The real estate industry is abuzz regarding the recent FHA announcement suspending the dreaded FHA 90
Day Property Flipping Rule. In 2009 FHA relaxed its initial guidelines to exempt bank-owned properties from this rule. If the lender could show that the property was recently acquired by mortgagees or by vendors to whom they had transferred title, the 90 Day Rule was waived. Now this exemption has been extended to individual investors who have acquired a property within the last 90 days and wish to sell it for profit.
HUD has realized that since the volume of foreclosures has increased over the past few years lifting this rule could potentially serve to stabilize real estate prices as well as communities where foreclosure activity has been prevalent. They realize that many REO properties are often sold in "as-is" condition and require repairs which many private investors will buy and repair in order to turn around and sell at a fair market price. This normally takes less than 90 days and since many home buyers today need an FHA loan in order to purchase, this creates a problem for the investor considering holding costs and potential vandalism on a vacant property. It is hoped that this integral change will serve to help stabilize and potentially increase home values if private investors are more willing to buy and repair such homes.
This is wonderful news for homebuyers who stand a much better chance of acquiring a property in "turn key" condition as the result of a previous purchase by a private investor. However, the waiver of the previous flipping rule brings with it the need for more due diligence on the part of the lender who must still confirm the following to ensure the proposed loan is eligible for FHA financing/insurance:
- There must be no identity of interest between the buyer and the seller or other parties to the transaction. The lender will have to ensure that the seller is the current title holder to the property among other checks (ie: if the property was listed on the MLS)
If the current sales price is 20% or more than the seller's acquisition cost the lender's job becomes more complex as they must justify the increase in value. This entails:
- Obtaining a 2nd appraisal or other supporting documentation to show the seller completed renovations/repairs/rehab work to justify the increase in value. If this cannot be shown then the appraiser would have to sufficiently explain the increase in value since the seller's purchase. If not significant repairs were done, this increase could be difficult to support within the short 90 day time frame.
- The lender would also be required to provide the potential buyer/borrower a property inspection report (which it may charge the borrower for).
While these "hoops" are not overly complex, they will require due diligence on the part of the lender and extra steps to take in order to close the loan. A second appraisal and inspection will eat up more precious time and could delay closings if not obtained in a timely manner.
Very rarely does HUD make concessions without enacting new requirements to mitigate risk. Overall we think this waiver will help the housing market. However, as real estate professionals we must be aware of all the potential pitfalls when taking advantage of such changes. If we know of these ahead of time, we can plan accordingly. In our experience, it's all about planning and time management. We will be keeping all this in mind going forward and hope you will too!
