A significant change in FHA lending guidelines is likely to spur quicker rehabilitation and absorption of foreclosure properties back into the real estate markets. On Friday, the Department of Housing and Urban Development announced that it is suspending the "90-day no flip" rule for one year, beginning on February 1, 2010.
Simply put, FHA policy denies mortgage loan guaranties to buyers if the seller had owned the property for less than 90 days. Buyers and Sellers that were agreed on sale terms were being forced to sit on the sidelines and wait until the Seller's title was properly "seasoned." This loan regulation tripped up several would-be buyers and sellers that I worked with last year. No doubt many other buyers and sellers hit the same road block.
"Flipping" is the practice of selling a property quickly after acquiring it. The idea of course is to buy low and sell high. The idea here is to enable entrepreneur/rehabbers to purchase bank-owned or distressed properties, fix them up, and sell them as soon as they have been rehabilitated. Having to wait 90 days - even if it only takes 21 days to complete a property renovation - adds to a flipper's carrying costs and lowers the bottom line. The new rule will streamline this process of bringing distressed REO properties back to market condition, and should help stimulate interest in this class of properties for buyers who intend to use FHA financing.
The 90 day rule is a necessary regulation to guard against the sort Flipping abuses that plagued the market for years before the bubble burst (and lets face it, folks, many of these REO properties that will be rehabbed & flipped became REO properties because of bad flips in the first place). Recall that many scammers were buying properties at below market prices and selling them (often the same day or week as they bought 'em) to unsuspecting buyers at inflated prices. Some of the more brazed schemes produced "laddering" of sales that inflated prices well above market. The most outrageous schemes involved flipped condominiums that were never even completed or occupied.
WHAT THIS MEANS FOR LOCAL HOME BUYERS AND SELLERS:
The rule change is likely to encourage rehabbers to buy distressed properties and to bring them to market as quickly as possible. Many of the investor - rehab deals that I have been seeing have been the properties that are most attractive to first time buyers - "starter" homes and condominiums. These are also the buyers most likely use FHA guaranteed loans. The timing of the announcement should make a wider array of these homes available to buyers as the spring market approaches.
These homes will likely feature a combination of newly completed or renovated kitchens and bathrooms, fresh paint, and upgraded electrical systems, all attractive benefits to first time buyers.
This will necessarily cause some disadvantage to sellers of non-distressed "starter" homes. These more lived-in properties will likely compete for buyers' attention with older, more worn, fixtures and appliances and perhaps dated design schemes. Developers who are still selling off condo conversion inventory will likewise face stiffer competition from the one-off investors.
As with all of these loan guideline and regulation changes, there is of course some fine print. Stricter procedures and higher loan costs will be charged when the prices FHA financed buyers pay exceed the investor's aquisition purchase price by more than 20%.
I can help buyers and investors alike as they evaluate the impact this change will have on their real estate transactions over the coming months.
Let me know if you have questions about any of this. Until then, the complete details of the waiver requirements are lined, here.