the unit. These fees are subject to 24CFR203.41. This section of the Code states that legal restrictions on conveyance may not limit the sales proceeds retained by the seller. [This doesn’t only apply to condominiums.]
Basically, a condominium’s CC&Rs may not limit the amount a seller may gain from the sale of his/her unit EXCEPT for the exceptions laid out in the section of the code named above.
Because governmental language can be vague at times (ah-hem), the session sought to clarify it as it pertains to condominiums:
Third party fees that are administrative in nature are acceptable. This would include reasonable fees charged by an HOA or management company for the processing of resale packages or for updating the list of unit owners, among other administrative-type duties. “Reasonable” is obviously subjective, but we can probably agree that $1000 to update the list of unit owners is a bit excessive.
Capital contributions are acceptable. Again, within reason, a requirement for the seller to contribute to the reserve account is acceptable because it is a benefit to the association.
Fees paid to affiliated or unaffiliated third parties are NOT acceptable. These would include required transfer fees paid to entities such as non-profit organizations that are not for the betterment of the condominium. This could be a topic in and of itself.
Fees may NOT be a percentage of the sales price even if the fees belong to the first two categories above.
Buyers may NOT pay the fees that are not acceptable. Even though the section of the Code pertains to the proceeds of the sale to sellers, HUD has determined that buyers may not pay the fees on behalf of the sellers.
If a developer or association wishes to collect the unacceptable fees and still be eligible for an FHA project approval (and, therefore, FHA-insured loans), creating an exemption in the CC&Rs for units encumbered with FHA financing is allowed. However, HUD does want specific language to be included in order for the project to be eligible.
Image courtesy of David Castillo Dominici/freedigitalphotos.net
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.
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Check out our article in Common Interest magazine on page 19!